5 Ways to become a real estate investor and 3 ways to F* it up
So you want to be a real estate investor. Now what?
Investing in real estate can mean a lot of different things but the reasons people do it are usually pretty similar. Real estate investors are generally self motivated individuals that don't want to work for "the man" and understand the value of leveraging assets to produce income. The allure of making large sums of money while taking calculated risks is super appealing to a lot of people. In this article I want to go over a few things you can do to get it right, and a couple ways to truly ruin your career before it starts.
1. Know your goals and have a strategy
Are you looking for traditional rentals? Do you want to create an AirBnB empire? Have you been geeking out on HGTV and now you're fired up to rip out every interior wall in a fix and flip? When someone asks you what your goals are as a real estate investor your first answer should never be "to make money". Like no shit, you're not doing this for practice so you need to have your strategy lined up.
Traditional rentals would be anything being leased out on long term leases. There is really nothing glamorous about owning rentals and when things are going well it is outright boring. What would be your goal with this type of scenario? Some investors look for appreciation in the house and are willing to sacrifice cashflow, maybe even taking a monthly loss on the property. Other investors only want cashflow and don't care as much about appreciation. Some people own rentals just for the tax benefits. What's important to you will depend on your personality, current assets, often times age is a factor as is your ability to put up with tenants. Traditional rentals are the real estate version of the hare and the tortoise story, slow and steady.
Short term rentals
Are you a straight up hustler/entrepreneur? Do you find the monotony of collecting rent from tenants once a month unimaginably dull? Maybe this type of investing would suit your better. The short term rental business is loaded with variables such as municipal regulations, market competition, regional demand, macroeconomic factors (think pandemics) and of course guests! Unlike the traditional rental setup where you might have the same tenant for years STRs will put you in contact with dozens if not hundreds of people a year. STRs can be the super popular AirBnb or VRBOs, they can be longer term like for traveling nurses and other niche markets or they can be arranged room mate situations that you create. The hustle here comes down to more work, more risk and more reward. It is not uncommon for STR owners to double or even triple the market rent in their units by taking these creative approaches and by scaling a business plan like this there are investors who make millions of dollars annually.
The potential downside to this business model is in not knowing your local regulations and getting nailed by the city for running unregistered units. Another concern can be damage to the units from guests and the lengthy process of trying to collect insurance. Whether LTR or STR one of the biggest causes of investor failure is being over leveraged and not having any money to deal with a rainy day.
Fix and Flips, Fix and Holds and the BRRRR method
ARV's, ROIs, NOIs, rehab budgets, draws, hard money, scheming contractors and lying wholesalers! Welcome to the big leagues. I'm kind of kidding but really I'm not, this part of real estate investing will make or break people faster than anything else. Whether you're flipping a house to sell or to keep the most important thing to do is have a well thought out exit strategy and better yet a few of them. There is real money to be made flipping houses and there are literally dozens of ways to lose money doing it too. We will go into some details further down. Bottom line is have a strategy!
2. Know your market
But that's the agent's job, that's why they get paid the big bucks. Yes, and a big NO also. While it is absolutely the real estate agent's job to know the market it's not their job to do your job for you. A good real estate investor will rely on agents to check their work but will have a sufficient understanding of the local market to know what is a deal and what isn't. Understanding fundamentals like neighborhood values, school districts, floor plans, functional obsolescence and micro markets is important to being able to make quick decisions. And the reality of the investment game is that being able to make good decisions quickly allows you to make money before others even spot the opportunity. Having a good agent here is important but having your own competence is key so that you can analyze more deals quicker and close more often.
3. Build a strong team
Having a core group of contractors, agents and lenders that you can rely on can make the difference between a bad hobby and a lucrative career. A good investor should have reliable contacts ranging from excavation crews to roofing companies. Every contractor that you work with should be someone you can trust and the way to develop that is by working together often. If you're just getting started it would make sense to get references for contractors and interview several of them before hiring them on. Getting things like proof of insurance is important for longevity in this business.
Real estate agents are not all one and the same. The top 20% of Realtors close 80% of the business in any given market. That being said it doesn't mean you can't find a good, hungry, newer agent. Just think about it like this, if you went to a dentist would you rather go to the one that fills 100 cavities a year or the one that fills one or two every so often and usually for a steep discount? The similarities between pulling teeth and selling real estate can very glaring and hiring the right agent for the job is crucial. A good agent will make you more money than a bad one will "save" you every time.
You should partner up with several hard money as well as conventional lenders. If you can make a deal work with conventional financing than that's awesome! But for those fast closings, for the torn up houses, for the hoarder homes, for the flood and fire damaged ones you need hard money. You should have a solid team of lenders to help you not only secure the properties to begin with but to BRRRR out of hard money as well.
4. Work with integrity
Just like in any other business your reputation matters in investing. No matter where you live the real estate community always feels like kind of a small town. Word travels fast especially regarding shady, unethical and down right wrongdoings. Doing business with integrity means approaching every project as a problem that you can help solve, not as an opportunity to gouge someone out of their last dollars. Actually if your motivation is to just pick apart people for your own personal gain you should stop reading this blog here and go back under the rock you crawled out from under. This is especially true when working with distressed properties such as short sales and foreclosures, investors deal with homeowners who are hitting rock bottom. There is no need to kick people when they're down as your job is to help solve problems and you get be paid handsomely to do so. The most successful real estate investors offer solutions that help the sellers out of corners instead of pushing them further back into one.
Doing good work on the rehab is key to getting the highest sales price and to not getting sued. Cutting corners on the remodel will come back to bite you sooner or later and lawsuits in real estate are seldom for small amounts of money. Do your best, documents the work, pull permits whenever you need to and just visualize your buyer's family enjoying their life at their home. That's what it's about to people, home. To us it can be just a project, an investment, another 3/2/2 or whatever but to the end buyer it is home. Remember that as you go through the process.
5. Focus on marketing
If you do everything else right then your biggest problem should be finding enough deals to stay busy. There are times like the recession of 2008-2010 when there was a flood of foreclosures but that's an anomaly. In today's market there are more flippers than there are homes to flip and so the successful ones get very resourceful. There is not one strategy that just seals the deal and you need multiple funnels. Some deal sources that a savvy investor might have available could be
- Foreclosure auctions
- Preforeclosure/trustee lists
- Estate sales
- Recent deaths...be kind to the family
- Tax liens
- MLS for undervalued or poorly marketed listings
- Driving for dollars using apps like Dealmachine
- Your own network of agents and contractors
- Being known for doing good work and having people reach out to you with deals
- Social media ads
- Targeted PPC ads
- Traditional print media,
- Outbound calls
How to f^&* it all up in 3 easy steps
1. Lie, cheat and steal
This shouldn't have to be said but unfortunately the idea of making quick and easy money often attracts the wrong people. Whatever you do in this business, good or bad, will reflect on your reputation and future performance. The real estate market isn't all that big, the number of players in it isn't huge, and being shady will come back to bite you sooner than later. For every successful real estate investor there are a dozen forgotten ones who tried to cut corners, short their contractors, steal from their partners and so on. Again this is a simple concept to follow but it seems when people are under the gun their true colors come out, which sometimes are just shitty.
2. Take on too much work or debt
Everyone can look good when things are looking up but it's the hard times that create great investors. Being able to maintain a steady amount of work without allowing yourself to get greedy isn't always easy. If you're having a ton of luck scoring deals instead of trying to keep it all for yourself consider wholesaling to other investors. They will appreciate it, you will still make money, and the quality of your efforts on your other projects won't suffer. Plus maybe one day you'll be slow and the people you helped will help you score some deals. But one of the easiest ways to not only fail out of this business but also to ruin your life financially is to take on too much work and too much debt. The payments are always due regardless of what you're going through, hard money is expensive, contractors aren't always honest, the market isn't always red hot and having a little bit of reserves will greatly help you sleep at night as well as think logically. Avoid letting greed make decisions.
3. Bad partnerships and stupid a$$ seminars
Real estate investing is a business, you should think of it that way. When you're considering partnering up with someone on a deal think to yourself, "self, would I open a restaurant with this person"? It seems like real estate especially fix and flips is just a quick in and out thing, and it can be, but being able to trust your partner is paramount. There are plenty of stories just out of our small community here in Colorado Springs of partnerships that ended poorly. These often start with the combination of a rookie investor looking to do their first deal and a "guru" of some sort that's fortunately willing to help you. The set up is generally that your new found partner knows exactly what to do, who to hire to do it, and is confident you're going to both make a ton of money. The only catch is that it will be your money and credit tied up in exchange for their experience. I have seen situations here locally where new investors were wiped out for $40,000 or more and were stuck with unfinished houses that were eventually sold for a loss while their partner suffered no consequence. Vet the people that you work with and do not fall prey to the idea of quick and easy money, it's not a real thing.
Seminars. There are so many. Look not everything that is covered at these seminars constitutes a scam, its just that charging people thousands of dollars for information that can be seen for free on YouTube totally is a scam. There are plenty of meet up groups such as the Bigger Pockets meet ups and local investor groups where you can go for free, have coffee and immerse yourself into the world of investing. Please, double please do not spend any money at all (not even $499) on any of these bullshit seminars. There is not get rich quick silver bullet in real estate investing that you have to pay money to uncover. It does not exist. You make money in real estate investing when you learn your market, build a good team, know enough to make quick decisions and employ ample exit strategies for the best and the worst of times. Seminars will just hustle you out of your dollars.
I know this is a super general article just scratching at the surface. There is so much to this business that people literally spend their whole lives practicing and learning it. It's always changing, shifting and adapting with the times that allows successful people to remain on top. If this article made you think of any questions feel free to reach out to me. If you think I'm missing something or missing the point entirely I'm open to your criticism. Thank you for taking the time to read this!
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