Many people think that becoming a real estate investor is expensive and complicated. It’s not! All that it takes is time, dedication, and getting familiar with the Dos and Don’ts of real estate investing. You can get started today.
As billionaire legend Andrew Carnegie said almost 200 years ago, real estate creates more millionaires than anything else. Let’s take some time to digest that; real estate creates more millionaires than anything else? That’s amazing.
Even The Oracles global influencers like Barbara Corcoran and Grant Cardone agree that this is still true.
In fact, I’d be willing to bet that you know or heard of people who made money by investing in real estate. You can too! The one thing stopping you right now is not knowing how to start and technical know-how.
Whether you want to flip houses, become a landlord, or build a portfolio of properties, the following tips and tricks from experts in the industry will help you become a successful real estate investor.
What Does it Take to Become a Real Estate Investor?
When I was in my teens, I lived in a city where there was a rivalry among high schools competing for which school was the best. The debate would be settled at the end of the school year, where students competed in a tournament showcasing their knowledge of Math, Chemistry, and History.
The school with the team that scored the most correct answers was crowed as the best school. Succeeding as a real estate investor works the same way; to win, you’ve got to know your stuff.
What do I mean by that?
Before buying a property, you have to know everything about the property, such as the following:
- Quality of the neighborhood,
- Condition of the property,
- Needed renovations
- Monthly rent rates,
- What the current owners bought the property for, and more
If you don’t know those things, hire a real estate agent who does. Experienced real estate agents know the market and can recognize shifting market conditions that allow investors to take advantage of opportunities.
You need to have a plan that clearly describes how you will make money, including answers to questions like how much money you will make (NET) each month.
Surprisingly, the answer is not so obvious; many beginner real estate investors buy properties hoping to do a flip but then realize they need to change the roof, change the appliances, and their profit goes out the window.
Your real estate investment plan needs to include all those details, so you can deal with the risks when things go the other way.
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The Challenge of the First Deal as a Real Estate Investor
One of the main reasons beginner real estate investors fail in their careers is inexperience and lack of knowledge. Whether you like it or not, true knowledge comes with experience.
If you’ve never closed a real estate investment deal, you might think you know, when in reality, what you have in grasping know-how. To get there, you need to get past that first deal.
It can get confusing and overwhelming at first, but all you need to do is develop a strategy that helps you overcome or prevent challenges.
For example, if you lack the knowledge or experience to close a real estate deal, find a mentor, a realtor, or another real estate investor to partner up with. Succeeding as a real estate investor sometimes comes down to minimizing the potential risks that may come up later on.
Now, without any further ado, let’s look at the seven steps to becoming a Real Estate Investor:
1. Choose a Real Estate Investment strategy
Real estate investing comes in many forms, but we can simplify it into two categories, active investing and passive investing.
Active real estate investing strategies include flipping properties, wholesaling, and buying and selling properties frequently.
Passive real estate investing strategies, on the other hand, include long-term investments where you’re collecting rent while focusing on monthly cash flow and long-term property value appreciation.
As you learn more about these options, you will choose the strategy that best suits your goals and risk appetite.
- Fix and flip is perhaps the most lucrative real estate investment strategy because you don’t have to wait years to get your money back, with profits.
However, you have to make sure you have a plan in place because it’s easy to end up losing money if you buy the property too high or if you spend too much money on renovations.
- Real estate wholesaling is a great alternative, particularly if you have little money or if you want a quick profit without actually buying the property.
The goal of real estate wholesaling is for the wholesaler to contract a home’s purchase and then assign it to another buyer who is willing to pay a higher price for the property. The price difference is the profit realized by the wholesaler.
- Buying a property to rent it out is perhaps the most common real estate investment strategy. It’s a good option because you can start earning money as soon as you can find a tenant.
With each mortgage payment, you build equity in the property; then, you can use the equity and rental income to buy more properties.
- Another highly lucrative real estate strategy is to buy and hold. This strategy is especially effective in markets where real estate prices rise quickly. It’s better to combine the buy and hold strategy with the buy to rent strategy so you can realize maximum profits.
2. Pick a Real Estate Market Niche
Failing to know your market is a good way to lose money in real estate investing. You have to get familiar with everything about the property, the neighborhood, the areas with strong demand, and the areas that have slowed down.
Have you heard the expression “jack of all trades is a master of none”?
Since you can’t become a master in every market, you should pick your market niche.
If you’re an expert in houses but don’t know a lot about condominiums, why waste your time looking at condominium deals?
Remember, in real estate investing, knowledge wins every time. There is a lot of money involved here, so don’t let your deals become somebody else’s win.
Pick a lucrative market where you can compete and become the most knowledgeable investor there.
Here are a few examples of metrics to watch for:
- Number of properties for sale in the neighborhood.
- Average days on the market.
- Sold prices for the type of property you want to invest in.
- Average price trend vs. previous years.
Other metrics you should become knowledgeable in your target market include local rent prices, quality of nearby schools, demographics, the jobs market within the area, and home price trends.
Analyze Your Local Competition
Do a search of the real estate agents in your target market and identify the agents that show up so that you can then follow them on social media. This will help you to analyze what they do and the type of properties they buy.
With that information, you can either mirror their strategy or find out a niche market that is not being properly served, which means an opportunity for you to become the dominant player in the area.
3. Know How to Analyze a Real Estate Investment Deal
Before investing in a real estate deal, you must understand the projected return on investment (ROI). This means how much money you will make after recovering your initial investment and paying all related expenses.
Two things are important when calculating your return on investment (ROI).
- How much cash flow can you get each month (after deducting expenses)?
- How much gain can you get when you sell the property?
In both cases, location will play a determining factor that could make the difference between a good and a bad deal. Thus, before you decide what property to invest in, make sure you’re investing in a good location.
The location will impact the following:
- Property prices
- How much rent you can charge
- Potential for value appreciation
Calculate your monthly cash flow
Investments are meant to make money, so when you buy a property to rent it out, make sure you have a positive cash flow from the beginning. That means your monthly rental income must exceed the monthly expenses you pay for the property.
Some beginner investors start their real estate investment with negative cash flow, hoping to increase the rent fee later on; this is a mistake. Your cash flow must be positive from the start.
The higher the NET cash flow, the better the ROI.
Here are two steps you can follow to calculate your expected net cash flow:
- First, find out how much rent tenants pay for similar properties in the area.
- Second, add up all expenses required to keep the real estate investment. Expenses include the mortgage payment, property taxes, home insurance, repairs, and an allocation for vacancy rate.
The difference between those two numbers is your NET cash flow. If you arrive at a positive cash flow, that’s an indicator of a good real estate deal. Spending money on repairs will also impact your net cash flow, so make sure you’re not buying a lemon.
Unless you’re buying a fixer-upper, avoid buying properties that require a lot of repairs. Even if a property provides positive cash flow today, tomorrow you could be losing money if you have to spend on expensive renovations.
4. Learn How to Spot Good Deals
Not all real estate investments are a good idea; some make money, and others lose money. If you don’t have the right experience, find a realtor who does, but the last thing you want is to buy the wrong property or worse, pay too much for it.
Here are important factors to consider to help you spot a good real estate investment:
- Property values: What are the comparative values of nearby properties? Are they trending up or down?
- Supply and demand in the area: How many days do nearby properties take to sell, and what is the average selling price compared to listed prices.
- Rents: How much monthly rent are similar units renting for in the area?
Beginner real estate investors find this hard to understand. When investing in real estate, you make your money on the BUY, not on the sale. What this means is that you must never overpay on a property.
A good deal is when you buy the property below its market value, so you’re making money on the buy.
5. Build your team
To be successful in this field, you’ll need to have access to a team of contractors and advisors. There will come the time when you need to hire professionals such as a plumber, an electrician, or a contractor.
Also, try to develop relationships with fellow real estate investors. Some of the best opportunities may come from partnering with other investors who have similar goals and objectives as you.
Your network of professionals should include:
- Mortgage agent
- Home appraisers
- Home inspectors
- A network of trades professionals
- Real estate agents and investors
- A mentor
Success in real estate investing relies heavily on experience. Savvy investors know this, so they build networks and alliances with other more experienced professionals whose support they can rely on.
Even experienced real estate investors may benefit from a helping hand. Thus, networking and relationships can open the door to deals you would have otherwise never found out about.
6. Identify Your Real Estate Financing Sources:
The financing options available to you will depend on the type of property you want to buy, the amount you want to borrow, and the terms.
For instance, if you want a mortgage for a property where you will live, you can get a mortgage with a down payment as low as 5%. However, if you’re buying a commercial property, you will typically need at least a 20% down payment.
Here are the most common mortgage financing options you will choose from:
Keep in mind that you can use conventional, government-backed mortgages to buy up to four properties. If you buy a fifth property, you will need to get a portfolio loan or an investment property mortgage.
Talk to a local mortgage advisor to find out what you can borrow and other mortgage financing options that might be available to you.
7. Get Familiar with Local Real Estate Laws and Rules
As a real estate investor, sooner or later, you will come across a legal challenge that will result in either making or losing money. It’s true! In the world of real estate investing, ignorance is not bliss.
In fact, understanding local real estate laws will help you avoid legal issues such as the following:
- Losing your property due to failure to pay property taxes.
- Insurance requirements rented properties vs. owner-occupied.
- Tenant eviction process
- Background checks on potential tenants.
- Annual rent increases requirements.
- Notice period and criteria to terminate rental agreements.
How to start investing in real estate with little money
The best way to invest in real estate when you have little money is to buy a home to live in. Other ways include the following:
- Buy a duplex home: This way, you will live in one unit and rent out the other unit.
- Buy the home together with an equity partner: This is a great option for buyers who don’t mind co-owning with other buyers.
- Buy shares in a real estate investment trust.
- Buy a home to live in. Best option overall.
Regardless of what option you choose, investing in real estate is a great way to build wealth even if you have little money. Besides, you won’t be able to save your way to retirement – those days are long gone.
Even if you have little money today, the best way to achieve financial freedom is by owning real estate. Anyone can do it as long as you can figure out a way to pay the mortgage, the bills and keep the property well-maintained.
Are you ready to become a real estate investor in these 7 simple steps?
Let’s admit it, finding a good real estate deal is like a treasure hunt on the island of rocks. It takes a lot of patience until you strike gold. However, if you learn the ins and outs of a particular market, the types of properties, demographics, and you’re up-to-date on price trends, you can do well in this industry.
You do not need to have hundreds of thousands in your bank account, although that can certainly help. You need knowledge or a network of professionals who have that knowledge and whom you can count on.
My favorite part of real estate investing is leverage, which means you use the lender’s money to make more money. In other words, when a property appreciates in value, you get the benefit of all the value increase even though the lender funded a huge portion of the purchase.
Know that there are risks – you could lose your shirt. So, be ready to keep a property long-term, even if you only buy it as a flip. Being able to keep a property long-term will allow to recover loses if things don’t go your way initially. Keep that in mind.
Lastly, start small and build from there until you can cover all your bills and expenses with the extra income you generate from your real estate investments. I hope that this article helps you get a step closer to becoming a successful real estate investor.