Investment Specialist, Team Denver Homes - RE/MAX Professionals.
Your first step as a real estate investor is usually the most difficult. I often talk to new investors who feel overwhelmed by everything they don’t know about real estate: the terminology, the market, the capital, the risks and rewards.
If this sounds familiar, let me reassure you: real estate investing is not rocket science. Anyone can be a real estate investor. All you need to take the plunge is a little savings and a little know-how. The $40,000 or $60,000 you save for a 20% down payment will become the foundation for long-term real estate investing and wealth building. Start saving your real estate investment income from Day 1, growing it in a separate account, and soon you’ll be ready to buy your second, third or tenth property.
Let’s explore four of the best property types for beginning investors and the pros and cons of each.
1. Single-Family Homes Near An Elementary School
I recommend most first-time investors start here: buy a single-family home in a suburban neighborhood that has a highly rated public elementary school. Search on a website like GreatSchools.org for schools that score at least 7 out of 10, and base your property search within those neighborhoods.
Pros And Cons:
Families will always be looking for houses in good school districts, so this property type is a reliable long-term investment. Tenant turnover tends to be lower than average, since families with school-age children typically want to stay in one place longer, and are more likely to renew the lease at a higher rent every year.
You’ll make a small monthly rental income from a single-family home, but the majority of your profits will come from its resale. You’ll pay a higher mortgage than for other property types, giving you much greater equity. When you sell the property a few years down the line, you’ll earn a large return that you can invest in your next property. I work with many investors who have developed a specialized portfolio this way: they buy multiple single-family homes, then sell them all at once for a sizable profit.
2. Condos Near Universities
There will always be high demand for housing conveniently located near colleges and universities. I’ve found that nearly all rental properties do well when they are within walking distance of schools, whether they are studios, one-bedroom apartments or larger condos. If you buy a studio, opt for one that is larger than 500 square feet, as smaller studios are harder to rent and sell.
Pros And Cons:
Turnover is high, but vacancy loss is extremely low. Though you can expect to rent to new tenants every year, you can quickly find a new crop of students without much effort by advertising at the school and getting referrals from previous renters.
Your equity in a condo will typically be lower than for a single-family home, but your monthly income will be much higher. I have clients who keep buying condos near universities and have no plans to sell any of them. They make a steady, high income each month and have no trouble finding new tenants.
A real estate investment trust (REIT) is a great option for first-time investors because it doesn’t involve actively buying or managing a property. REITs are companies that own and/or operate income-producing properties, pooling the capital of a large group of investors. They allow you, as an individual investor, to buy shares of and earn dividends from real estate assets on an exchange, like stocks or ETFs.
Pros And Cons:
REITs are generally low-risk, high-liquidity investments that offer good diversification and reliable — and potentially high — returns. Investing in a REIT is a simple way to get your feet wet as a new investor, especially if you don’t have much money saved, you don’t want to actively manage a property or you’re nervous about putting all your savings into one property.
You can begin investing in some REITs for as little as $1,000. Start small, and look for REITs that have a good track record, showcased by experienced management, growth in earnings and satisfied investors. Do your due diligence, and ask for referrals before investing. Speak with people who have already received returns from the REIT you’re interested in, and beware of deals that seem too good to be true.
4. Properties With Two Separate Entrances
If renting an investment property to one tenant is good, renting the same property to two tenants is even better. Look for a property that you can legally lease to two long-term tenants; for example, one that includes a mother-in-law suite or a furnished garage or basement unit with its own separate entrance.
Pros And Cons:
Single-family homes with additional dwelling units (ADUs) and other properties that can be divided into two rental properties are in high demand. But if you find one that is legally built and zoned, you can build two steady sources of income with one purchase. Just be sure that you are leasing each unit for more than 30 days at a time. You’ll run into legal issues in most cities if you try to use them for short-term rentals.
The bottom line is: don’t be intimidated by real estate investing. There are many different ways to get started, but the important thing is that you take the first step.
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?