Real estate can be one of the best investments you can make, but it’s important to understand exactly what you’re getting into and how to minimize risk because the numbers are big enough that a single deal can make or break you financially.

This is especially important in today’s uncertain economy, and it becomes even more important when you look at how fragile the real estate industry is as it’s being pummeled by inflation, skyrocketing interest rates, and declining consumer confidence.

So in this article, I’m going to outline exactly how you can get started in real estate investing while minimizing the risks that typically come with it. I also want to be clear that you need to look at this as a starting point rather than a complete A to Z education. Real estate is a complex and constantly evolving industry, so if you’re going to get into it, you need to be prepared to always be learning.

Let’s get started…

Develop a strategy that aligns with your knowledge and risk tolerance

Let’s get the bitter pill out of the way first — you need to be realistic about what you can achieve in the short term.

For every rags to riches story you see out there where someone went from being broke to becoming a millionaire in a short period of time by investing in real estate, there are hundreds if not thousands of examples that took the opposite direction. And this is an industry where you have to be especially careful to avoid mistakes, because the losses can be significant, plus, this can also lead to damage to your credit, which can take years to recover from.

So you need to start by identifying the types of real estate investing to see which is the best fit for you, based on your local market, knowledge, capital, credit, and whether you have an experienced mentor.

Asset types

When most people think of real estate, they think about the typical houses you or I might live in, but there are several other types of real estate as well. There is no right or wrong type or property when it comes to investing, but some are better than others depending on your unique situation and goals. That’s why it’s so important to understand the pros and cons of each.

Residential

• 1-4 unit properties, which could include single family homes, duplexes, triplexes, quadplexes, condos, and townhomes.

Pros: Lower costs, easier to get into, less complex, faster transactions

Cons: Lower profit potential, more volatile, more emotion-driven sellers

Commercial

• Office space
• Retail
• Industrial
• Multi family
• Storage
• There are also what I would consider “outside the box” types of commercial real estate, like land for cell towers, billboards, and other commercial applications.

Pros: Less competition, greater profit potential, less volatile

Cons: Higher costs, more complex, slower transactions

Land

• This could be any kind of land, ranging from an empty lot in an established neighborhood to a massive plot out in the boonies.

Pros: Less competition

Cons: More pitfalls, greater risk

Investing methods

There are also several methods of real estate investing, and each of these methods can be used with any asset type.

Wholesaling

This is the process of locking a property up with a contract — essentially agreeing to purchase it, marking it up for a profit, and then selling it to another buyer before you need to pay the original seller. The key here is that you are selling the contract, not the house.

While this enables you to get into real estate investing with little to no money up front, this comes with some risk because if you can’t sell that property to another buyer, you’ll be legally obligated to purchase it per the contract. It’s also worth noting that wholesaling may be the least profitable method of investing.

Fix and flip

The fix and flip method is similar to wholesaling in that you’re still going to sell the property, but with this method, you’ll buy it outright, either with cash or financing, then add value by renovating it before putting it back on the market to sell to another buyer.

This is a more straightforward approach that removes some of the variables from the equation, and it increases the value of the property which can help to increase your profits, but it also comes with greater risk because you have to come out of pocket with your own capital.

Buy and hold

This is the process of acquiring and renting out a property, which you’ll hold as a long term investment.

The cash flow from a buy and hold approach is generally smaller and more spread out than you’ll see from wholesaling, but it’s still usually considered a long term wealth building approach. That’s because once you own a property, your tenants help you pay to own the property and over time, it has been shown that houses appreciate faster than inflation. Similar to a retirement investment, assume you pay in over 10-30 years to pay off the mortgage, now the rents can flow to you like a dividend without diluting your principal.

If you’re going to use this method, it’s important to make sure you have sufficient cash reserves to maintain the property — especially when you first acquire the property, because you need to make sure you can stay current on your mortgage even when unexpected expenses, such as new roof or HVAC unit, come up. Additionally, when interest rates are higher, it may be cash flow negative which requires a strategic decision.

Development

New development or redevelopment requires you to acquire or control landland, work with the municipalities to obtain permission to do what you want and then construct one or more buildings on it. Finally you would sell or rent it out.

This is the most complex and riskiest method of investing in real estate because it requires a deep understanding of municipality zoning codes, planning and building requirements, political and special interest aspects  , more capital, more risk that after spending money and time you can’t do what you want and a much longer timeline. I generally recommend that most investors avoid this method until they have a reasonable amount of experience under their belt.

Invest in your education before you start — because you’re going to pay for it one way or another

One of the biggest mistakes I see new real estate investors make is trying to wing it. They’ll often rationalize that by saying, “Well, I don't have the money to invest in my education, so I’ll do that after my first deal.”

I get it, but that doesn’t work in the real world. How are you going to do a successful and profitable deal if you don’t even know what you’re doing yet?

These are the same people who try to do their first deal on their own, fail, break even or lose a lot of money in the process, and then conclude that real estate investing doesn’t work or is too risky.

Here’s the thing — there’s a ton of educational resources out there, ranging from free content you can find online, to inexpensive books, to courses and coaching programs that cost between a few hundred to upwards of six figures.

One of the first things I recommend doing is picking up a copy of Rich Dad, Poor Dad, a book that literally everyone I know in the industry raves about. This will give you a clear understanding of the higher level strategic thinking that goes into real estate. It will also give you the insight to better evaluate any other education and training you’re considering.

I can’t overstate the importance of this because unfortunately, I’ve seen far too many good people invest in ineffective, outdated, and flat out false information that hurt them financially.

It’s also smart to do a search on anyone you’re considering buying any educational resources from. Be sure to look at both the main and News tabs in Google.

Do you see a lot of complaints about them or do you see something positive? Are they regularly cited in the media for their expertise? Are they regularly sharing their knowledge? Their online presence says a lot about the quality of what they’re teaching.

It’s also important to look at the structure of any educational resources you’re considering. If you’re a bold action taker, a self-paced course that you can plow through might be great for you, but if you’re a little more timid (and there’s nothing wrong with that) then you might be better suited with a program that also includes one on one coaching.

Build a network of like-minded collaboration partners

It’s easy to feel like you’re all alone in this, especially when you’re first getting started, and well-meaning family and friends may try to dissuade you with horror stories about all the things that could go wrong, making the situation feel even more difficult.

That’s why it’s so important to build a network of like minded people to collaborate with on your journey. Your first goal here should be to connect with one or more experienced real estate investors who can partner with you on your deals to help you avoid the pitfalls and maximize your results. Obviously, they will expect a percentage of the deal for their time and effort, but that’s more than fair considering that they’re helping you make more money. (And perhaps more importantly, helping you avoid losses!)

This may sound counterintuitive, but you’ll also want to build relationships with other investors at all levels. Here’s why — every investor has their own criteria for what types of properties they are willing to buy. We call this a buy box. Often, investors will find properties that aren’t a fit for them, but might be for someone else in their network. This creates two types of opportunities for you.

The first is the opportunity to find deals that you would have otherwise missed, and the second is the opportunity to make some money on deals that weren’t a fit for you, by referring them to someone in your network. Investors will typically pay a referral fee, sometimes called a bird dog fee, for bringing them solid opportunities. And most will expect you to pay them a fee for referring solid opportunities to you. Fair is fair, right?

You’ll also want to connect with people who work in and around the real estate industry because they can be a good source of potential investment opportunities, as well as resources for your investments. This might include Realtors, contractors, home inspectors, architects, zoning officials, financial planners, and anyone else connected to the industry.

There are two things to keep in mind when building your network.

The first is to be careful who you’re getting involved with. Make sure the people you’re bringing into your circle are truly what they present themselves to be. This often means moving slowly until you can verify their claims. I’ve seen too many cases of self proclaimed gurus ripping good people off.

The second is to always add value to your relationships. A common mistake I see many people make is to only engage with those in their network when they need something. That’s a recipe to push people away. The better approach is to certainly engage when you need something, but also engage just to see if they need anything you can help them with. Yes, it takes more work, but that’s how you build a network of people almost as committed to your success as you are.

Get started in real estate investing!

I may be biased because I’ve personally experienced the profound impact that real estate had in my own life, and I’ve seen it happen in so many other peoples’ lives as well, but I believe you absolutely should get started sooner, rather than later. And by following the advice I’ve laid out in this article, you can reduce or eliminate the risk you would have otherwise faced.

_______________
Lori Greymont is a seasoned real estate investor, creator of the hit TV show, Funding Faceoff, and founder of a private mastermind community with the mission to help 5,000 real estate entrepreneurs get their real estate deals done and create true financial freedom.