Real estate is a popular investment strategy because it’s so diverse. From condos to single-family homes, and long-term rentals to nightly vacation stays, there are many different opportunities to earn passive income.
When looking in the MLS at property listings, It’s easy to feel overwhelmed because there’s a lot to sort through for a beginner in this space. Ready for the good news? The first step is the most daunting.
While buying up real estate does require you to be a little financially savvy, the hardest part is saving up for that down payment.
Once you have enough for about 20% down, it’s time to start searching for your first property! Here’s everything you should consider as you take this first step toward investing in real estate.
Deciding Between Long-Term and Short-Term Rental Strategies
One thing to think about before you buy is your rental strategy. Long-term and short-term rentals differ greatly, so it’s important to consider your goals before you buy a property.
Long-term rentals are usually provided to tenants in a lease agreement that lasts for a minimum of six months. These rentals offer steady and reliable income with the bonus of appreciation over the course of many years.
The main risk here is retaining tenants. Depending on the type of property you buy, tenant turnover can be a hassle.
If you do choose to go this route, you may want to consider hiring a property management company. This can relieve the stress of finding tenants, along with a variety of other landlord tasks, such as maintenance requests.
Alternatively, short-term rentals have become an increasingly popular strategy over the last decade. These are vacation rentals that are available on a nightly basis for shorter periods of time.
Whether you rent out your own home or buy a property solely for the purpose of creating a short-term rental, a good location can result in desirable profits.
Many investors use companies like Airbnb and VRBO to advertise their homes and maintain occupancy.
Fixer-Upper vs. Turnkey
Before you begin your search, you’ll also need to think about whether you’re up for the challenge of a fixer-upper. These types of homes can vary greatly when it comes to how much rehab they need.
On one end of the spectrum, you may have a property that is outdated, but the bones are good. A kitchen refresh or a simple bathroom remodel will do the trick. For those who enjoy these types of projects (or have the money to hire a contractor), it can be relatively easy.
On the other hand, a distressed property may come as a great deal in a competitive market, but the renovation process will be highly involved.
Many people go this route and then refinance to find a loan that includes the repairs in addition to the initial purchase price.
Budgeting for home renovations becomes a key consideration.
For some investors, the fixer-upper is just too daunting. This is when a turnkey rental property will be your best bet.
Whether it’s a condo or a single-family home, “turnkey” refers to properties that are essentially immaculate and ready for immediate use. This is ideal for a beginner investor who doesn’t have the time, experience, or money to take on big renovation projects.
Types of Homes to Consider for Your First Investment
Now that we’ve discussed the various strategies associated with real estate investments, it’s time to find a property. Here are the main types of homes you’ll find on the market, with information on the pros and cons of each.
This is probably the most common route for beginner investors because it’s usually a safe bet. Single-family homes are relatively affordable and easy to manage on a day-to-day basis.
Because they’re in demand, especially in family-oriented suburbs, the opportunity to attract high-quality tenants is promising. In fact, find a single-family home in a great school district, and you can probably guarantee you won’t deal with frequent tenant turnover.
So, what are the cons? The main thing to consider here is that your ROI probably won’t be seen through monthly rental income. It will come a few years down the line when you sell the house.
When a residential property has at least two separate units, it’s classified as multi-family housing.
The benefit of this type of investment is higher monthly rental income. That said, qualifying for the right financing can be complicated. This makes it a less common option for a beginner investor.
If you are thinking of going this route, consider starting with a duplex (housing with just two units) and see if it’s the right fit for your investment goals.
A townhouse is a multi-floor home that is common in both suburbs and urban areas. They share one or two walls with neighboring units, while still offering more privacy than a condo.
They are usually smaller than a single-family home, but they still offer the feeling of a traditional house. In fact, most have two stories, and many have three or more. In most cases, a Homeowners Association (HOA) oversees the surrounding landscaping and any other shared spaces.
Unlike a townhouse, a condo may be above or below another unit, making it more like an apartment. The difference is that condos are owned by individuals instead of one large management company.
These are typically small and low maintenance because the HOA will handle shared spaces (much like a townhouse). Condos usually include amenities like gyms or swimming pools, which are nice to have, but can lead to higher monthly HOA fees.
Closing the Deal
Real estate is a promising investment, regardless of the type of property you choose for your first venture. In addition to generating rental income, you may reap the benefit of profitable appreciation and various tax benefits. It’s a diverse type of investing with many different facets.
Take time to research the housing market trends in your area and dive into your financing options. Stick with a deal that you understand before you start to think outside the box. A straightforward and safe investment is usually the best route to take when you’re just getting started.