As a real estate broker, I meet plenty of people at dinner parties who, when the subject comes up, mention that they are real estate investors. The conversation will go on for a bit, and I typically classify the person in question as either a true investor, or a real estate “investor.”
True investors typically have a number of transactions under their belt, realize they are still learning, and are open to any insight I can provide – and I am always open to their insight. The real estate “investor” typically has never actually taken the leap and bought a property purely for investment, doesn’t realize the difficulties of real estate investment, and proceeds to overwhelm me with their “expert knowledge.” What they should do, is listen.
1) It’s not as easy as it looks on TV
“Flip This House” is a fantastic television program – that’s about as realistic for the average investor as “Sponge Bob Square Pants.” The problem with TV real estate investment programs is that they downplay the work involved, and accentuate the money made by the investors.
“Flip This House” will show you a tidy $150,000 profit wrapped up in a 30 minute episode. What they’re not showing you is the work done to find the property under market value, build the industry relationships necessary to tackle a sizeable project, the skills necessary to manage that project, and the market knowledge to accurately predict that properties final sales price. Bottom line is: investing is hard. It can be, however, very lucrative.
2) Walk before you run.
So many “investors” decide one day that it’s time for them to make millions in the market, and begin looking for that perfect flip, or perfect rental property – with a hefty price tag. Would you walk out of your door today to run a marathon without training? Absolutely not! Investing is very similar.
There are MANY mistakes you can make, and one big mistake can turn an investment sour. The best way to minimize your risk is to start out small, and reduce your variable costs. If you’re buying an income producing property, purchase one that’s already rented out – preferably to long term tenants.
That way, you can research a tenant’s credit worthiness BEFORE you’ve taken the leap and bought the property. You’ll also know exactly how much cash flow your new property will generate. If you’re buying a rehabilitation project, it’s often the carrying costs that can overwhelm a new investor.
If, at all possible, buy your rehab project as your home – that way you can take your time without paying the consequences. If that’s not possible, then build in PLENTY of carrying costs – around 6 months worth. Once you have a few investments under your built, you’ll be able to accurately predict your variable costs, keep them lower, and make more profit.
3) For Long Term Wealth – It’s a Marathon, Not a Sprint.
Many new “investors” come to me with the business model of “buying old houses and fixing them up.” This seems to be the easiest way to make money, but it’s not. Flipping houses takes skill, foresight, market knowledge, and market resources.
Furthermore, flipping houses is hard work, and results in quick profits. Unless you take advantage of 1031 exchange, flipping houses results in short term capital gains. The true path to long-term wealth lies in income producing properties.
Purchase an income property in a market you think will appreciate, hire a property management company, and forget about it. Let the check come in the mail once a month – this “mailbox money” will turn into your best friend.
After you’ve let the property rent for 3, 5, even 7 years, check its value and you should be pleasantly surprised! The key here is that you didn’t have to put in very much work – you merely found a great property in an appreciating market, and let a passive investment earn big returns.
4) Use a Realtor You Trust – And Don’t Go After Their Commission.
Author Robert Kyosaki says, “Corporations have boards of directors. You should have one, too.” Good Realtors earn a sizeable income – and they’re worth every penny. The keyword here is “Good” because the real estate industry is like any other – there are plenty of bad agents.
Don’t hire any agent that crosses your path; Make sure and interview plenty of Realtors and find one that works with investors, and personally invests. When you find your “Realtor Advisor” don’t go after their commission. Any good Realtor will have plenty of clients and you want to make sure that you’re not playing second fiddle to them.
5) Put Together a Business Plan, And Stick To It
The only time you can’t POSSIBLY lose money is before you invest it. That’s why putting together a solid business plan is the smartest action step you can take. Decide the type of property you plan to buy, what it will cost to purchase it, what it will cost you to hold the property, and how much income the process will produce for you.
Most investors have a “formula” for buying properties – develop, borrow, or steal one. Write EVERYTHING down on paper and analyze every possible expense. Plan for the worst and anticipate how you will avoid the worst. Once you’ve put together your business plan and investing “formula” – Stick to it!!! Execution is key to successful investing.
6) When You See Something That Looks Good – Take Action!
I’ve worked with many investors that have excellent business plans, and great formulae, but who refuse to pull the trigger on something that looks good. There are MANY ways to back out of a contract, and if you hesitate when you see a good deal – another investor will already have tied the property up in their contract.
In Texas, you typically pay $100 for a 10 day option period. You have 10 days to terminate the contract for ANY reason. In my opinion, not losing a good deal is well worth tying up MANY questionable deals at $100 a pop.
7) Talk Yourself Out of the Deal
After you’ve put together your business plan and contracted a property, you need to look at every negative aspect of the property. Plan for the worst and hope for the best! Oftentimes, planning for the worst involves walking away from the transaction.
After you’ve invested the time finding the property and the money to contract and inspect the property, you might feel emotionally invested. However, don’t let these feelings get in the way of making a smart financial decision.
If you look at every possible negative that can happen in the transaction and you will still make a profit, then go for it. You can always minimize the negative variables. However, if the worst does happen, you will still have all the clothes on your back. No matter how hard it is, if it looks like you COULD lose money, walk away.
There’s big money in real estate investment, and there’s the potential for big losses, as well. Someone giving themselves the title of “investor” far from makes them an actual investor. Before you take the plunge, talk to plenty of educated investors with experience, and follow these simple steps.
By Robert Holiday