As a real estate broker, I often meet self-identified real estate investors. When I speak to these people, I usually find that they are either true investors or real estate “investors.” The difference is that the real estate “investor” often has never actually bought an investment property. They often downplay the difficulties of real estate investment, and they generally are very eager to peddle their “expert knowledge.” The true investor is usually experienced and is privy to a few basic facts:
1) It’s not TV
“Flip This House” is great television – but is about as realistic as “Sponge Bob Square Pants.” “Flip This House” will show you a tidy $150,000 profit wrapped up in a 30 minute episode because viewers want to see the money and not the work involved. Real investing is very lucrative, but investors also spend years honing skills and market knowledge that lets them find properties under market value.
2) Walk before you run.
Too many investors start with high-risk properties, which is a little like deciding to run a marathon when you’re a couch potato. In both cases, you’re likely to get hurt. New investors need to start small and learn to minimize risk while lowering variable costs. For example, new investors are better off buying a property that’s already rented out to credit-worthy, long-term tenants. For a first time rehab project, buy the house as your home or build in at least 6 months of carrying costs. Once you have made a few deals, you will have the experience for bigger investments.
3) Investment is Long Term
Many new investors assume that they can make quick money by flipping houses, but unless you make 1031 exchange work for you, flipping results in short term capital gains only. Savvy investors focus on income producing properties. They purchase property in a market that seems likely to appreciate, hire a property management company, and let checks come in monthly for several years. The passive income lets them earn consistently while property value rises.
4) Use a Realtor Wisely.
Research realtors until you find one who not only works with investors but makes good investments themselves. Don’t make the mistake that many new “investors” make by going after the agent’s commission. You want a realtor to be on your side.
5) Work With a Business Plan.
All successful professionals and companies have business plans – and you should, too. Determine what properties you are interested in, how much money you can make, how much money a property will cost to buy and maintain and decide your business goals. Work on paper, coming up with every possible expense and writing down how to minimize risks or any problems that may crop up. Once you have a plan, don’t waver from it.
6) Take Action!
You can’t make money if you don’t invest. Once you have your business plan and you see a property that looks like a good deal, take out an option period. In Texas, you can get a 10 day option period for $100 in many cases, which gives you plenty of time to research and snap up a great opportunity.
7) Talk Yourself Out of the Deal
Once you have contracted a property that fits your business plan, play devil’s advocate. Working on paper, come up with everything that could go wrong and what you can do if something negative does happen. If there are negatives that you can’t mitigate, walk away. You want a property that will make you money no matter what, so that if the worst does happen you won’t be ruined.
Not everyone claiming to be a real estate “investor” actually is one. Following these simple steps and learning from successful investors can make you one of the few who do and not the many that merely talk.