Thinking of becoming a real estate investor? Where do you begin? That’s a tough question that only you can answer because there are so many different ways to invest in real estate and each investor has their own investment preferences, budget, and comfort level. Do you want to invest in long-term rentals, short-term rentals, house flipping, wholesaling, house hacking, live-in flip, BRRRR, syndication, and many more strategies? Are you looking for properties that are turnkey, light fixer-upper, full gut, or develop ground up? What asset class do you plan to invest in residential 1-4 units, commercial multifamily 5+ units, land, self-storage, industrial, retail, and on and on. As you can see, it can easily become overwhelming. Don’t worry though, check out my list below of real estate investment principles that you must develop for yourself to help guide you on your real estate investment journey.
1. Decide on a real estate investing strategy. Do your research on the different real estate investing strategies and asset classes mentioned above and pick one that you’re most interested in or fits your current situation best. Everyone begins with a different starting point: finances, knowledge, background, skills, and expertise. So what works for one investor may not work for you. Pick something that makes the most sense for you and then dive deep, like a mile deep, into that strategy until you’ve become an expert. It is very hard as a new investor to dabble or juggle multiple strategies, asset classes, and have any hopes of being good at even one of them. It’s also very easy to have shiny object syndrome where you get distracted by the newest and hottest trends. Don’t lose your focus, keep following your investment strategy plan until you’ve mastered it and then you can move on to adding in another investment strategy or asset class. Great sources to learn about the many different ways to invest are podcasts and investor forums like biggerpockets, the Real Estate Guys, and many others out there. Attending local investor meetups in your area is a great way to meet other seasoned investors and learn from them. You can search for local meetups on facebook or meetup.com.
2. Develop your investment criteria. Once you’ve determined your investment strategy, the next task is to define your investment criteria. Every investor has their own set of investment target metrics that they look for in a deal. You cannot simply follow someone else’s metrics as their market and investment goals are going to be different from yours. What might be a deal for you may not be a deal for them and vice versa. Don’t be the newbie investor who has no target metrics at all and simply says, “I’m open to all and any deals, send them all to me.” That is an immediate red flag that you don’t know what you’re doing as an investor. Investment criteria may include things like cashflow, ARV, net profit after sale, equity after rehab, debt service coverage, cash on cash return, cap rate, property class, neighborhood class, return on investment, etc. Once you figure out what target metrics you’re looking for it will be a lot easier for you as well as an agent to help find you a deal that works for you.
3. Secure your funding. Investing requires money whether it’s your own or borrowed from a traditional lender, hard money lender, or private lender aka friends and family. Review your finances and see how much you personally have to invest. Unless you’re already well off, you’ll likely have to seek financing. To find lenders you can simply call local or national banks, a google search, or network with real estate agents and other investors for trusted recommendations. Without funding you won’t be able to close on any deals you come across. You’ll want to make sure that you have at least one source or strategy that you can utilize for funding your first deal. It’s not a bad idea to also come up with backup options in case your primary option doesn’t work out.
4. Pick a real estate market. Most investors begin with investing in the real estate market that they live in. Because it’s convenient, close, and they already know the market. However, if you live in an expensive market or where the laws and regulations favor tenants. You may not want to invest there. Instead, you’ll want to do your research and find a market that makes sense for your investment strategy and criteria. Some of the major items to check and create a list of criteria are: population size, unemployment numbers, number of major employers, are the local laws landlord friendly, median home purchase price, avg rents, ratio of renters to homeowners, and median household income. Once you have a city in mind, you’ll have to go another level deeper and find specific neighborhoods that meet your investing strategy and criteria. You’ll definitely want to take a field trip and drive these areas in person.
5. Find your real estate agent. As a new investor, one of the best and quickest ways to learn and navigate any market is to find a local real estate agent who’s already an established expert in that market. You’ll want to do your homework to find a few experienced agents who are investor friendly, this is important as not all agents understand real estate investing. An investor friendly agent thinks like an investor and can help educate you about what areas might have listings that best meet your budget, investment strategy, and deal criteria metrics. Interview a few agents and go with the one that you think will work best with you and what you want to accomplish. It is important to note that you’ll only want to work with one local agent at a time. Contrary to what some new investors might think. If they don’t commit to working exclusively with one agent and instead keep an open relationship with multiple agents, this will increase the number of deals sent to them. That is not necessarily true as all agents see all the same listings on the MLS. There’s no benefit to having multiple agents blowing up your inbox sending you the same deals. What about off-market listings that an agent may have? The reality is that being a new investor contact with who they have no relationship yet and hasn’t closed any deals. It is highly unlikely that an agent is going to send you their top off-market deals. The correct approach is about finding the right agent who has the local expertise, communicates well, is responsive, works hard for you, understands your investment strategy, and able to pick out the right deals for you. If an agent senses you’re non-committal or not a serious investor, a real estate agent is not going to spend time on your requests as they already owe that time to their other investor clients who have committed to them. Once you build that trust and business relationship, you’ll move up into that agent’s VIP list and whenever they find a great deal you’ll be one of the first to know. If your working relationship isn’t going as expected, be upfront, mutually cancel the buyer representation agreement, and find another agent. Just because you sign an exclusive working relationship doesn’t mean that it’s forever, either side can terminate at any time. In addition, a great agent will also be your conduit to meeting other valuable local real estate professionals such as contractors, lenders, lawyers, title companies, and property managers.
Work on developing these five investing principles and you’ll have a great road map for your real estate investing journey. However, avoid analysis paralysis where you feel like you must have everything figured out before you begin taking action. The truth is, you’ll never know everything, just get started and fill in the blanks as you go. At a minimum, you need to put in the time and work to develop a rough draft of your investment strategy, learn the basics and general process of what you’re looking to do, and can speak somewhat intelligently on the topic. When you meet more experienced investors, real estate agents, lenders, or potential mentors, they’ll be more willing to help someone who they see has clearly done their homework and has developed: a specific investment strategy, deal criteria metrics, sources of funding ready, and general knowledge of the target market. Don’t be the complete newbie investor that asks super basic questions that Google could answer, expects them to give you all their knowledge that they’ve spent years accumulating, or to do your work for you. No one likes to work with people who only take. Instead, ask how you can provide value to them and hopefully, you can learn a few things by building that relationship. Similar to a goal of getting in shape, even when using a personal fitness trainer, at the end of the day, only you can lift those weights to achieve that goal. Happy investing, if you should have any further questions or need help with getting started investing in the greater Milwaukee area reach out to me for help.