How to start investing in real estate

Types of real estate investing

There are two main types of real estate investing: active and passive. The main difference between the two is whether you own or manage the property.

Active investing

Active real estate investing is the more hands-on approach. You buy and manage the property directly.

This can include buying a house to rent it out either as a short-term vacation home or a long-term residence for tenants.

Another common form of active investing is property flipping, where you buy a home below the market price, renovate it to boost its value, and sell quickly for a profit.

Some of the benefits of active investing are:

• You can collect rental income
• You build equity
• Property values usually appreciate
• You control how the property is used
• Tax benefits

However, there can be downsides, such as:

• Higher up-front costs
• Higher ongoing costs
• It’s less liquid
• Managing the property can be a full-time job
• More research is required on markets and landlord laws

Passive investing

Passive real estate investing requires less effort because a third party does some or all of the work for you. Crowdfunding, real estate investment trusts, and real estate funds allow you to invest in real estate without acting as a landlord. Passive investing also can be good for investors who want to avoid the high up-front costs of active investing.

Here are some of the potential perks of passive investing:

• Lower up-front costs
• Less research and expertise needed
• It’s more liquid

Keep in mind that there may be drawbacks, such as:

• You split profits with other investors
• You have less control over the investment
• More taxes and fees for third parties
• You must share the tax benefits

6 steps to start investing in real estate

If you’re ready to jump into real estate investing, arm yourself with information. Learn more about your investment options and establish your financial goals. All investments come with risk, and some real estate investments are riskier than others.

1. Learn the basics of real estate investing

Before investing in an abandoned property, it helps to understand how real estate investing works and what risks to expect. Learning common strategies — like real estate flipping, renting, or holding long term — can help you decide what fits your goals. This guide on how to make money in real estate offers a helpful overview of different approaches.

You may also want to meet with a financial advisor who can explain how different markets, financing options, and timelines could affect your returns. If you prefer a flexible option, working with an online financial advisor can provide guidance tailored to your situation.

For more structured learning, organizations like the Institute of Real Estate Management and the National Apartment Association offer webinars, courses, and certifications. Some universities also provide real estate investing certificates, such as the University of Pennsylvania’s program. Building this foundation can help you approach abandoned property investments with clearer expectations and more confidence.

2. Determine your risk tolerance

Real estate investing involves risk, and the level of risk you take on varies by investment type. As an investor, it’s important to understand your risk tolerance, which the U.S. Securities and Exchange Commission defines as your ability and willingness to lose some or all of an investment in exchange for potential returns. In practice, this means considering not only what you’re comfortable risking, but also what you can realistically afford to lose.

Your personal and financial situation plays a big role in determining investment risk tolerance. Ongoing obligations like housing costs, debt, and monthly expenses may point you toward more conservative investments, while fewer financial commitments and more disposable income may allow for greater risk. Building a diversified portfolio can also help manage risk by spreading exposure across multiple assets, so a single underperforming investment doesn’t carry the full impact.

3. Choose your investments

Real estate investing can be as hands-on or hands-off as you want. First-time investors may be more comfortable with a lot of third-party involvement and guidance, while more experienced investors may prefer more autonomy.

Here are some common types of real estate investments to choose from:

• Real estate investment trusts. A real estate investment trust, or REIT, is a company that makes a profit through real estate, often by owning income-producing properties or office buildings. As an investor, you can buy a share of the company to add real estate to your portfolio. In some ways, this is like a mutual fund. REITs come with low up-front costs but can be subject to market volatility.
• Rental properties. A rental property is a home or apartment you buy to rent out to tenants. As your tenants pay rent, you build an income stream and equity in the property. Rental properties have high up-front costs and can require a lot of work to retain and manage.
• Commercial real estate. Commercial real estate refers to properties rented to businesses, hotels, retail stores, and offices. Typically, investors enjoy a longer lease term, translating into a more consistent cash flow. However, commercial real estate also can be sensitive to market changes.
• Crowdfunded real estate investment platforms. Crowdfunded real estate investment platforms allow individual investors to contribute capital to a real estate project of their choice. In many cases, the funds are illiquid for an extended period.
• Mortgage-backed securities. A mortgage-backed security includes multiple mortgages that loan issuers bundle together and sell to traders in the bond market. It’s a very indirect way of investing in the mortgage industry.
• Tax lien investing. Tax lien investing involves buying at auction tax lien certificates, which are created when a property owner fails to pay their property taxes. Ultimately, you can claim ownership of the home if it’s foreclosed on, but the original owner could pay their tax bill and keep the property.

4. Search for properties

Not all real estate markets perform the same, and some areas offer stronger potential returns than others. Before zeroing in on a specific property, it helps to look at broader market trends to understand where demand is growing and where prices may be more volatile.

You can evaluate the profitability and risk of a property using analytic software and reporting services, along with market-level data like population growth, median home sale price, rental yield, vacancy rates, and home price trends. Rocket Mortgage’s guide to the most promising places to invest in real estate in the U.S. uses these factors to highlight markets with strong investing potential.

To narrow down hot markets in real time, you can also review Redfin’s regional housing trend reports, which show where home prices and buyer demand are rising or cooling across the country. Once you’ve identified a market, you can begin searching for individual properties in a few different ways, such as working with a real estate agent, looking for “for sale by owner” listings, or networking and advertising yourself as an all-cash buyer to find off-market deals.

Keep in mind that not every real estate investment requires you to find and purchase a physical property. If you prefer a more hands-off approach, options like real estate investment trusts (REITs) and other passive investments let you gain exposure to real estate without managing or owning a specific home.

5. Figure out financing

Once you’ve found the right property to invest in, you must figure out how to finance it.

You’ll find that finding financing for an investment property can be trickier than getting a mortgage for your primary residence. Lenders have stricter mortgage criteria for investment properties because the borrower is more likely to prioritize paying their primary residence, which means the lender is taking on more risk.

It’s still possible to buy an investment property with a traditional mortgage, but you’ll likely be charged a higher interest rate. Other options for financing include:

• Freddie Mac’s investing property program. This is designed to help borrowers get the financing they need for investment properties with one to four units.
• Real estate crowdfunding. Crowdfunding involves asking the public to help fund the venture. You’ll ask other investors to help you finance your real estate investment and share the risk with them.
• Holding multiple mortgages. You may be able to take out more than one mortgage to help finance your real estate investments. However, this can be risky, and some banks are unwilling to let you hold multiple mortgages at once.
• Loans for flipping houses. You may be able to obtain a loan from a private lender specifically to flip a house. A hard money loan, a home equity loan, or a cash-out refinance may be a better way to fund house flipping ventures than a traditional mortgage.
• Opportunity zones. Opportunity zones encourage investing in disadvantaged communities by providing incentives under the Tax Cuts and Jobs Act of 2017. This is a good option for anyone who wants to revive an economically underprivileged area.

6. Monitor your gains and losses

While each investor will have different goals, they all share the general objective of building an income stream and making money. It’s important to assess your progress toward these general goals by tracking your gains and losses.

For example, if you’ve invested in a REIT, you’ll want to track how your dividend payments compare to your up-front costs to determine when you’ll break even and start making money. If you’ve purchased an investment property, you’ll want to know how many months of rental income it will take until you’ve offset your up-front costs.

You can use profit and loss statements to tell you whether your investment is moving toward profitability or losing money.

You can use several different ratios and calculations to help you understand your progress. Some work better for specific properties, like residential versus commercial, so doing your homework before using one is important. Examples of metrics you may need include net operating income, internal rate of return, and operating expense ratio.

What are the pros and cons of real estate investing?

Like all financial decisions, real estate investing has advantages and disadvantages. How you weigh these pros and cons will depend on your priorities, financial situation, goals, and risk tolerance. If you’re just starting with real estate investment, you might prefer something less risky with lower up-front costs. If your income is high and debt is low, you may be more comfortable with higher up-front costs and illiquidity.

The bottom line: Real estate investing takes knowledge and time

Real estate investing can be a powerful way to build income and long-term wealth, but it isn’t a one-size-fits-all strategy. Whether you choose active investing, like rental properties or flipping, or passive options, like REITs and crowdfunding, the right path depends on your goals, timeline, and risk tolerance.

Taking time to learn the basics, research markets, and understand your financing options can help you make more confident decisions and avoid costly mistakes. If buying an investment property is part of your plan, Rocket Mortgage can help you explore financing options and get started.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Refinancing may increase finance charges over the life of the loan.

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