I personally hate the term “analysis paralysis”, but I also admit it’s a real thing. The reality is that getting started in real estate investing requires thinking, planning and preparation. However, it’s important to realize that these are just steps in a process, and once you have completed them, there are other steps to take. Here are some steps you can take to get started.
Two truths about investing in real estate.
#1 Investing in real estate has a $$$ barrier to entry. Some investment gurus will tell you that you can invest in real estate with little or none of your own funds. Sure, you can. Borrowing money from a bank, family, or investors is certainly a legitimate way to get started. Remember, borrowing a lot means you have to pay a lot back. There’s no getting around this. Borrowing money is OK but paying it back, at some point in the future, should be part of your planning.
#2 Investments in real estate are not liquid. Once you have used your funds to purchase and/or renovate a property, the only time you will get your money back is when you sell the property. If you are getting into fix-and-flip investing, you aim to own a property (have your funds invested) for the shortest period possible to sell and make a profit. If you’re going to be a buy-and-hold investor with rental properties, it will be years, or never, before you ever cash out your original investment. Wait! Before you start protesting — yes, cash-out refinancing is a thing, but go back and read the first about investing in real estate.
Take steps to get your personal finances in order.
If we assume that you’ll use at least some of your own funds to purchase your first investment property, you will need to get those funds together. Here is a shortlist of the kinds of money you need:
· Emergency Fund. Having an emergency fund has nothing to do with purchasing an investment property, but it is sound advice. The rule of thumb for adults is to have 3–6 months of living expenses set aside so that if you lose your job or stuff happens, you can keep going a little longer while getting back on your feet.
· Down Payment. One function of having a down payment is that the bank will view you as having skin in the game when buying a property, and this typically helps you get a better interest rate. Also, banks seldom (or never) offer 100% mortgages anymore.
· Closing Costs. These are the transaction costs of buying a house. They can be between 2–5% of the value of the property you are purchasing.
· Maintenance and Renovation Funds. How much you’ll need will depend on your investment strategy. You’ll likely need more for a fix-and-flip investment than for a buy-and-hold, but in both cases, you’ll need to do something to get the property ready to sell or rent. Renovation can range from a fresh coat of paint to a complete gut renovation of a property. For buy-and-hold investors, you also need to consider the ongoing maintenance of the property.
So, assuming you’ve done some work on preparing for your first real estate investing (i.e. you’ve got at least some of your own money) and you’ve made an appropriate-for-you decision on how much risk you’re going to take on by borrowing the rest…
Let’s talk about how you’re going to make real estate investing profitable.
Take steps towards successful real estate investing.
To be a successful (read: profitable) real estate investor, you need to figure out how you’ll make money. Very simply: Income — Expenses = Profit.
For the fix-and-flip investor, your income will be the sale price of the property when you sell it. Your expenses will be purchase costs (down payment, closing costs), holding costs while you own the property (insurance, taxes, HOA fees, utilities, mortgage payments, etc.), renovation costs, and costs of sale (closing costs, any taxes, marketing costs, etc.). Your goal is to sell the property for more than all these expenses combined to make a profit that was worth your time and effort.
For the buy-and-hold investor, your income will be the rental income paid by your future tenants. Your expenses are the same as for the fix-and-flip investor, except for costs of sale since you’ll be holding the property. Also different from the fix-and-flip investor, you’ll probably spend less on renovation initially, whereas you’ll have to budget a portion of the rental income for maintenance and vacancy costs over time. Your goal is to maintain a positive cash flow, where rental income each month is higher than your expenses.
In both cases, you need to become an expert on the different categories of income and expenses, how you can maximize your income and reduce your expenses, and thereby ensure that you make a profit! How much profit you make will also depend on the real estate market you invest in.
Are you going to get started?
My aim was not to give you detailed instructions on investing in real estate, but rather to get you thinking about what you need to think about. The path you choose will depend on market-related factors, your financial decisions, and your risk tolerance. You can read a lot from wise people who have done it before, you can learn how to make complex Excel tables for analysis, but ultimately, you have to decide how you will invest in a way that makes sense for you.
