5 Steps on How To Get Started in Real Estate
Whether you have lots of money or none at all, getting into the property market is easier than it’s ever been
Owning property has always been an attractive prospect — it can pay you passively, holds its value well(ish) during economic downturns and has the potential to spring back up, even above your initial investment when the economy starts climbing again.
There’s always been a stigma attached to getting into the property market though, and that is;
You can only get started in the property market IF you have loads of money. This isn’t strictly true.
There are many methods and strategies you can use to get started, beginning with a lot of money or next-to-no money at all.
In the current global coronavirus situation most of us have to stay at home. Many markets have slowed down and real estate is one of them — there are less people selling, less people buying, less people renting, less people advertising.
This market slow-down provides brilliant opportunity for a few reasons.
First of all, many of us have more time — if you do it’s a great moment to research and learn how to get started. Secondly, with the entire market being slower, demand has dropped and prices of properties/rentals have dropped alongside them.
Now is an opportune time to get everything in place so when the markets starts ramping up again you’ll be ready to act. As soon as the world resumes business, property prices will begin to creep up as demand rises. With the preparation you do now you’ll be able to take advantage of the low prices before they start rising again. All while everyone else is still trying to figure out how to get into the market.
I’m based in London, UK so some of the terminology I use will be UK-specific. The steps below are applicable to the vast majority of countries and can be carried out anywhere really. But I invite you to perform your own research, especially on things which could be country specific. I’ll point them out in the steps.
1. Figure Out Your Budget
Your budget will have a very large hand in defining your strategy so this is where you must begin — figure out how much you want to put into your property investing.
As a general rule, and I won’t pretend to be a financial advisor (because I’m not), never put more than 50% of your total available fluid capital into investment. Investing is good but you still need money to live. Don’t quit your day job either, property is great but it takes time for income and gains to show.
If you have a large amount of capital to put in (tens of thousands or above), you can consider traditional avenues like buy-to-let (buying a property to rent it out for the rental income), buying a large property and converting it into rentable rooms /apartments or even property development.
If you have a smaller amount of initial capital ((£/$)10,000 or lower) you can go for newer strategies like rent to rent, lease options or property management. If you have no money at all but a keen mind and an insatiable drive to succeed, you can consider deal-sourcing and connecting investors.
Don’t worry, I’m going to go through all of these strategies in point 3.
Ascertain how much money you can comfortably afford to put in while still being able to live comfortably. Seek professional financial advice if in doubt (and seek it anyway, just to be sure).
You can also seek investment, but that’s a bit outside the scope of this piece. Have a look here for some investment-raising ideas.
2. Do You Want Short-Term Income or Long-Term Growth?
Some strategies are based purely on active, short-term income (working for your pay) like property management or deal sourcing, some are based in long-term growth (and income way down the road) like property development.
Some can be both short-term and long-term, like buying a house, sprucing it up, renting it out and eventually selling it when the value has (hopefully — dependent upon market and demand) gone up.
As general rules, short-term income strategies require less capital to start with but make you less money overall, whereas long-term growth strategies require more capital but have a much higher potential for larger returns.
Decide if you need income now or if you want growth over time. You can also have both, but it will depend on what your budget allows and how much time you have to put in.
3. Pick a strategy
I’ll go through the strategies mentioned point 1, but my descriptions will be very brief. There are whole books dedicated to each strategy so please do your own research if any of them interest you.
Obviously initial capital requirements will fluctuate wildly depending on what local area and part of the world you’re looking at — a 2 bed apartment in the middle of London is likely to cost the same as a 6 bed house in a village in the midlands. I’ve included minimum budgets but they’re fairly arbitrary for much the same reason. The values are generally the absolute minimum needed for each strategy.
Strategies also depend on which country you live in. Do your due diligence on domestic laws and local rules before taking any action.
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Deal-Sourcing
Min Budget: £0
The middle-man strategy; finding property deals and selling them on to investors for a commission. This takes practically no money to start but it is labour intensive. There are many people out there who want to get into the property market — they have the money but not the time or the know-how and this is where the deal sourcer comes in. The sourcer finds motivated sellers, deals below market value and passes them onto investors for a fee. The labour intensive part is doing the leg work to find the deals and the investors; go to real estate agents, network as hard as you can in circles where you could find buyers.
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Rent-to-Rent
Min Budget: £3–5k
This means renting a property on a long term basis then renting it out on multiple short term lets. A fairly new strategy, especially with the rise of the Airbnb style short let. The difference between the nightly price you’ll charge and what you pay in rent will be your profit margin. The toughest part of this is finding your first property to rent. Real estate agents and landlords don’t tend to like the idea of short lets and you must be upfront with them if this is what you intend to do. If they agree they’ll usually ask for a deposit and few months rent upfront, and this, plus the costs of furnishing the properties is where your budget will go. This is a low initial cost but high income potential strategy — it’s not uncommon for rent-to-renters to amass properties and make thousands per month.
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Buy-To-Let
Min Budget: £15,000
The classic strategy; buy a property, rent it out and hope the value goes up in time. The budget amount I’ve put is pretty arbitrary because it all depends on location, size, condition etc. Most of the budget will go on the deposit and the rest on purchase fees (legal and such) and any work needed. The best way to do this is find an area popular for rentals then see if you can find a property for below market value (one which needs work). Buy it, spruce it up (which will add value) then tenant it for the rental income. You’ll need to be able to get a mortgage (if you don’t buy the property outright — which I suggest you don’t) so you’ll have to demonstrate you can afford the monthly repayments. After the initial mortgage period has passed you can remortgage (when the value of the property has increased), get your initial deposit out and start the process again.
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Multi-lets and Houses of Multiple Occupation (HMO’s)
Min Budget: £40,000
Where you buy a property and split into separate, rentable units. Say you have a large house with 4 bedrooms and 3 receptions rooms. Renting the house as a whole might command £3,000/month but, turn 2 receptions rooms into bedrooms and you’ll have 6 bedrooms you can rent for £750 each. Your rental income will jump to £4,500/month instead of £3,000. Each tenant rents their own room and shares the communal areas. You’ll need to ascertain if there’s a market for shared living in the area first. These rentals usually come with a lot of regulations; they need to include a minimum number of bathrooms, fridges mandatory fire safety installations etc, depending on how many people can live there. This is a very good income strategy, it takes more work than a buy-to-let but definitely makes more money.
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Land-Buying
Min Budget: £100,000
This one requires money and expertise. It’s the buying of land and adding value to it by way of planning permission or changing the scope of the use of the land. This can also be done with buildings; for example buying an existing building, changing it’s use from residential to commercial and selling it or renting it on as a commercial let. This strategy could be done with less money but it’s not worth it at low price points and generally you can’t mortgage buying land. It requires having an in-depth knowledge of the land laws of your country, local planning regulations and the practical process of filling in all the damn forms, or knowing someone who does. A lot of money can be made in a short amount of time with this strategy, but knowledge (and high capital) is key.
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Property Development
Min Budget: £1,000,000
Buying a plot of land or an existing building and either converting it into separate saleable/rentable units and or tearing it down and rebuilding. This is the most ambitious, long-term and costly of all strategies. It will take time, effort, experience and a lot of money, even if the project is relatively small in scope (like say, converting a building into 3 or 4 apartments), but the payoff at the end can run into the millions, depending on scale. This can often only be done by high net-worth individuals, companies with a team of professionals or very, very savvy entrepreneurs. A beginner cannot start here, but it’s a hell of a goal to aim for.
4. Define Your Area and Do Your Due Diligence
Once you’ve defined your budget and done your research on your chosen strategy, one of the first things you need to do is define the area you’ll operate in.
Say you’re looking to do buy-to-let and you think a particular area has potential. Are rentals popular in the area? Are property prices within your budget? Is it close enough for you to comfortably travel to? Are the rental yields high enough to consider it a potential?
Similarly if you’re looking to deal-source. Where are the areas investors can make most money? Where are rents high and property prices comparatively low? Are you able to comfortably travel to and from the area to speak to agents, see properties etc?
The particular questions you’ll need to ask will become clear on further research of your chosen strategy. The vast majority of these steps can be taken from home while we’re all self-isolating. We have the internet to look at maps, travel times, property prices, rental rates, mortgage calculators — everything is at our fingertips.
5. Watch The Market & Get Talking To People in The Industry
Stay abreast of local news, business news and keep an eye on changes in property and rental prices, which again you can do almost solely using the internet.
Staying current with trends will help you make far better informed decisions.
Equally, you can pick up the phone and speak to people with know-how. Real estate agents, lettings agents and mortgage advisors are still available on the phone, even if they’re at home. You’ll pick up valuable knowledge you may not get online and you’ll become known to them. So when we do get past covid and the time comes to act, you would’ve already built your bridges.
Now’s the opportune time to get started. Happy researching :)
