Although stay-at-home restrictions have eased in many states, roughly a third of Americans still find themselves working from home. The sheer amount of digital tools and online information — along with the shifting real estate market — have created an opportunity for people who want to begin a career or side hustle investing in real estate.
In my current role at MetaProp, I invest in technology companies that help make the real estate world more transparent and efficient for investors and other market participants. I also worked as a developer, landlord, and property manager, and I've invested in many different types of real estate assets over the years.
Virtually all the tools required to research, purchase, and operate real estate exist online. It has never been easier to invest in physical real estate thousands of miles away without ever having to leave your couch.
Here are the four steps to getting started.
1. Do your research
Before attempting to analyze a property or a company for a potential investment, a beginner should get familiar with real estate concepts and vocabulary. For example, you should understand the difference between an office building and an apartment building, as well as the basic guidelines of a commercial and residential lease.
There are many helpful quizzes and flash card solutions for studying available online. Quizlet, for example, has created a series of easy-to-use flash cards to help drill down on some essential real estate terms.
Business Insider recently published a list of the 27 essential real estate books, and here is a list of the most impactful podcasts to listen to.
YouTube is also a great resource. One of the most dynamic personalities in the real estate "wholesaling" or "house flipping" game is Max Maxwell. His videos teach everything there is to know about buying "ugly" houses, renovating them, and selling them for a tidy profit. This is a good intro video to his methodology.
The Bigger Pockets team also creates excellent content for anyone who wants to start investing. The community shares best practices on how to conduct core real estate tasks, like making an offer on a property, communicating with brokers, and negotiating a lease.
Twitter also has a lot of reliable real estate information. There are many lists of Twitter accounts to follow that will keep a beginner up to date on important trends happening in the industry. Social media can also help investors narrow their theses and execute transactions step by step.
Fortunately, the real estate community has become more accessible with plenty of online content.
2. Analyze the data to find the best investment
After understanding the basics, most investors will start to wonder why one particular property might be a better financial investment over another.
For this exercise, transparency and accessibility of real estate data is paramount. A quality investor will want to know about the target market as well as the property itself. Is the property in a neighborhood that will see significant household growth? How can we estimate this? Does the property need a significant amount of work? Is it selling for a discount because of the work required?
With any real estate opportunity, look for an information arbitrage. For example, if someone had a thesis that a large corporate tenant in a specific area would increase the value of nearby residential properties, you should purchase and renovate in that neighborhood before other investors catch wind. Similar to investing in the stock market, being able to connect dots will reward the cautious investor over time.
But how do you access this data? Many excellent commercial real estate data providers like Real Capital Analytics, CoStar, and Reonomy cost money to access and are intimidating. These websites provide important information on the purchase and sale prices of commercial assets as well as trends in leasing prices at the property. These online platforms can also collect publicly available data to provide insights on who owns a particular property.
Commercial assets also tend to be more complex in nature than residential, as commercial leases can run thousands of pages and landlords tend to collect more income from tenants than just the base rent.
That's why many new real estate investors begin with purchasing, renovating, and leasing out single-family homes.
Technology-enabled real estate brokerage firm Redfin publishes its own residential data on the market for free. This is a great place to start to look for trends in specific neighborhoods, rental data, and cost of operating assets based on the location.
3. Take the plunge
After using the data to come to a conclusion about what type of real estate investment to make, it's time to evaluate the merits of a potential opportunity, and if it makes sense financially, put the capital to work in a real estate transaction.
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In real estate parlance, it's called underwriting the deal.
People often ask, "Does the deal pencil out?", which is a way of asking, "Does the deal make money for the investor?"
An underwriting model looks for whether the property will pay the investor back on a monthly basis from rental income, the cash on cash return. The model will also explore asset price appreciation potential.
While there are many advantages to holding real estate long term and passing it on to future generations within the family, many investors look to exit real estate investments with some frequency. In this case, the underwriting model will want to calculate Internal Rate of Return (IRR), the primary metric used to calculate the profitability of a real estate investment.
Professional real estate investors spend significant amounts of money annually to use software to help underwrite deals. Platforms like Argus help to automate a lot of the manual data entry required for complex properties.
Many real estate investors use Microsoft Excel as their primary underwriting tool, and many templates exist online to help a beginning investor get started. Single family homes are typically the easiest type of asset within the real estate universe to underwrite, so starting there makes sense for many beginners.
Websites like HomeUnion allow investors to purchase homes to rent to tenants, providing not just a transaction portal but a potential IRR calculator as well. Investors can analyze the return potential from these homes themselves, and then engage with an Automated Valuation Models (AVMs) provider like HouseCanary to derive a "second opinion."
AVM's have become more common as a "gut check" for investors as this type of valuation underwriting removes the human component completely, and relies exclusively on data and an algorithm for calculating the potential value of a home. If they like the deal financially but are unsure of the physical condition of the interior of the home, Investors can engage with the property and view it in an immersive virtual experience with tools like Realync.
Once you're ready to purchase a property, online mortgage brokerage platforms like Morty make it easy to shop the best rates for a mortgage, and technology-enabled title agencies like Spruce ensure a transparent online closing process that's fast and saves customers 25% by not charging random unnecessary fees on top of the title policy.
4. Renovate and manage your new investment
After closing and taking title to the property, you might need to renovate the place.
Companies like Skipp enable designs and specs for home renovations just by snapping a quick scan of the interior and uploading the data to their engine. Technologies like Matterport have made it easy for people to get the "feel" of a home, without ever setting foot within the four walls.
Then, after the home is renovated, platforms like Avail let investors manage their investment property with tenant screening, lease signing, rent collection, and insurance capabilities. Avail operates with a freemium model, so basic features and functionality can be accessed on the website at no cost.
Purchasing and managing a property is both expensive and time-consuming no matter how much amazing technology exists to make the process easier and more efficient.
For those pursuing real estate as a truly passive pastime, investing in the stock market represents the lowest barrier to entry and the least time commitment.
Following the success of investment platform Robinhood, many stock brokerage firms have dropped trading commissions to $0 per trade or a de minimis amount. Just a few short years ago commissions were almost always above $10. Therefore, it has never been cheaper to invest in the public equity markets. In order to obtain exposure to a diversified basket of Real Estate Investment Trusts (REITs), investing in a good Exchange Traded Fund (ETF) might be the optimal option. An ETF is a basket of stocks that can be tied to a certain sector. Just as an ETF can be tied to the pharmaceutical sector, companies can assemble a bunch of similar companies together to form the ETF.
- Individual Pubic REITs
However, for more control over asset type and geographic exposure purchasing shares of individual Public REITs may be more appealing as selection of companies is ceded to a professional manager when investing in an ETF. Individual Public REITs still often provide diversification of geography and multiple assets within the portfolio, although often they focus on one particular asset type like office or retail.
Many different free online financial media outlets analyze both past and future performance of individual REITs. Public REITS are also covered by professional research analysts like Green Street Advisors. However, only a small smattering of their work is available without a paywall. A REIT at its core is a company that owns and usually operates income producing real estate assets.
- Debt Crowdfunding
Another interesting avenue for passive real estate investing is found in real estate equity and debt crowdfunding. Crowdfunding sites like Fundrise, Yieldstreet, and EquityMultiple let you invest passively in individual assets, often through a Private REIT structure, meaning a REIT that enables someone to invest in income producing assets, but the access does not come through the stock market. Some investors prefer this style of real estate investment because they become familiar with the singular asset and the income it generates. These investors prefer the concentration of a single asset over the diversification of multiple assets.
Regardless of your path, real estate investing can be lucrative, intellectually stimulating, and fun. Conversely, it can also be both financially and emotionally painful. So, before taking the plunge, make sure to do plenty of research and ask lots of questions. As Sam Zell, one of the most famous real estate investors of all time, famously said: "There is tremendous value in being a good listener."
Disclosure and Disclaimer:Through the MetaProp venture capital funds, I am an investor in Morty, Spruce, Skipp, and Avail. The content in this article is for informational and educational purposes only and should not be construed as legal, tax, investment, financial, or other advice. The views expressed here are my own and not those of any entity with which I am affiliated. Not all investors will have the same experiences as me, and it is important to remember that investing involves risk and to do your own analysis before making any investment based on your own personal circ*mstances.
Zach Aarons is the co-founder and general partner at MetaProp. He has been working at the intersection of real estate and venture capital for the past decade.
