Steps to Take Before You Start Investing
So — you want to start investing in real estate? Following these five easy steps can help!
Start Setting Money Aside to Invest
The thought alone of needing significant cash to start investing in real estate may scare you away…but spoiler alert: you don’t need all that cash! While it does take some money to get started, it does not need to be the full price of the property you wish to purchase.
Let’s talk about how to use other people’s money! If you’re leveraging the property (in other words, getting a mortgage), most lenders will require 20-25% down for investment properties. Depending on what other real estate you own, you may qualify for a lower down payment if you plan to occupy the property. Either way, I always recommend putting the minimum down because there’s no advantage in using your own cash when the bank will finance most of the purchase. Leveraging allows you to spread your money further. It allows you to make multiple purchases at a time and it helps you create wealth much faster than if you had to save to purchase one property at a time.
Say you find a small, single-family home you’d like to hold as a rental for $75,000 — your down payment of 25% would be $18,750. This may seem like a lot but realistically, could you save $18,750 over the course of a year? What about over the course of two or three years? Creating a separate savings account for your investing goals and meeting with a financial planner is a great way to get started. But let’s say you already have some money set aside maybe from your yearly bonuses, a 401K plan, or another retirement plan. You may have equity in a home you already own. There are so many ways to come up with that initial down payment for your first purchase. Once you have one purchase under your belt, it gets easier from there! Many wealthy people use leverage or other forms of capital to continuously buy real estate and you can too.
Bottom line — if you’re serious about investing in real estate, I recommend you start today.
Choose a Real Estate Market and Investing Style
Now that you’ve started to save money to put towards real estate investing, it’s time to pick a market and a style of investing. There are several ways to invest in real estate, so you have to ask yourself what kind of investor you would like to be. Buying and managing a property is an obvious option, but if experiencing the ups and downs of owning actual real estate isn’t for you, check out these other options:
Syndication or Hedge Fund — Your money goes into a pool with other investors to purchase properties. You are truly a passive investor. You can participate in bigger deals that you otherwise could not afford on your own, without the hassles of finding and managing a property yourself. While a syndication is usually one larger property, a Hedge Fund would be investing in multiple opportunities. If this is of interest to you, check out Empire Capital Fund!
REITs (Real Estate Investment Trust) — This is similar to a stock or an ETF (Exchange Traded Fund), which owns multiple properties and sells shares that investors can buy into.
Crowdfunding — Online platforms that raise capital from a pool of investors for real estate projects. This allows you to passively invest in real estate, similar to a syndication.
Once you’ve chosen a style that fits your financial goals, you need to choose a market that you believe has potential. There are many different market factors so it may feel overwhelming to find a market that will allow your investment to perform well. When identifying if a new market is suitable for investing, I look at the following characteristics:
Population growth
Job growth
Wage/salary growth
Employment Diversity
Think about what kind of neighborhood can best serve your financial goals. Adding value through capital improvements to properties in B and C class neighborhoods is a great option for investors starting out. These properties can be a little more affordable to start and as long as the above-noted demographics remain consistent, growing your portfolio will be a snap!
find and Analyze Deals
Once you’ve identified your target market it’s time to start looking at deals and analyzing their potential. Analyzing deals simply means running the numbers on potential properties. You’re looking for a few things:
Does it cash flow? Cash flow is simply the cash left after subtracting all the property expenses (taxes, insurance, utilities, and mortgage if applicable) from the income.
What are the expenses and is there a way to improve/reduce them? Are there utilities you’d have to pay as the owner? If so, can you charge this expense back to the tenants or submeter the property so the tenants have the responsibility of this utility service? This is typically done with electricity, water, and sewer.
Is this an area with strong rental demand? Are the rental prices increasing?
Is there an upside in the rents?
To help you avoid some of the common pitfalls that many first-time investors make when analyzing properties, find yourself a real estate broker who specializes in investment properties.
Start to Build your Team
It takes a village to be successful in real estate investing. Here is a short list of who you might need on your team:
Real estate agent/broker
Property manager
Lender
Insurance agent
Accountant/Financial Advisor
Real estate attorney
Vendors for service to properties
Title Agent
Find a real estate agent first. Network, ask around. Once you’ve found a rockstar agent — who specializes in investment properties — they will likely be able to recommend the rest of your team.
Make Offers and Close on Deals
One of the most important things to remember in real estate investing is: you’ll make ten offers before you close one deal. Offer away. Don’t get too caught up in analyzing — you’ll overanalyze and end up missing out on deals. Nail down your process so you can quickly run your numbers and spot good deals. Plan to make your offer based on assumptions, not facts and once you have it under contract, you can dig a little bit deeper. That’s what the “due diligence” period is for — to get the facts. Don’t worry, you can negotiate again if your assumptions turn out wrong or something doesn’t add up during your due diligence period.
Real estate investing can be a bit daunting to first-time investors, but it can be a great way to diversify your portfolio and earn some passive income. After your first deal closes, you will become more comfortable with the process and before you know it, you’ll have multiple properties under your belt!
This information may not be used as a substitute for legal and/or financial advice and you should consult your attorney and or financial advisor for professional advice if you have any questions relating to this advisor guide.