Investing in real estate is usually done with one goal in mind: earn more money!
We all want to earn more money, right? But how is that achieved?
Learning from those who have already accomplished this is essential to your success. Reading a book like Rich Dad, Poor Dad, can give you a good start in real estate investment. This book will help frame your perspective on money and wealth and how they are created. Here are the main takeaways:
- Buy assets, i.e. real estate.
- Do not subscribe to typical consumerism, i.e. don’t allow lifestyle creep to eat away at your income.
- Do not buy liabilities.
- Unless it puts money in your pocket every month, it is not an asset.
- Poor people work for their money; rich people make their money work for them.
- Poor people work IN businesses, rich people start and work ON businesses.
Getting to know what success would take should include reading lots more books, blogs, forum posts, etc.
Start Setting Money Aside to Invest
Investing in real estate is often thought to require hundreds of thousands or even millions of dollars. The answer is no. To get started, you may need some money, but not as much as you might think.
What is the down payment on a $75,000 investment property? Probably around $15,000 because 20% (a typical down payment) of $75,000 = $15,000. So if you’re thinking that you could never save up $15,000, what is the down payment on a $50,000 property? $10,000. Could you save $10,000 over the course of a year? What about over the course of two or three years?
Getting educated and putting money aside for investment can take a year and a half, and that is okay. Just make sure you don’t give up or loose sight of that goal.
Choose a Real Estate Market and Investing Style to Pursue
When you’ve started saving for a real estate investment, it’s time to choose a market (or several) and a style of investing to focus on.
The five main styles of real estate investing include:
- Sole proprietorship – you own the home alone
- Partnership – you own the home with others
- Syndication – Your money goes into a pool with other investors to purchase a building/property. You are likely a passive investor, i.e. you are not making decisions.
- REITs (Real Estate Investment Trust) – this is like a stock or an ETF which owns multiple properties and sells shares that investors can buy into.
- Crowdfunding – You invest in an online platform which is like a syndication.
Some investors will have several types of properties in their portfolio despite choosing to focus on one type of property.
The easiest way to learn the basics is to invest in a single-family rental (SFR). You can apply your understanding of investing principles to bigger and more expensive deals after you have learned the basics. Making mistakes with an SFR is better than building a $1 million, 20-unit building.
There are some who invest in the multifamily sector such as duplexes, triplexes and quadplexes. After buying multifamily deals with 5 or more units, some of the investors will move to larger, commercial multifamily deals. Once they understand what they are investing in, many experienced investors decide to invest in funds and syndications.
Once you’ve chosen a style you like, you’ll need to decide on a market that appeals to you and has a lot of potential.
You may feel overwhelmed by the sheer number of market factors and statistics available. When I look at investing in a new market, I look for the following four characteristics:
- Population growth
- Job growth
- Wage/salary growth
- Employment Diversity
The key data points in a market can usually be found in a quick Google search. Additionally, here are a few great resources to help pinpoint a market:
- How to Buy, Rehab, Rent, Refinance, Repeat
- Some of The Best Cities to Consider Investing in This Year
- Tax breaks and your Rental Property
Analyze Deals
Once you’ve identified a target market, you’ll want to start doing deal analysis in that market.
What does “deal analysis” actually mean? It’s a fancy term that investors use meaning to run the numbers. When you run the numbers, you’re looking for a few things:
- Does it cash flow? i.e. Is there money left over at the end of each month from the rental income after you’ve paid all of the expenses, including a mortgage (if you have one).
- What do the expenses look like and is there a way to improve/reduce them?
- Is this an area with a strong rental demand and is this a property you would consider investing in?
Start to Build your Team/Network
Start getting to know the people who will help with and be involved in the transaction. These people include the following:
- Real estate agent/broker
- Property manager
- Lender
- Insurance agent
- CPA/Accountant
- Real estate attorney
You will likely interface with all of these people directly. Remember, real estate is a people-based, relationship business. It’s nearly impossible to be a successful investor on your own. Networking and getting to know some of your key team members will help you grow as a real estate investor.
The best way to build a team is through referrals. If you’re JUST starting out and have never met anyone who has done a real estate deal, you may not know anyone who could give you referrals.
In that case, you’ve got to be a little more resourceful. It’s a good thing that Google is always happy to lend a helping hand. A great place to start is to simply do an online search for “the best investor friendly property manager” in your market. Calling is the most effective form of communication when forming and developing a new relationship. Attitude, tone, and emotion are much easier to convey over the phone, as opposed to through text or email.
Also, many people remember those with whom they’ve spoken over the phone. It’s much easier to forget someone who has only sent you an email. You want to be the person that agent thinks about when they come across a listing.
Additionally, they may be able to recommend some other team members. You shouldn’t overlook the importance of doing your own due diligence just because someone comes highly recommended by another member of your team.
Keep in mind that it is still your responsibility to scout and draft a great team. There is no substitute for a live interview, but recommendations can be useful.
Make Offers and Close on Deals
Making offers is one of the most important lessons in real estate. Due diligence before submitting an offer can take weeks in the beginning.
You will dissect the property thoroughly, and by the time you feel ready to make an offer, the house is no longer for sale! Two weeks earlier, it had been picked up by an investor who was much more adept at deal analysis.
Taking your time to learn what a fair deal looks like can make you improve your skills. If you see something that looks like a good deal, make an offer. You can go into detail after the contract is in place in order to establish whether it was actually a good deal. The due diligence period is meant for that.
As soon as you’ve analyzed deals, you can start making offers. Take input from your team, but ultimately you are the one who decides whether something is a good deal.
What Makes the Most Sense for YOU?
Make sure you take your time with each of these steps, and don’t be afraid to ask for help along the way. Many resources are available, both paid and free, to help educate people. Don’t feel as though you’re on this journey alone.
There are books, podcasts, forums, meetups, seminars, and training programs that are readily available. Any and all of the above are great places to start. Find what works best for you and absorb as much knowledge as you can.
You could also chat to one of our experienced BDMs for more information, please contact us.
