How do you start out in real estate investing? If you’re new to real estate investing, and just starting out, maybe think about purchasing an in-law unit or constructing a separate unit on your existing home.
There's nothing wrong with starting out small. There's no need to take on too much risk when you're just learning about real estate investing. Sure, there are a wide variety of investment properties to choose from, but starting out with a condo or a townhouse is a good way to learn about owning property and make money in real estate.
Even renting out a basement or one floor in your house, is a great way to get started in the rental property space with little capital, risk, and time. Plus, again, it's a good way to learn about real estate investing. Then, once you have a good understanding of real estate and what risks you can take, buy a larger investment property or an additional condo.
Another option for a new investor is to buy a duplex and live in the top or bottom floor, or create a second home that acts as a vacation unit - that you can rent out. These are good ways to get into the real estate game without putting up a lot of capital—these types of investments are cheaper and very easy to manage. No need to hire a property manager to look after a number of units or have the burden of screening and finding new tenants all the time.
Click on a link below to see examples investment property deals for a wide variety of property types.
In-laws are a great way to offset your mortgage payment and you will be able to write off the depreciation of the unit and the appliances in the unit. Plus, when and if you sell the home, you can include the cash flow from this unit in the price. But you need to be aware of zoning laws for your city and neighborhood, specifically for an in-law unit or an addition.
However, if you have an in-law unit, you will have what is probably the most negative aspect: someone living in your residence. But if the house is structured with a separate entrance, kitchen, and bathroom, you'll still have the freedom and privacy of your home.
If not, you might want a friend or relative to live in the in-law, which will make the conditions much more pleasurable. Conflicts can always arise but with some borders between your living spaces, things should go smoothly.
Similarly, with a duplex, your neighbor can conceivably pay for your home, but you are again in closer quarters with your tenant. But if you're starting out and are young, these are not bad options. Look for a duplex that makes separate living very easy, and comes with good parking and a separate stairway for the upper unit.
The other option is renting out your second home or vacation unit. Again, you run the risk of having the tenant in the unit when you might want to use it. But the IRS gives you two weeks of tax free rental income each year for second home landlords, which could be worth the intrusion. I know someone who has a large house near Lake Tahoe where the rooms have been split up and he rents the unit out to snow boarders and skiers. The house even has closets that function as lockers. There are ways to generate cash flow, reduce your taxes, and get into the investment property game. Sometimes, the key is to be creative.
Think about ways you can satisfy a demand, whether it’s in a ski area or near the beach, or maybe it’s an apartment in Arizona just near the spring training practices for Major League Baseball. Each spring you'll have a waiting list for baseball enthusiasts looking for a place to stay.
TIP: Don’t Sell Income-Generating Property. When you sell it you have to pay taxes and you lose the cash flow. Consider that you can still refinance and then pull out equity, or use equity to buy another property. And, don't forget about the 1031 exchange.
Give up that cash flow only if you know there’s a downturn coming in the market or perhaps new rent control for the apartment you own. Or maybe there’s huge growth and demand in the area you own property, and you can make a substantial gain by selling. Take these factors into consideration before you make that decision.