Today’s real estate industry is competitive, and if you are unprepared, you are bound to fail. To help you in your mission to get started in real estate investing, I’ve put together a few conditions that you need to evaluate before jumping in and investing your time and money. You need to ask yourself the following questions before you think about purchasing an investment property.
It’s a complicated process, so I’ll give you a blueprint which will get you going down the right path.
Step 1: Set Realistic Financial Goals and Expectations
The greatest mistake that amateur property investors make when they are planning to invest is that they have no financial objectives. They usually have a common intention of getting rich or earning some sort of passive income. However they don’t have a strategy for how much they are willing to invest or what realistic goals look like.
You need to think about what you want to accomplish financially from real estate investing. Research and jot down a real estate business plan in which you specify how much money you want to make as a real estate investor. One of the simplest ways is to consider what you earn right now and use that as your starting point. Once you’ve matched your current income, your options open up as to whether you’d like to quit your job.
Step 2: Select an Investment Strategy According to your Financial Goals
There are several strategies that you can use to invest in real estate. The most popular investment strategies are:
Properties with Positive Cash Flow
These are rental properties that you lease to earn rental income. This takes longer to replace your income because each property may only produce a few hundred dollars a month in actual cash flow. You’ll still be rewarded with tax and appreciation benefits, but this is a long-term strategy, not a “quit your job” soon strategy.
Fix & Flip Investment
Fix & Flips involve purchasing discounted properties from motivated sellers. These properties are often in poor condition. After buying the property, you’ll work on renovating it to boost its value and then sell it for a profit.
House/Rent Hacking Strategy
This is a combination of purchasing a place to live in yourself and rental property. What you do is you buy a multi-unit, such as a duplex, and you live in one unit while renting out the others. This allows you to receive rent from your tenants, and you can utilize it to pay off your mortgage. Hence, you can earn passive income and live rent-free!
Buy and Hold Strategy
This is solely investing in future financial growth. Since properties almost always increase in value over the long run, which is known as appreciation, real estate investors can buy when the price is low and sell it whenever the prices are high. You can also lease the property for rental income while waiting for it to appreciate over time.
As you can see, there are several strategies for investors to build wealth if they choose to invest in real estate. The trick is to figure out which investment strategy suits your financial goals and risk appetite.
Step 3: Work on a Detailed Real Estate Business Plan
Whether you’re starting a real estate investment business, a beautiful café, or a company that manufactures mobile phones, it’s a good idea to prepare a business plan. Research shows that 83% of the businesses that don’t have a solid business plan fail within the first few years.
Having a detailed real estate investment business plan helps you in two ways:
- It helps you in formulating your goals and leads you in the right direction.
- It helps you attract other investors or private lenders by appearing professional.
If you don’t have any background in the real estate industry, it’s a reasonable idea to get advice from someone successful in this business. They can get you started in the right direction with proper dos and don’ts. You can even invest in a proven system to study house flipping and buying your first investment property.
Step 4: Do Proper Market Research
Without understanding the area you’re planning to invest in, you’re likely to misevaluate the purchase price and after-repair value of any properties you’re looking at. You’ll be getting into deals that are likely to fail because your financial research will be wrong.
The area where you are purchasing investment properties can considerably affect your investment. From the preliminary expenses of buying and operating a rental property to the future returns on an investment, the location defines it all. For example, a high crime area can adversely affect your ability to resell the house.
One way you could do this is by performing a real estate market analysis. For instance, you might discover properties for sale at discounted rates and think of them as terrific investment opportunities. But after completing a real estate market analysis, you’ll most likely discover them in areas where people don’t wish to live. This is one of the more common issues I see with new investors. They ignore important factors about the neighborhood and project profitability numbers that are too favorable.
The ability to assess an area is a foundational skill for a real estate investor.
Step 5: Finding a Great Deal
It doesn’t matter if your goal is to flip a house or rent it, you must find deals at a discount. For starters, you can look for properties that are bank-foreclosed. Although foreclosure of a property is a sad affair, it could be an ample opportunity to buy your investment property. You might be able to get it at an extremely affordable price and help out the owner with a cash offer.
A great place to start is to read about our favorite strategies for finding profitable off-market deals with little competition.
Step 6: Financing Your Investment Property
Let’s assume that you choose to buy your first investment property with a loan. In this case, before you begin scanning houses for sale, you need to understand how much the bank will lend you or if the bank will give you a loan at all. Also, there are various alternatives when it comes to mortgage loans for purchasing investment properties.
Moreover, most lenders will check your credit score, debt-to income ratio, job history, etc. These factors will determine if you’ll get authorized for a mortgage loan and how much money you can obtain from the lenders.
You might be thinking that you can’t even think about buying an investment property without sitting on a massive pile of cash. But, you will be surprised to know that when it comes to purchasing an investment property, having a tremendous amount of money on hand isn’t a prerequisite at all.
We suggest looking at hard money lending. The Investor's Edge doesn’t require a certain credit score or experience, and we’ll teach you how to find deals with $0 cash-to-close.
Real estate investing can be enormously profitable for you. We’ve seen it change people’s lives over and over again. It’s changed mine forever. However, without a great plan and proper research, you can also have the potential to lose lots of money.
Find out how to make money flipping properties with us by attending our next webinar.