Even if you’re new to the real estate world, you’ve probably heard of this common acronym: REI.
“REI” means “real estate investing,” however it can also mean “real estate investor.” REIs make up a large number of entrepreneurs in the real estate industry.
Now that you know what REI stands for let’s dive into what investors are, what they do, and how you can become one.
What is REI in Real Estate?
Simply put, real estate investors invest capital into real estate in hopes of earning a profit.
Real estate investing is a wide niche, with pros varying in methodology, experience, and income levels. There is no one-size-fits-all approach to investing in real estate, which is why several branches within the industry exist.
What Does a Real Estate Investor Do?
What a real estate investor does will depend on the type of investing they focus on. There are three main branches of REI:
Fix and Flip
If you’ve ever watched a show on HGTV where an investor purchases an old house, makes it look new, and sells it to a buyer, you’ve witnessed the work of a fix-and-flip investor.
Fix-and-flip investors search for relatively inexpensive properties before purchasing them, performing renovations to make the property appealing to a buyer, and selling for a profit.
A fix-and-flip project can vary in intensity depending on the skills of the flipper. Some projects may only require minor cosmetic updates, such as paint, new appliances, doors, etc. Other fix-and-flip properties need to be completely gutted and rebuilt.
With this avenue of real estate investing, greater risk often reaps greater rewards. While fix-and-flip investing may sound straightforward, it requires extensive planning, budgeting, and smart marketing once it’s time to sell.
Buy and Hold
Buy-and-hold investors generate income by buying properties and renting them out to tenants for a profit.
The amount the investor will rent the property for will be higher than their monthly mortgage, allowing them to pay their mortgage payment while making passive income on the property. Rental properties can be either long-term or short-term rentals, depending on the investor’s goals and how much time they’re willing to spend managing the property.
Pro Tip: Long-term rentals involve leasing the property to a tenant for extended periods, typically anywhere from 30 days to 6 months or more. Short-term rentals are occupied by tenants for shorter periods, typically a few days or even a few weeks in some cases (think Airbnb® or VRBO®).
Many buy-and-hold investors work with a property management company to handle day-to-day operations, such as collecting rent, maintenance, and booking. This allows investors to spend their time and energy finding other investment opportunities while their current property (or properties) bring in passive income.
Wholesalers generate their income by assigning the contract of a home that can be sold for under-market value to an interested buyer.
A wholesaler will typically target homeowners who are in financial distress. These homeowners have properties that are too poor of condition to sell the traditional route (fixing the property up, working with an agent, having showings, etc.). These homeowners need to sell quickly, so the wholesaler will assign the contract to a buyer who doesn’t mind the property being distressed, often a flipper or rehabber.
Since the wholesaler is assigning the contract to a buyer for the homeowner, they will take a commission from the deal. The commission amount varies from wholesaler to wholesaler.
While contracts can be sold to another party by default, a seller’s preferences or local regulations may prevent a wholesaler from selling the contract itself. In these cases, the wholesaler may need to purchase the property for a very short period (typically 1-3 days) before turning around and reselling it to their buyer. This process is known as a “double close.”
Many new investors find wholesaling appealing because it requires little to no money to begin earning commission since the wholesaler can often assign contracts without actually purchasing properties.
Pro Tip: Want to learn more about wholesaling? Check out our PropStream Academy course: Introduction to Wholesaling.
How to Become a Real Estate Investor
To become a real estate investor, you’ll first need to choose the type of investor you want to be.
Take some time to think about your skillsets and how involved you want to be with the properties you invest in. For example, flipping may be your route if you're handy and enjoy performing renovations. Or, if you enjoy working with people, wholesaling or buying and holding may be better options for you.
When you’ve decided which branch of investing you’d like to pursue, you can move on to the next steps to get your REI career off the ground:
Step 1: Educate Yourself About Your Type of Investing
Before you spend a dime on purchasing a new property, you’ll want to learn the ins and outs of your type of investing.
Whether you choose to watch podcasts, read articles, take courses, or any other means, you’ll want to learn the fundamentals of your niche, such as:
- How real estate contracts work
- How to maximize your ROI (return on investment)
- Local regulations about investing
- Tax advantages for your type of investing
- Resources that will help you succeed
The more you know about investing before diving into a contract, the more prepared you’ll be to make the most educated decisions.
Important: We recommend working with a legal professional before entering into real estate contracts to ensure you know exactly what you agree to.
Step 2: Find a Property
After you’ve performed extensive research, you can begin searching for properties.
The type of properties you target will depend heavily on your investing route. For example, if you’re a flipper or a wholesaler, you’ll want to target distressed properties with great potential. As a buy-and-hold investor, you may want to look for properties requiring minimal or no renovations to get tenants in immediately.
Additionally, you’ll need to choose a real estate market with the most earning potential.
Since the competition for getting on-market properties is stiff in the current seller’s market, you may want to consider looking off the market.
A real estate investing software like PropStream is a great tool for finding off-market properties with motivated sellers. Identify hot markets, use unique search filters to uncover selling motivation, create lists of potential sellers, and more with this intuitive, all-in-one solution!
Step 3: Make a Plan For Funding
Most new investors can’t pay in cash and must lean on funding until they’ve built enough capital to make cash offers. The type of loan you choose will depend heavily on the type of investing you’re doing.
Funding a Buy-and-Hold Property
If you choose to invest in a rental property, you may be able to get a conventional mortgage through a bank, credit union, or other financial institution.
While you’ll need a higher credit score to qualify for a conventional loan, the interest rates are typically lower. If you don’t meet the requirements to get a conventional mortgage loan, you may want to consider borrowing from a private or hard money lender.
Funding a Fix-and-Flip Property
There are plenty of loan options available for flippers that will help you not only purchase your investment property but pay for necessary renovations as well.
Many flippers seek hard-money or private loans as they typically have looser requirements to qualify than a conventional mortgage. Fix-and-flip loans have shorter terms with higher interest rates since, ideally, the loan will be paid back in less than 24 months.
Wholesaling Real Estate Funding
As a wholesaler, you may be able to get away with selling the contract, meaning you never actually own the property.
If the deal requires a double close, you may need a transactional loan to purchase the property for that short period before selling it to a new buyer. A hard money or private lender is the best resource for obtaining a transactional loan.
Are You Ready to Start Investing?
If you’ve been thinking about becoming a real estate investor, there’s no better time than the present.
While jumping in and finding your first deal can be daunting, the earlier you start, the more time you’ll have to perfect your methods. The sooner you perfect your methods, the sooner you can grow your portfolio and make real estate investing a full-time career.
Ready to find your first investment opportunity using real estate data? Try PropStream for 7 days free and enjoy your first 50 leads on us!