How To Invest In Real Estate
Finally asking the right questions! It’s not about “Should I invest in Real Estate” or “Why did you invest in Real Estate”, this is about “How can I invest in Real Estate?”
Right of the bat, let me tell you that this is a really broad topic. So many paths, so much to say, such little space to write about it. Which is why I’ll give you an overview on what you can do to get started and then recommend some resources you can check out to further your interest and learning.
To give you some background about my experience in real estate investing, I got started in December of 2020. One of my co-workers mentioned he does this part time and sent me two e-books to learn. To my surprise, I got sucked into the book immediately. The book went through a 7 year process to becoming financially free. It was crazy to imagine at the time and at that moment I decided that at the very least - I have to give it a shot. It’s now ~2 years later and I’ve acquired 2 rental properties set on a goal for one more this year! (Wish me luck)
I currently have a long term rental property and a short term rental property. To start out, let me tell you that there’s a million ways to become a millionaire in real estate. There’s rentals, flipping, wholesaling, BRRRR, commercial real estate, syndication, and much more! You have to decide for yourself which route you are going to take.
Step 1: Determine Your Market
The very first thing you’ll need to figure out is which market you’re going to invest in. The best approach to this is the market you’re currently in! Download zillow and trulia right now and look at properties in your neighborhood, in your town, and even nearby areas.
However, if you’re in one of the expensive cities in the country and the budget is more than you can afford at the moment, that’s okay too. There’s two options here:
Continue to look at your market and research creative financing ways such as syndication, private money, raising capital, leveraging low down payment loans, etc.
Research out of state markets! (This is what I did) I live in San Francisco, one of the most expensive real estate markets in the country and decided to research other areas. Now if you choose to do the same, please don’t fall for analysis paralysis. An easy choice would be to invest where you have family or where you went to school. If not, I’d create an excel sheet to determine markets based on: population growth, # of fortune 500 companies in the area, median home prices, etc. Pick your location based on these criteria and move on! Only spend longer if you’re going into short term rentals or some niche investing area. The remaining methods of investing can be done literally anywhere!
Step 2: Form your Team (It’s your business)
The next step is to form your team. This is as important if not more than determining your market. To find and run a good investment, having a solid team will lead to higher success. Below are the team members I’d focus on in highest priority to lowest priority order. When I got started, I created another excel sheet to keep track of each person I spoke to, the questions I had to vet them, their responses, date I called them, and follow-up steps from there.
Agent
Your agent will be the #1 most important person in your deal finding process. Agents have access to the MLS giving them access to tons of properties with all sorts of information that Zillow simply doesn’t provide. With their connections, they’re also able to find off market properties (that’s how I bought my second investment) and give you insights on the history of the house, neighborhood, etc. Just like with every occupation, there’s good agents and there’s not so good agents. I like to vet out anyone I’m working with to ensure it’ll be a positive relationship. Again: if you think of your investment as a business, you’ll end up making smarter decisions. Here are the list of questions I always ask:
Have you worked with investors/flippers/etc in the past?
Which markets do you cover and are the most familiar with?
Based on my criteria and limit, what kind of properties should I expect to see in this market?
Can you connect me with an investor you’ve worked with in the past (This is a great way for you to network with other investors and form another connection!)
If you’ve found a good agent, be sure to ask for recommendations on a lender, inspector, contractors, etc. They’re the best sources of truth and having that recommendation gives you a boost when it comes to developing that next relationship.
Lender
Your lender will be your best financial friend during the process. I like to be very transparent with my lender, tell them exactly how much I have saved up, my credit score upfront, and my income level to determine what kind of loan I can get. One of the biggest things to note is some lenders only operate in some states. Be sure to ask them if they operate in all 50 states and especially the market you’re interested in. Here are some questions to get started:
Do you loan on investment properties?
What kind of down payment do you require?
What are the current rates?
What's a typical closing time?
Do you operate in all 50 states?
What kind of requirements do you look for? (work history, income, credit score, debt to income, etc.)
How long does it take to get pre-approved?
Do you have a minimal loan requirements?
Property Manager
A property manager is someone who takes care of your property when you can’t. For an out of state investor, I highly recommend getting one - I’ve had one ever since I bought my first rental. It saves me a lot of headache, late nights calls, and the constant tenant questions. Remember that a property manager will typically take a portion of your rent. Typically it’s 10% but it’s a good question to ask. If you’re investing in your area, an option is to manage the property yourself. You can save that typical 10% and learn what kind of problems arise being a landlord. Of course, this doesn’t apply if you’re in the flipping or wholesaling business. Some questions to ask:
What percentage do you charge for a tenant?
What is the tenant vetting process look like?
How do you ensure the tenant requests are taken care of? What’s the process?
How often are you in touch with the investor themselves?
How many investors have you worked with in the past and currently?
Contractor
Contractors are needed when you’re a little further along in your project. If you’re deciding on flipping houses, contact contractors asap to get quotes on different projects around the house on an estimate basis. Since I primarily focus on rentals, the work with contractors is typically fixing things here and there such as plumbing, roofing, fence work, etc. These questions depend on a contractor level and the kind of work you need. Hence, the questions will vary and I’ll leave that up to you
Inspector
Any time you purchase a place, you will get an inspection done. It usually costs anywhere from $300-$500 depending on the property, inspector, and location. The report is meant for an official home inspector to take a look at your place before you continue with the purchase to inform the buyer about issues around the house. There’s a 100% chance that they inspector will find something or another wrong - that’s a good thing; it means they’re doing their job right. I’ve always asked my agent for an inspector recommendation, vetted them out based on their experience and the cost. The big thing here is to be sure you have a call with them after the inspection to understand the report in detail and understand which issues are actually important and which can be dismissed. A lot of the times there’s issues like this one wall outlet doesn’t work - that’s not a big deal in the long run and can be fixed easily. However if you find plumbing or roofing issues, it’s a good time to reanalyze your purchase and pull out if needed. Again, this will happen when you’re in the ‘escrow’ process - that’s after you’ve signed the intent to purchase document and before you’ve officially closed on the place.
Step 3: Run your numbers
My favorite part 😊 (can you tell I was a math nerd growing up? haha)
Yes determining your market is important. Yes forming your team is important. But the most important is to RUN YOUR NUMBERS! Whether your goal is flipping the property for a profit or renting it out, it is so important to create yet another excel sheet to determine if this investment makes sense. A lot of beginners ask ‘is it even worth it’ if I can get 8-10% ROI in the stock market and it’s one of the best questions ever. The answer: it depends! There are a lot of guides online so I won’t bore you with all of them just yet. Just remember to factor in:
Initial costs
Down Payment
Closing Costs
Inspector
Renovation
As a safety net: 3 months worth of mortgage
Recurring Monthly Costs
Gas & Electric
Water
Property Management (%)
Wi-Fi (if applicable)
Trash
Lawn & Snow Care
Insurance (usually part of monthly payment to lender)
Taxes (usually part of monthly payment to lender)
Vacancy Reserve (3-10%)
Maintenance + CapEx Reserve (3-10%)
Step 4: Purchase and maintain :)
If the numbers make sense, you’re ready to move forward with the purchase! You’ll let you agent know and they’ll take care of all the documentation. I like to review anything I’m signing with them. There will typically be an escrow process, usually around 30 days, where you’ll do your due diligence such as getting a loan, getting an inspection done, visiting the property in person, double checking numbers, etc. This is your final check and your last chance to confirm or cancel moving forward. If things are looking good, you’ll meet in person with a Notary to sign all the documents and the property is yours!! Congratulations!
If you get this far, please send me a note and we’ll celebrate together because this is a huge step towards your financial freedom!