Obviously, my 5 Day Weekend blogs and book aren’t an exhaustive treatise on real estate investing. My goal in these posts has been to give you enough of a foundation so you can move forward with confidence. You’ll need to learn what works for you, but I can tell you what has worked for me over two decades of experience in real estate.
With that said, here and in the following post are the most important things you need to know to get started in real estate investing:
- Focus on cash flow
There are a number of real estate strategies, and every “guru” has his or her own favorite. Different strategies include single-family rentals, fix-and-flip, lease options, multi-family units (duplex, triplex, fourplex, etc.), land development, commercial proper- ties, etc.
When you’re first starting out, you need to focus on generating immediate positive cash flow versus appreciation, and long- term buy-and-hold versus a quick flip. Don’t get into sophisticated strategies like commercial properties or development. Keep it simple—your best bet is cash-flowing rentals.
- The Profit is in the Purchase
When real estate is done right, you make money not when you sell, but when you buy. I look for properties that I can improve in order to immediately increase the value. The profit has to be in the purchase. I’m either buying a below market value, or the property is poised for significant capital appreciation, based on market data and demand. I will not acquire a property unless I can confidently buy and sell the property on the same day and still generate a profit, if that was my intention.
You never want to bank on long-term appreciation in real estate. If it happens, great. But if you’re depending on that to turn a profit, you may be waiting a long time to realize one. Plus, with long-term appreciation, you’re not really adding value to the property or to the economy. This means that you have little or no control over your profits. To make money, all you can do is sit, wait, and pray.
- Buy Multi-Unit Properties
Today I never purchase single-family homes—all my property investments are multi-family apartment buildings. They can be easier to purchase, they’re less risky, and they generate greater cash flow than single-family properties.
- Get Your Financing in Place Before Buying
It’s typical for people to spend all their time funding deals and very little, if any, time putting their financing in place. Even if they find a good deal, they often can’t execute on it because they haven’t done the legwork of financing. You need to get your funding in place before you find a deal to purchase.
Meet with banks to understand what it takes to get a real estate investment loan, and the types of loans available. Know what your credit score is and work on improving it. Get your down payment in place (20% of the purchase price for most real estate investment purchases). Know how much money your in- vestment will tie up to calculate the pros and cons.
There are also alternatives to traditional bank loan financing that you should study, such as those I listed in previous posts.
- Know Your Market and Your Numbers
Before you buy a rental property, know the rental market you’re buying in, know your numbers and have solid data on what your cash flow will be, and know and exactly how you plan on getting a tenant as soon as you close.
- Don’t Be Impatient and/or Emotional
When would-be investors first start out, they find a deal that seems to work and they get really excited. With that excitement comes a scarcity mindset and fear of loss. They get too anxious to buy the property because they’re afraid they’re going to lose it. In that impatient and emotional state, they don’t analyze the numbers carefully enough. Or even if they do, they make the decision emotionally and then try to rationalize poor numbers logically. They also tend to “fall in love” with a property instead of looking at the cold, hard facts and data.
Savvy investors know that there are always plenty of deals to be had. They don’t get emotionally attached to any one deal.
Don’t make real estate investing emotional, and don’t be in a hurry. Take your time. There is an abundance of opportunities. If one deal falls through, there are ten more to take its place. It’s far better to wait six months for a good deal than to act now on a mediocre deal.
- Buy in the Right Location
You’ve heard it a lot, and it really is true: In real estate, location is the key to profit. The value of any real estate property is driven by location and market demand. By location I’m referring both to a micro level of the particular neighborhood you buy in, as well as on a macro level of the city or region in which you buy.
In recent years I’ve purchased properties in Indianapolis, for example, because it’s currently a strong rental market. That may change by the time you read this and I may have moved my investing to a different part of the country.
Study market trends to understand where the deals and demand are.
I will continue these tips in my next post.
In the meantime, have you had your own insights into real estate investing from your experiences or the experiences of others? I’d love to hear them. Thank you for sharing.
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