I became a landlord somewhat by accident. I didn’t have a grand investing strategy or clearly-defined financial goals. But I found myself living in an affordable real estate market, and I decided to buy a four-unit home and live in one apartment while renting out the rest.
In hindsight, this is one of the best financial decisions I’ve ever made. The rental income paid for my mortgage and expenses, and even netted a small profit. A year and a half later, I had learned enough to realize that real estate investing could be a crucial piece of my own financial independence. I also saved enough money to buy a second investment property, this time a two-family home that was fully occupied by tenants.
If that all sounds overwhelming to you, I get it — it was for me too at first. But there are many different ways to get started, depending on what your goals are and how much money you have to work with. Here’s a breakdown of how you can do it, too.
Tips on Getting Started
1. Buy a single family home and rent out extra bedrooms
Most first-time buyers see a single-family home as just that—a home for their family, a place to call their own.
But that single family home can also be your first foray into real estate investing, if you’ve got some extra space. In larger cities especially, demand for rentals means there’s a market for spare bedrooms or renovated basements.
Craig Curelop, a real estate agent and investor in Denver and co-founder of The FI Team, is one of many people who call this strategy “house hacking.” He advises many of his clients to think about adding roommates as a way of generating income from their primary residence.
“House hacking is definitely the most popular way” to get started in real estate investing, Curelop said.
He jumped in with that strategy when he first moved to Denver. Now he’s onto his fifth house hack and helps his clients do the same.
“It’s really made a big difference in my life,” Curelop said.
2. Buy a multi-family home and rent out the apartments
This is probably what you think about when you think about real estate investing: Becoming a traditional landlord.
This path definitely has a higher barrier to entry. Multi-family homes are more expensive — sometimes prohibitively so in big metros — and require a higher down payment if you aren’t going to live there.
You also have to make sure you’ve got the stomach for handling emergency maintenance calls.
“It can pay dividends, but it’s work, and you’ve got to be willing to put the work into it,” said Randall Lee, a partner and financial planner at TrustCore, a financial planning firm. He and his wife have been landlords together for more than 25 years.
Lee uses his own experience to help new investors avoid some of the pitfalls of multi-family investing. One of the biggest oneshe says? Not doing a thorough job of screening tenants.
“What more than anything dictates the success of a relationship with the rental property is really the quality of the tenant that’s in there,” Lee said.
Expensive and unexpected expenses can arise too. A pipe may randomly burst, causing late night flooding, or you may need to lay down a new concrete driveway, which can cost a pretty penny. It’s easy to spend money on necessary repairs when you first get into a rental property, regardless of how the inspections came out.
And finally, you’ll need to run an honest look at the numbers to make sure it’s worthwhile. Positive cashflow alone isn’t enough. Lee advises doing the math to determine the true return on investment: How much profit a property will generate compared to the equity you have invested in the home. Becoming a landlord isn’t for everybody, so be sure it’s what you can really afford to do.
3. Find an investing partner and buy property together
Maybe you want to buy an investment property, but you’re hesitant to go it alone. Whether you have financial constraints or simply want to lean on someone with different skills, this is where finding a partner can be really helpful.
Lee says investing partners often balance each other with different areas of expertise: Maybe one investor is a math and finance whiz, while the other has a contracting background and can handle construction repairs.
Creating these types of partnerships can be a win-win: Both parties receive a stake in the investment and the help they need to be successful. Plus, it might make a purchase possible in a market where housing prices are too high to invest alone.
“There are different strategies that work best depending on your location,” Curelop said.
But make sure you can really trust your investing partner. When you buy property together, you’re likely locked into that relationship for 15 or 30 years (depending on the type of mortgage).
4. Put money into a real estate investment trust (REIT)
If the idea of directly owning property turns you off completely, there’s one other way to invest in real estate: REITs.
A real estate investment trust is a type of publicly-traded company that allows investors to buy shares of a large, diversified real estate portfolio. The REIT does all the work of buying and managing the properties, and the shareholders earn a portion of the profits.
“Those can have the advantage of spinning off some income,” Lee said, without the work of being a direct landlord.
But Lee advises his clients to take a close look at these funds before investing, and cautions that they don’t weather economic downturns as well as directly-owned real estate does.
“They tend to not provide the protection you’re looking for in a nasty market,” Lee said.
Make Sure You’re Investing For the Right Reasons
Patricia Hausknost understands the “lure” of real estate investing. She spent 20 years in real estate financing before becoming a certified financial planner, and she’s seen many of her clients do well. But she warns that it’s not for everyone.
“While it’s true you can do well investing in [real estate], if you don’t have the stomach for the potential downsides you may want to consider more passive investments (like the stock market),” Hausknost said.
Investing in real estate might be more accessible than you think. But before you take the plunge, make sure you’re willing to put in the work to make the investment successful.
Lee also tries to make sure his clients are investing in real estate for the right reasons.
“What is this going to give you that a diversified stock and bond portfolio won’t give you?” Lee often asks. The answer, most of the time, is higher returns. But that can also mean more headaches.
Take it from me: Investing in real estate has given me a big leg up financially, but it has come with its fair share of emergency calls, dirty work and sticky situations.