Real Estate Investing Could Be Your Key to Financial Freedom

Make sure you have good credit.

Before you get started in real estate, make sure your finances are in good shape. A good credit score and low debt will help you get approved for loans faster.

"Keep your FICO (credit) scores up," says Vera Barnes, a realtor at Urban Nest Realty in Las Vegas. "A lot of people don't understand how important that is. Unless you have a lot of money in the bank and can pay cash, your credit is the key to actually acquiring property."

Most people don't have piles of cash sitting around, but a good credit score will help get you better financing options that don't require much money upfront.

"Most people are familiar with bank loans as a strategy," says Halm. "There's also seller financing, where the seller is essentially the bank. Or there are hard money lenders, which are a lot more flexible than banks. They tend to have higher interest rates and shorter terms, but they move faster."

Keeping your debt low is an important factor in qualifying for properties and financing options. Barnes specifically warns against credit card debt, which is a common issue.

"Credit card debt is just not a powerful tool to build wealth," says Barnes. "It affects your debt-to-income ratio, which is the amount of income you have coming in versus the amount of debt and payables going out, including credit cards, car notes, and house notes. That all has to be fairly low so that you can qualify for a property. With a low debt-to-income ratio, you can qualify for a larger amount of money."

Another tip? Spend two years or more at a job before trying to invest in real estate. "If your taxes don't show that you're making money, you're not going to qualify for a property with a reasonable interest rate," says Barnes. "There are companies that can qualify you, but the interest rates can be really high. Hard money loans can have 10, 15 percent interest rates."

Figure out what your goals are.

When choosing the type of property to invest in, there are a lot of options. Ask yourself how much time and money you want to put in, as well as your long-term goals.

"If you're looking to make passive income from the property (say, by renting it out), figure out how much you want to earn," says Halm. "Are you looking to replace your work income or just get enough passive income to replace your expenses?"

Others have a goal to set themselves up for retirement. "People can use a retirement fund to invest in real estate," says Halm. "They would have to put the property in a type of retirement account called a self-directed retirement account, which isn't limited to the mutual funds and stocks we often have. You can self-direct this account for real estate and other types of assets."

Choose a type of real estate and a location.

Next, consider the type of property, or asset class, you want to invest in. Single-family or multi-family homes, retail or office buildings, industrial or commercial properties, mobile homes, land, student housing, and short-term rentals are all types of assets you could potentially invest in.

"Take on one purchase at a time," says Barnes. "It could be a small townhouse or a condo, and you get that financed. Then of course the objective would be to put a tenant in it. Or live in it yourself for a few years, saving money and building your credit score higher. You want to save as much as you can during this period."

Once you know the type of asset you want to invest in, think about the location. When Halm first got started in real estate investing, she assumed she could only invest where she lived.

"But I live in a very expensive market, and that was very limiting to me at the beginning," says Halm. Then a mentor counseled her: Live where you want to live, and invest where the numbers make sense. This allowed her to "quantum leap" with real estate investing. "For the price of one house in L.A., I could get 20 houses in Jackson, Mississippi," says Halm.

Barnes suggests looking at growing cities rather than ones that are already booming. "It might be good to invest in smaller cities where the property prices are lower," says Barnes. "In places like California, Las Vegas, and New York, buyers are paying over market value in most instances. I don't know that that would be a wise time to start investing in those places."

Look into online real estate investment funds.

Maybe you want to invest in real estate but don't want to actually buy a property. Or perhaps you want to contribute a smaller initial amount. In those cases, look into online real estate crowdfunding platforms.

"There are online real estate investment trusts that you can get into, some for as little as $100, some a minimum of $500," says Halm. "You can get into these funds and get 10 percent back on your money, or more. There's one called the American Home Preservation fund, which invests in properties where people aren't paying their mortgages. You can get in for $100, and get 10 percent back on your money."

Halm also recommends DiversyFund, which has a $500 minimum and deals with multifamily apartment buildings, and Fundrise, which has a $1,000 minimum and offers different asset options from apartments to single-family homes.

These platforms make getting started in real estate easy because they handle the vetting of the properties and work with the property managers for you. You can also manage and track your investments online, which offers more flexibility.

Invest now.

The current low interest rates make it a great time to invest in real estate. "Interest rates are at record lows," says Halm. "When you're borrowing money, you are borrowing it less than the cost of inflation right now, and then you have these tenants that are paying it off."

"You can look at properties as a retirement vehicle, or money in the bank, because it is continually appreciating," says Barnes. "Home ownership is key to building your wealth; the market will go up and down over the years forever. That's just the way the market is."

Bottom line: Despite changes in the market, investing in real estate is almost always a good idea and could be your key to financial stability.