One of the questions I usually get when talking to someone who is looking at real estate investing for the first time is, “Where do I start?” Sometimes the question comes out as directly as that, sometimes the conversation dances around the topic for a while.

This is a hard question to answer because what the right steps are really depends on where you are as an investor and what your goals are for moving into REI. Really answering this question requires knowing what your personal investment philosophy [1] is. While this sounds daunting, it really isn’t that different than what you should be thinking about for any investment: what are you trying to accomplish with your investment and how does it fit within your overall strategy.

The reason this is so important is that REI is not a single, one-size-fits-all solution. There are millions of ways to successfully invest in real estate. The right one for you depends on your philosophy – and may well change over time. I started out actively managing my own single family rentals, but am now focused on syndications. Goals change as circumstances and knowledge change, and that is ok.

The one thing I always recommend is to get educated. Just like anything else in life, REI becomes a lot less daunting as your knowledge increases. Learning new things does take time and energy, but investing in yourself is ultimately the best investment you can make. Fortunately, it has never been easier to get informed, with a number of podcasts sharing great information that can be consumed around your schedule. My favorites are:

• https://realestateguysradio.com/ – a heavy focus on macro economic trends and syndications, they also host interesting in person events
• https://www.thebillionairepodcast.com/ – a range of alternative investment ideas (not just real estate) and macro economic trends
• https://www.biggerpockets.com/ – a great place for beginning investors to understand the fundamentals of REI, dive into some of the beginner strategies, and meet others (disclosure: I don’t listen here much anymore as I found the topics to be repetitive after a while, but I found it was a great introduction to how other investors were thinking about REI)

Beyond education, I don’t have a single piece of advice that I can offer – there isn’t a do X, then Y, then Z formula that will guarantee you success. What I can do is give you a few things to think about and see if any resonate with you. If one (or more) does, then start with that. If none of them do, then keep looking. And a word of caution, anytime you start doing something new, it is going to take some effort. Over time, the effort decreases significantly, but you can’t learn how to be a great (or even a good) investor in any area without putting in some time to learn about the area.

As you can tell from my posts, I am a huge fan of syndications. If you are an accredited investor and are looking for passive investing opportunities, I think these are the best option out there. As I have shown in a previous article [2], they solidly beat passive investing in the stock market and work well even in the face of high inflation (since rents typically rise at the same rate) and rising taxes (since they are inherently tax efficient). There is an initial time investment in finding a sponsor you trust, and then there can be incremental time spent vetting a specific deal (depending on the investment you are in). At a high level, however, this is similar to the effort you invest in buying an individual stock or determining your stock portfolio strategy – you need to research different options, find one that works for you, then over time, you want to make sure the fundamentals haven’t changed. This doesn’t take months, but rather a few focused hours of effort. If you are a passive investor in the stock market, you probably invested the time in determining your stock strategy (e.g. what mix of index funds do you have, how much do you contribute to each, when do you rebalance, etc) so long ago that you forgot that you actually had to figure out what your strategy is (at least, I hope you did and didn’t just do what a random relative told you to do without doing any researchJ). The major downsides of syndications are that the investment is not liquid, the minimum investments can be large – the lowest I have seen is $25k, but $50k-$100k is more typical –and you have to be an accredited investor [3].

If syndications aren’t right for you right now, there are still lots of ways to get started.

You can consider house hacking, where you buy a duplex, live in one half and get a tenant in the other (or get a roommate or two if you already own your home) to offset your mortgage payment. Done right, you can effectively live for free and use the money that you would have been paying your mortgage with to build up your investment portfolio. When you are ready to move, don’t sell the house, rent out your side as well and get even more cash flow. Keep doing this and moving every few years and soon you will have a huge rental portfolio of really nice properties (because these were places where you wanted to live). A major advantage here is that owner occupied properties have the best financing possible – 30yr fixed rate loans at extremely low rates. The downsides are that you need to share your residence with someone else (at least having a shared wall) and this is an active investment since you will likely be dealing with the tenant yourself. My first experience with real estate investing was with an up and down duplex where we lived upstairs and the downstairs tenant made our mortgage payment.

If sharing your home doesn’t appeal to you, you can buy a single family rental (SFR) or small multi-family property and either manage it yourself or have someone else manage it. This could be a stand-alone home or a condo (watch out for the HOA rules) somewhere – it doesn’t need to be near where you live since you can use a property manager [4]. I am doing this with my current active portfolio. I still have to manage the manager, but my time commitment is much less and I have more control over when I get involved since I don’t need to deal with calls from the tenant in the middle of the night. In this case, the effort is in finding the right property so that it cash flows while still paying the manager, and then finding the right manager. If you are willing to put in the work to remodel the property, this can translate into the BRRRR strategy (buy, rehab, rent, refinance, repeat) where you are able to get (most of) your initial investment out of the property within a year or two and use it to buy another property. While these are tried and true strategies, depending on the market it can be very hard to find properties that cash flow enough to make this work. I would strongly recommend against buying properties that don’t cash flow since you will need to be investing money in the property every month – which takes you farther away from your passive income goals.

A variation on the SFR option is to pursue vacation or other short term rentals (STR). AirBnB has been a popular option for people looking for rental income while also enabling you to have a place to stay when you go on vacation. This can be a good option if you chose the right property and have the right manager. However, don’t underestimate the amount of work involved. This is a customer driven business and you are going to need to spend a lot more time and money on a STR than you would for a SFR. Make sure you are ready for that investment. You also need to watch your cash flow on the property and make sure that your assumptions are reasonable. If you need the property to be rented out 80%+ of the time in order to cover expenses, you are unlikely to be cash flow positive. I have had STs in the past, and while I enjoyed the lifestyle of having a place I could vacation in, the cash flow wasn’t what I had hoped and the investment only made money through appreciation (not an approach I generally recommend).

If you want something where you don’t have to deal with tenants at all, you can look at investing in notes – either individually, through a group, or as a hard money lender. This is typically a lot less work on the management side but you need to do your research on the notes themselves. I invest in an open ended syndication that focuses on mortgages and have been pleased with the steady 9% return on the funds here. One important caveat here is that notes don’t tend to have the same tax advantages as investing in real estate, since you are really loaning money, so this may impact your comparative returns.

Finally, you can find someone to partner with on a deal directly. For example, you could bring the cash and they do the work and interact with the tenants, do the repairs, etc. This would be like a small scale syndication, but you would both be active partners in the deal so you don’t have all of the paperwork and SEC filings (although you should still have enough details written down so that all expectations about the deal are explicit). Since you are an active partner, you would be able to influence the decisions and guide the process even if you weren’t doing the day to day work. I participated in a few flips where I was the capital partner in the LLC that purchased the building for a while before I found syndications. It can be profitable, but you need to know the right people, and your money will often sit idle between deals.

I don’t recommend wholesaling (finding a property, locking it up, and then selling it instead of taking ownership). While this can be a way to raise capital to seed your investments, it is a lot of work and you are basically doing a job, not investing. For people who already have jobs they enjoy and pay well, this is usually not a good use of time.

I am also not a fan of REITs, since from my perspective they are more like stocks in a real estate business as opposed to actual REI. The shares of a REIT can trade at multiples of the value of the underlying assets, and you don’t get any tax advantages which, to my mind, defies the point of REI. I want the underlying asset to appraise for as much or more than I am paying for it so I have inherent equity – I consider paying more for an asset than is it worth speculating on the market, which I prefer not to do.

What are your thoughts? What else would you consider investing in when you get started?

If you have any questions about this post, please email them to me at terence@mbc-rei.com, I will reply to the questions that are straightforward and will turn the questions requiring more detailed answers into future blog posts

For additional reading:

[1] https://realestateguysradio.com/resources/developing-your-personal-investment-philosophy/

[2] https://mbc-rei.com/blog/where-to-put-your-investing-dollars-rei-vs-the-stock-market-the-numbers-2/2

[3] https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor

[4] https://www.amazon.com/Long-Distance-Real-Estate-Investing-State/dp/0997584750