(ARTICLE) Real Estate For Beginners: Everything You Need To Know Before You Get Started

I was going to make a video on this but I thought it would be better if I wrote it out step by step as I wouldn’t be able to demonstrate that clearly in a video.

Also, read this again as often as you can to keep your memory fresh.

Investing in real estate is a way to build wealth efficiently over time. As a beginner, you might be wondering where to get started.

Luckily for you, I will cover the ins and outs of real estate investing for beginners.

Let’s dive into everything you need to know about investing in real estate as a new investor.

Real estate investing for beginners

Before we get started, I just want to say that it is important to understand one truth.

It is completely possible for beginners to take charge of their financial future by investing in real estate. Although you will need to take action to build the real estate portfolio of your dreams, it is completely possible.

As a brand new real estate investor, it is critical to learn the basics. Before you start your real estate investment journey, it’s important to learn about the different options.

Here are the most common ways for new real estate investors to jump into real estate.

HOUSE HACKING

The idea of house hacking is that you buy a property with extra space, which could mean extra bedrooms or completely separate units. Then you rent out the extra spaces to help cover your mortgage costs.

The power of house hacking is that you can lower your housing costs while building equity in a home and potentially generating a cash flow. Beyond that, you will be able to take advantage of the best owner financing opportunities.

Equity in a home = Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe £150,000 on your mortgage loan and your home is worth £200,000, you have £50,000 of equity in your home.

Your equity can increase in two ways. As you pay down your mortgage, the amount of equity in your home will rise. Your equity will also increase if the value of your home jumps.

Your equity can fall, too, if your home’s value drops at a rate faster than the speed at which you’re paying down your mortgage’s principal balance.

an example of how equity can change over time.

Say you buy a house for £200,000. You might come up with a down payment of 10% of your home’s purchase price – which would be £20,000. Your lender will then provide you with a mortgage loan of £180,000.

If your home is worth that £200,000 sales price, you now have £20,000 of equity, or £200,000 minus £180,000.

Jump ahead 2 years. You’ve been making your mortgage payments on time, and you might now owe £170,000 on your mortgage. Maybe your home’s value has jumped too during this time to £210,000.

You now have £40,000 in equity, or £210,000 minus £170,000.

Your home’s value could work against you, too. Say you’ve paid down your mortgage loan to that same £170,000, but your home’s value has actually dipped to £195,000. Now you have £25,000 in equity, or £195,000 minus £170,000.

To determine your equity at any one time, you’ll need to know the value of your home.

That’s the basics of equity, I needed to make that very clear as some of you probably didn’t know it in detail properly 👍

Overall, house hacking can be the best and most accessible way to start building your real estate portfolio.

LIVE IN FLIP

In this strategy, you would buy a property that is in need of some updates. While you live in the property, you would make the updates. At some point, you would sell the house for a profit and move on to your next deal.

With a live in flip, you can take advantage of attractive owner financing options without any tenants. But you might have to live in a construction zone while making changes to the house. So it may not be the most ideal living conditions.

LIVE IN RENT LATER

A live in now and rent later strategy is very similar to a live in flip. Instead of selling the house after you’ve used it for your purposes, you turn it into a rental.

You could make updates to the property while you are living there or you just rent it as you found it.

Either way, you would move on to a new place and a tenant would move in. The goal would be to create positive cash flow with a new tenant.

If the idea of physically owning a property is too daunting, there are still other options.

You could choose to invest in a REIT,

real estate investment trust.

With that, you would not own a property. Instead, you would own a share of a REIT which may own several properties.

You’ll be able to buy REITs through most investment platforms. Many investors compare REITs to mutual funds because they are relatively hands-off investments. But they often offer worthwhile returns with minimal effort on your part.

RENTAL PROPERTY

Buying a rental property is one of the most common ways to invest in real estate. The goal of buying a property is for it to create a profit for you over time.

With a rental property, you will face some complications with the need to maintain the property and manage the tenants that live there. However, it can be well worth the effort if you invest in a lucrative opportunity.

If you’d like to make your rental property portfolio less labor-intensive, then consider hiring a property manager . They can take care of all the tenant headaches for you so that you can simply enjoy the profits.

Hiring a property manager is something I STRONGLY RECOMMEND because dealing with tenants yourself can be a nightmare!

TRUST ME😂

Property managers can take care of all the tenant headaches for you so that you can simply enjoy the profits.

How To Start Investing In Real Estate For Beginners

Although it is not difficult to get started, you can save yourself time and energy by following the steps below.

Take stock of your personal finances.

There’s a reason why I always go on about having your finances in order.

Before you can move forward with building your real estate portfolio. It is important to build a financial foundation that can comfortably support your real estate endeavors.

Real estate investing, and life in general, can be more complicated when you don’t have a solid financial foundation.

Take some time to learn about your finances. Make sure that your finances are rock solid before venturing into real estate investing.

Go back to my second video on How To Manage Money to refresh your memory and to make sure you’re up to date with properly managing your finances.

Yes, Real Estate is a great opportunity to build wealth. But your finances need to be ready to make that leap. You’ll need to set aside some money to invest in a growing real estate portfolio.

Understand the numbers of a real estate deal

If you are considering investing in real estate as a beginner, then it is important to do some research on the numbers of a deal.

There are several numbers that you should consider when evaluating whether or not a real estate property is a good deal. Let’s take a closer look at the top rules

THE 1% RULE

The 1% rule can help you determine what kind of rent you should be able to charge for the property.

As a quick rule of thumb, the total monthly rent should be equal to 1% of the purchase price plus any renovation costs.

For example, if you buy a property for an all-in cost of £100,000, then you should be able to rent it for at least £1,000 per month.

Of course, this is just a rule of thumb. Check the market rental rates in your area to see if the 1% is realistic in your area. In some cases, you might be able to stretch your rental income to obtain a 2% rule.

In high cost of living areas, you might not be able to come close to the 1% rule.

When you are determining where to invest, you might need to look beyond your postcode or city to find an affordable property with exciting returns. However, the decision to invest in a particular area is entirely up to you.

WHAT IS A CAP RATE?

Read this carefully

A cap rate, also known as ‘the capitalisation rate’ and this the ratio of net operating income to the property asset value.

the ratio can let you know how much of a percentage of investment you’ll receive each year on the property if you bought the house in all cash.

With a higher cap rate, you should expect a riskier investment. A lower cap rate might provide a slower but stable return.

The amount of risk you take on in your real estate property will boil down to your individual risk tolerance. If you have a high risk tolerance, then you might find yourself gravitating towards properties with a higher cap rate.

If you have a lower risk tolerance, then you might stay towards the lower end of the spectrum. There is no right or wrong way to approach this issue, it just depends on your preferences as an individual investor.

Cash flow (positive vs negative)

The cash flow of a property is the difference between the property’s expenses and the income it brings in.

For example, let’s say you have £2,000 worth of monthly expenses on a property but are able to charge £2,500 in rent. With that situation, you would have a £500 positive cash flow.

If you were only able to charge £1,500 in rent for the same property, then you would have £500 in negative cash flow.

I hope that made sense.

As a real estate investor, the goal is to have a positive cash flow whenever possible. In fact, if a real estate deal would produce negative cash flow on a regular basis, then it is probably not a good fit.

The only exception is if you are house hacking the property. In that case, negative cash flow might be reasonable if you are still able to reduce your housing costs to some degree.

The 50% Rule In Real Estate

This rule states that half of all your total rent will go towards the expenses to maintain the property.

50% rule example.

£1,000 monthly rent received

£1,000 x 12 months = £12,000 total rent

50% of 12,000 = 6,000

And then £6,000 is how much you should reserve for property expenses.

Of course, the exact expenses will vary based on the property. But this is a good place to start your calculations.

The 50% rule is there to make sure that you don’t overextend yourself. It states that half of all your total rent will go towards expenses to maintain the property. With that factored into your budget, you will likely be able to manage the costs of your property with fewer surprises.

RESEARCH DEALS

Many new real estate investors want to start looking for deals in their local area. That can be a good strategy if you live in a low cost of living area.

However, if you live in a high cost of living area *cough* London *cough* then you might want to expand your geographic search.

As you look in different areas, consider the numbers we talked about above. Plus, consider the logistics of managing a property from afar. If you want to hire a property manager, then you’ll need to include the cost of hiring a property manager in your calculations.

START SMALL

Diving headfirst into the waters of real estate might sound exciting, but it might be better to start off small.

You ain’t gonna be Real Estate Billionaire mogul on the Forbes List In 1 Year. Real estate is a LONG GAME. Some people have been doing for 20-30 years

Instead of jumping straight into a very expensive real estate deal, start small. Don’t take on more than your finances can handle.

There is absolutely nothing wrong with starting with a small property and building up to a larger investment.

After all, just because a lender will give you the money doesn’t mean that it is a good idea.

As you get your feet wet, exercise caution along the way. You’ll get more comfortable as you work through more deals.

If you want to start with something extremely manageable, then try renting out a room in your current home, if possible.

Learn More About Real Estate

Moving forward with your real estate investing plans may seem like a big step. And it really is.

You are embarking on a journey that could carry you all the way to financial independence.

However, it can be a struggle to get comfortable with taking risks as a real estate investor.

Instead of flying blind into your real estate journey, take some time to learn about real estate investing for beginners. You will likely feel more comfortable with your real estate choices if you know more about your options. Once you have more information, you’ll be able to move forward more easily.

I will also share lots of information on real estate too as I am also learning more about it too.

TAKE ACTION

Of course, learning is great. But eventually, you will need to take action. Don’t let great deals pass you by because you are nervous to get started.

Take the time to learn about real estate investing but then move on to actually invest when you can.

Don’t let this make you feel like you have to RUSH into a deal either.

KEEP AN EMERGENCY FUND!

An emergency fund is critical if you want to avoid unnecessary stress while building your real estate portfolio.

You should expect that emergency repairs and vacancies will take a bite out of your profits at some point in your journey.

vacancies = no one is currently occupying the building

If noone is occupying the building then that would mean you’d have to be the one to cover the rent payments until the building has tenants again.

You have an emergency fund for your personal finances, so why not your real estate portfolio? It could be the perfect way to protect your personal finances from a major impact due to a rental property issue.

FINAL THOUGHTS

Of course, you might not be able to start today without the proper funding on hand. That’s okay! If you don’t have the funds on hand now, then set a goal for yourself.

The average salary in the UK is £25K (slightly less or slightly higher)

With 3 years of focused grinding and making the right financial choices and sacrifices you could have more than enough to start investing into real estate.

Take time to get creative on how you will finance your real estate deals. You might need to consider an unconventional living situation through a house hack to enter the market.

Or if you need money for a down payment, then you might need to get serious about building a side hustle or doing more hours at work whilst living below your means and being frugal.

IS REAL ESTATE FOR EVERYONE?

Real estate investing is not for everyone. If you don’t have your personal finances under control, then you might need to wait before taking the leap into real estate investing.

However, if you have already build a solid financial foundation, then you are likely more than ready to start investing in real estate.

Take some time to familiarise yourself with real estate concepts and decide what you want your real estate portfolio to look like. Then take action and start building your real estate portfolio.

If you aren’t sure which strategy is best for you, then seriously consider house hacking. It is the perfect opportunity to get your feet wet in real estate investing as a beginner. You’ll learn more about the home buying process and gain some experience managing tenants. Once you have that experience under your belt, you’ll be ready to tackle even bigger investments.

You may want to read this again at another time. 😊👍

Till next time :)