I’m not referring to experienced investors who already have several transactions under their belts, who recognize that they are still learning, and who soak up all the information they can from experienced real estate agents and other experts. These real estate investors are probably already on the right track, although it never hurts to go back to the basics.
I am addressing this to folks who have decided to purchase a property for investment yet never done so, who do not comprehend the difficulties they face, and who consider themselves expert because they attended a seminar or read an article or two. If this describes you, be sure to continue reading...
1. Walk before you run.
You probably wouldn’t run a marathon without training because you want to minimize the risk of injury and you don’t want to collapse before the finish line. Well, you shouldn’t start investing in real estate without training either.
Start by talking to the real estate pros and considering every word of advice from experienced investors and real estate professionals alike. Keep notes, and keep track of who suggested what so you can follow up with these advisors later if you run into a situation they’ve faced in their own situation. Then, start small. You can minimize your risk with that first investment property – and there are many risks – by controlling your variable costs.
If you’re buying an income property, for example, choose one that’s already rented, preferably to long-term tenants. This will enable you to realistically anticipate the cash flow for your new investment without likelihood of immediate vacancy factor or rental costs. If you’re buying a property to "flip” – i.e. rehab and sell for profit – remember that it comes with carrying costs as well as hidden construction costs that are difficult to anticipate. “Flip This House” is fun to watch on TV but, as Eric Bramlett says, that’s about as realistic for the average investor as “Sponge Bob Square Pants.” (Bramlett is the broker and owner of One Source Realty in Austin, Texas.)
2. Remember that real estate investing is a marathon, not a sprint.
Quick profit in real estate is more of a myth than a reality. Buying houses to rehab and flip may seem like the best and fastest route to profit, but it is hard work and requires skill, foresight, market knowledge and financial resources. It’s hardly a good first step into real estate investing. Again, the best advice is to start small.
Choose a property that you can purchase at a price significantly below market; one that is structurally sound and needs only cosmetic touches or clean-up to sell at top dollar.
And don’t forget to use a 1031 Starker Exchange, or you will have a hefty tax bill eating into your profits. Income-producing property will appreciate and add to your wealth with minimal risk and without significant effort on your part. With the help of an experienced real estate agent, purchase a property that is structurally sound and likely to appreciate, hire a property management company to deal with the day-to-day hassles, and go about your life – with the bonus of a small rental income check in your mailbox every month. A few years later you can re-finance the property to pull out cash for other investments or sell it for a profit. Again, don’t forget your friend, the 1031 Starker Exchange.
3. Make and follow a business plan.
After you learn everything you can and build a team of real estate professionals – an accountant or tax advisor, experienced real estate agent, property management company, and home-improvement contractor – it’s time for you to sit down and develop your short-term and long-term business plan.
You want to know how much money you have to spend up-front, how much reserve you can set aside for unexpected expenses, how much monthly expense you can handle, how much time you can devote to this. You want to know how much income you hope to generate and whether you want to focus on rehabbing and flipping or income-producing properties. Be sure to include the cost of real estate professionals in your budget, and remember that you get what you pay for. It is likely that experienced and knowledgeable professionals may charge you more – but your end profits, with the benefit of good professional advice, are likely to be optimized. Decide upon an area, a type of property, and an approach to purchasing… Ask yourself if you plan to “rent with an option” or use some other deferred settlement strategy, buy foreclosure properties, or search for hidden gems in the marketplace. Do you plan to use the equity in your home to pay cash for the purchase or do you have a pre-approved loan in place for investing?
Make a plan, execute it – and stick to it! ‘Chances are that other investors are looking for similar properties, and the best ones get snapped up quickly. For example, I recently listed a property for a distressed seller, and the price was very, very low for a quick sale. Numerous agents and investors contacted me within hours of the property going on the market, but one investor wrote a full-price non-contingent cash contract within an hour of its going into the computer – sight unseen! He had a plan, kept his eye on the multiple listing service, and knew this property met his guidelines; he didn’t have to give a second thought to purchasing the property before anyone could even look at the property.
A word of caution: Like any investment, whether it is the stock market or real estate, income potential is real but not guaranteed. You should never invest money that is not discretionary, i.e. money that you can’t afford to lose. Minimize your risk of loss by working with experienced real estate professionals.
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New real estate investors, this is for you
Copyright 2007. All rights reserved. Margaret Woda
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