Real estate investing has been around for quite some time, at least in the sense that most people are familiar with. It wasn’t until recently that real estate investing became a commonly used wealth-building vehicle. If for nothing else, advancements in the industry, like more flexible lending strategies, have made real estate more accessible to the masses. As a result, there has arisen a dire need to educate the majority—so that they too may not only choose to invest in real estate, but to do so wisely. Therefore, consider the following an introduction to real estate investing—a real estate investing 101, of sorts.
Real estate investing is an activity intended to generate profits through the purchase, ownership, management, and/or sale of real estate assets. Having said that, there isn’t a single way to invest in real estate, but rather several ways—each as viable as the last. People interested in real estate investing may choose from a number of strategies: Wholesaling, rehabbing, buying rental properties and more. However, regardless of which exit strategy you choose, the first steps are all the same. For more information on how to start investing in real estate, please continue reading our comprehensive guide.
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There are a number of intangible character attributes that have become synonymous with today’s most prolific real estate investors: An unwavering commitment to diligence, an insatiable desire to seek out educational opportunities, and the uncanny ability to build relationships are just a few of the defining traits of a good real estate investor. Therefore, the first step you should take to becoming a real estate investor is more intangible than anything else. You need to look deep inside yourself and confirm that you have what it takes to move forward. To that end, it is worth noting that each of these characteristics are skills that can be learned.
Once you become confident in your intangible abilities, there are several tangible steps you can take to make the transition into the real estate industry more seamless and streamlined. While no two real estate investors are the same (nor are their paths into the industry), the following steps should make investing in real estate more of a reality:
The single most valuable tool real estate investors have at their disposal is their own education. Knowledge is power, and nowhere does that sentiment ring more true than in the world of real estate investing. Those equipped with a proper education will simultaneously mitigate risk and potentially increase profit margins. That said, the real estate industry will prove difficult for those content resting on their laurels. It’s not enough to be satisfied with your current knowledge; you need to constantly seek new learning opportunities. The real estate industry is in constant flux, and the tenets we know today are susceptible to change. Investors need to be open to expanding their horizons through research.
Research, at least as it pertains to the first step of becoming a real estate investor, shouldn’t be confined to any single aspect of the industry. Instead, research should be expanded to include anything and everything. The first step to becoming a real estate investor will require you to research everything from exit strategies and sources of financing to character-building techniques. At the very lest, the more complete your education is, the better investor you’ll have the potential of becoming.
When you are first starting out, try not to stretch yourself too thin. While I am a huge proponent of learning as much as possible, it may help beginners focus on one aspect at a time. Those interested in wholesaling, for example, may want to stick to that particular exit strategy before learning the ins and outs of rehabbing and rental properties. In focusing on a single niche for a long enough time, new investors will be more likely to improve their efficiency within a single category.
Let it be known that this step is, in fact, perpetual, and must be present in each of the steps to becoming a real estate investor moving forward.
Becoming a real estate investor has as much to do with being able to find financing as it does with finding deals—if not more so. In reality, however, deals and financing are not mutually exclusive; however, you can’t invest in real estate successfully without a sound comprehension of how to do both. To that end, one of these two comes first in the order of operations: securing financing.
Contrary to what many new investors believe, you don’t want to look for deals before you find financing. It is the financing, after all, that’ll give you a clearer picture of what markets you can start looking in and the deals you can afford to buy. You can’t possibly know what deals to consider until you know how much money you will have on hand, which begs the question: Where can new investors find financing?
Fortunately, financing is not as hard as many new investors make it out to be. There are countless private money lenders scattered across the country who are ready and willing to lend their funds to investors. Leveraging the money of private money lenders can easily become the backbone of your entire company, and a great second step to take after conducting enough research.
It is worth noting that private money lenders tend to come with higher interest rates, but I can assure you it is an expense well worthwhile. Interest rates can be upwards of three times more than traditional banks (oftentimes between 12 and 15 percent), but their price comes with an advantage: speed of implementation. Whereas banks can take months to get money in the hands of investors, private money lenders can take as little as a few hours or days.
[Need more information on finding the right financing for your next deal? Please reference our private money lending guide.]
It is entirely possible to invest in real estate by yourself; plenty of people do it with a high degree of success. However, taking advantage of a network—especially in the beginning—can maximize efficiency, offset holes in your knowledge and increase profits. It is worth pointing out, however, that not just any network will do; you need to assemble a great network. The people you align yourself with will play an integral role in your success.
When building a network, pay special consideration to those who will compliment your skill set. Take note of the gaps in your own knowledge and experience, and find those that can compensate where you are lacking. Doing so will not only fill out your network in a meaningful way, but it’ll give you more learning opportunities (see step one).
A good real estate network will be well rounded. Partners, Realtors, contractors, mortgage brokers and attorneys can all contribute in a meaningful way if they are vetting accordingly. With each of these pieces in place, investors will be able to focus on what matters the most: money-making activities. More specifically, a proper team will award investors the opportunity to find their next deal.
New real estate investors should fight the urge to find deals too soon. It is only natural to want to browse the market the minute you decide to invest in real estate, but a practice in patience will pay off. Prematurely searching for real estate deals will result in wasted money, and perhaps even worse, wasted time. At the very least, time is an investor’s most valuable resource, and those who look for deals before they are ready are more inclined to squander that time away.
When looking for deals, the first thing you’ll want to do is determine the location in which you want to invest. After all, the golden rule of real estate still remains in effect: location, location, location. The area you invest in should promote a healthy market for investors. Pay special attention to major economic indicators like job growth, unemployment rate, new buildings, and anything else that would suggest the health of a respective area. The idea is to gauge future prospects and invest in an area people want to buy in. Stagnant markets are less likely to provide investors with the opportunities they need to make a living. Therefore, you need to vet an area first, before even looking at a single home.
As an investor, you’ll need deals with attractive profit margins, so you’ll want to look for motivated sellers. Here’s a short—but nonetheless reliable—list of the types of properties investors should look for:
Each of these types of homes are owned by people who may be willing to part ways with the property—at a discount, nonetheless. At the very least, you’ll never know until you inquire further. To vet your own neighborhood for distressed homes, all you’ll need to do is take a trip to the local courthouse. There, distressed properties are made public knowledge; you just need to know what to look for. For more on visiting your local courthouse, read this article on finding foreclosed homes.
In addition to locating distressed homes, there are several other ways investors may find deals, not the least of which include:
Of course, simply finding a deal won’t net you any profits. As an investor, you’ll need to know how to maximize your return on investment. This is where you will come up with a plan to, wholesale, rehab, hold, or sell the property. Rehabbers, for example, can’t acquire a property without a plan of attack; they can’t simply make upgrades without knowing why they are making them. Every detail must be calculated and made for a specific reason. Investors need to know how to work within a budget that will net them the greatest return.
Typically, maximizing your profits will require you to check comparables (similar homes within close proximity to the subject property). Look for a handful of comparables in your immediate area, and be sure to take note of their prices and amenities. Then, proceed to improve your own property within a strict budget. The idea is to create a slightly better product that will attract more buyers.
If the right upgrades are made and the home is priced accordingly, there’s a chance a bidding war will ensue. I can’t stress that enough: pricing a home correctly is one of the most important steps in maximizing profits. That said, it may be worth pricing you home slightly under market value, as to attract more buyers.
Wholesalers, on the other hand, may need to address their buyers list to achieve maximum profits. Maintaining a good buyers list should ensure investors are contacting their most efficient and professional contacts. Not only that, but the speed in which a wholesaler may connect a buyer with a wholesale deal could actually increase their profit margins. Therefore, proceed to maintain a carefully groomed buyers list; that way, you’ll be able to find a buyer faster, and perhaps even increase your wholesale price. Case in point: each strategy will require a different set of skills and tools to maximize profits.
This article is intended to serve as an introductory real estate investing 101 course, and is not representative of every single detail new investors need to account for. Subsequently, the information provided above is more of an outline to help investors get their feet wet in a promising industry. Therefore, if you would like more information on learning how to invest in real estate, may I recommend the following resources to further your education:
There are countless steps to becoming a real estate investor, not the least of which are as important as the one that came before them. However, the steps mentioned above are universal, and should be included in everyone’s initial strategy. Following these steps, and iterating them on repeat attempts, will not only maximize your efficiency, but also increase your likelihood of realizing success.