Chapter 2: Real Estate Investing Education
"A journey of a thousand miles begins with a single step." - Lao-tzu
This chapter is very important in your real estate investing journey. Without a clear understanding of the principles found in this chapter, you are at a much higher risk of failure and defeat in your real estate dealings. In fact, if you only remember one chapter in this entire guide, we sincerely hope it's this one. Let this be your first step to a successful future in the real estate investing world.In this chapter, we'll cover:
- Don't Skip Your Real Estate Education
- Real Estate Terms and Mathematics
- Mentors, Gurus, and You
- Overcoming Fear
- Analysis Paralysis
Don't Skip Your Real Estate Investing Education
As we discussed at the end of chapter one, real estate investing is not a “get rich quick” scheme. Just as any solid home needs a strong foundation, the same is true when it comes to your real estate education -- a solid foundation is key to a long-lasting business.
This guide, while not exhaustive on every aspect of real estate investing, will help develop that foundation. We put it together to be a first step in your real estate education – and as an introduction to the possibilities that come with real estate investment.
There are many different ways to get educated in real estate investing, and you don't need to pay hundreds or thousands of dollars to learn the business. Below ,you'll find a list of a few sources of real estate investing education; be sure to consider each before making a final decision on how you're going to move forward -- what works for one person may not work for another.
Sources of Real Estate Investing Education
- Books -- As the old saying goes, “Those who lead, read.” Books are fundamental in gaining an education in real estate and perhaps the most widespread learning method for investors. Real estate books are produced each year by the thousands, and every major bookstore in the world contains a whole section on real estate investing. Chances are, if there is a way to make money from real estate, there has been a book written about it. If reading books, however, is not within your arsenal of skills, you are in luck. Today, we live in a world where nearly every new book is also made into an audiobook. (Try Audible.com for the web's largest selection.)
- Blogs -- Blogs, short for an older term called a “Web log” are a collection of short essays written about a topic. Blogs can be an amazing source of information, and there are fantastic ones for every topic you can imagine. There are many great ones written by people living in the trenches of real estate worth checking out and learning from. Be sure to check out the BiggerPockets Blog, which features dozens of expert contributors sharing their best tips and advice, as well as the BiggerPockets member blogs (TK) for great examples of real estate blogs. You can also see a list of BiggerPockets' “Top 35 Real Estate Blogs” and discover new favorites.
- Mentors -- Perhaps the most powerful way to gain a good education in any field of study is through a mentor -- and the same holds true in real estate. While there are dozens of professional real estate mentors who charge for their service, there are also millions of mentors all over the world that will cost you as little as a cup of coffee - they are your local investors. People enjoy sharing what they know, and seasoned real estate investors are no different. By introducing yourself to a successful local real estate investor who you would like to become more like, you'll have the opportunity to learn from someone in the field who knows your market and who can ultimately become a partner as you come to become successful yourself. We'll talk more about mentors later in this chapter.
- Podcasts -- One of the newest innovations in the world of real estate investor education is the Podcast. A podcast is simply a recorded audio program, similar to a radio show, that can be produced by anyone with a computer and a microphone. There have been a number of great podcasts that have emerged in the last few years. If you have a smartphone or MP3 player, you can listen to hundreds of hour long shows covering a wide variety of real estate topics whenever you want – whether in the car, jogging, or lying in bed -- for free. Be sure to check out the pitch-free BiggerPockets Podcast or search iTunes for other options.
For more information about gaining a solid education, check out these posts:
- Real Estate Guru Courses: Are They Worth It?
- 5 Books That Keep Me Focused As A Real Estate Entrepreneur
- What Is Wrong With Paying For Mentoring, Coaching Or A Guru’s Program?
- Continuing Your Education is Key for Real Estate Entrepreneurial Success
- Real Estate Investing Education in the Information Age
- BiggerPockets Radio Podcast 003: Getting Started in Real Estate and Raising Money with Brian Burke
- BP Podcast 011 : The Ultimate Beginner’s Podcast For Real Estate Investors
Real Estate Mathematics: No More Complex Than Junior High
You don't need to be a college calculus student to understand real estate math. In fact, most of the math you'll need is grade-school level. This section is going to quickly touch on some of the basic concepts and math formulas you'll need in your real estate investing career.
Income is simply the amount of money that comes in from a property. This math is perhaps the easiest of all: simply add up the amount of rent and any additional fees that comes in.
For example – you own a rental house. The home rents for $1000, and the tenant also pays $25 for the use of the garage.
Your total income was $1025.00.
Income could also include late fees, application fees, pet fees, laundry or other vending machines, or any other value you receive from your rental.
Expenses are simply the things that cost you money on an investment. For example, the garbage bill for a home is $50 per month, the loan from the bank was $500 per month, and maintenance was $100 per month. The total of these three expenses is $650.00.
Your total expenses for this example were $650 for this particular month. Keep in mind that there are many other expenses that you'll face as a real estate investor, including things like taxes, insurance, management, holding costs, capital expenses and various others.
Cash flow is simply the amount of money left over at the end of the month after all expenses are paid. To determine the cash flow, simply subtract the total expenses from the total income:
Your total cash flow in the above example property was $375.00 for the month. Let's look at a few more math equations.
Return on Investment:
Your “return on investment” (also known as ROI) is a fancy way of describing what interest rate you are making on your money per year. For example, if you invested $250 and you made $250 from that investment (for a total of $500) over the course of one year, you would have made a 100% return on investment. Similarly, if you invested $5000 and made an additionally $2500 over the course of a year (for a total of $7500) you would have made a 50% return on your investment.
The actual calculation for Return on Investment looks like this:
ROI = (V1 – V0) / (V0), (where V1 is the ending balance and V0 is the starting balance)
A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1000 into a bank account. On the following January 1, you cash out the account for $1100. Your ROI on the investment is:
ROI = (1100 – 1000) / (1000) = .1 (or 10%)
You start with $1000 and end up with $1100 after a year for a return of 10%.
These simple concepts present the foundations upon which almost all other real estate calculations are based. The rest will come in time, but most calculations are simply related to these.
For more information regarding real estate math, please see:
- Introduction to Real Estate Investment Deal Analysis (A great comprehensive blog post about real estate investing math)
- Introduction to Internal Rate of Return (IRR)
- Return on Investment (ROI) Versus Cash on Cash Return (CCR)
Real Estate Investing Mentors:
A mentor is an individual who comes alongside you to teach and instruct based on their first-hand experience; they are someone who has lived the life before – walked it, talked it, and breathed it. Finding a mentor and learning from those who have come before you is one of the most important steps you can take in your real estate investing education, yet perhaps the most misunderstood. This section is going to focus on what a great mentor is, how to find one, and it will look at the question, “Should you pay for one?”
Non-Real Estate Mentors in Your Life
In your life, who have been your mentors? I'm not talking just real estate – but life in general. There are a number of different individuals who may have served in a “mentor” role at one time or another, such as:
- Older sibling.
Among all these mentors, there exists a common thread that all these sources has: an existing relationship with you.
These individuals were first in our lives through an existing relationship, and the mentoring relationship grew organically out of it. It wasn't forced or manipulated. There was no formal “mentorship agreement” written ahead of time, no payment required for mentorship, no force. The only requirement was the relationship.
How to Find a "Organic" Real Estate Mentor
For those who have been taught that the only mentors are the kind that cost $19,997.97, the concept of an organic mentor is a profound thought. After all, why would a seasoned professional real estate investor bother to help a newbie? "Won't I just be wasting their time?"
There are a variety of reasons why a seasoned real estate investor might choose to help a newbie, but the fact is, many do. Whether it's the dream of passing on their legacy, having someone with similar interests to talk with, or the potential making future deals, organic mentorships happen each and everyday. These mentorships are usually called by another name, though: friendships.
On the other side of the spectrum, there are new wannabe investors who tend to approach the relationship as if the mentor should be lucky to work with them. This entitlement attitude leads many of these individuals over to the BiggerPockets Forums, where they proudly announce that they are looking for a mentor to teach them all they know, but offer nothing in return but the privilege of working with them.
In other words
“Hi, my name is (so and so) and I'm looking for someone to invest a significant portion of their time and energy telling me how to get rich. I offer nothing to this relationship, but expect you to jump at the chance because you probably have nothing better to do. Most likely, I'll just disappear once I realize I can't get rich overnight, leaving you exhausted and irritated. So, who's first!?”
f you would like a mentor to come into your life, instead of your search being all about you and what you need, seek ways to grow a mentorship organically. Try these tips for building those relationships:
- Concentrate first on establishing a relationship with seasoned investors who you would like to learn from. A mentor doesn't need to be Donald Trump or Robert Kiyosaki. A mentor can be the investor down the street who owns a half-dozen rentals and works a full time job or an active BiggerPockets member who donates his or her time to answering questions in the forums. The key is finding an individual who you want to learn from in the field you want to enter. While you can glean a lot of information from any successful investor, attempting to build a deep mentorship with a mediocre house flipper, when all you want to do is buy and hold small multifamily properties, is probably not a great first step. Seek out individuals who are doing what you want to do.
- Make yourself valuable in a way that is meaningful (profitable) to the other person. What can you offer the other person who you want to learn from? Do you have a free weekend that you can offer to help clean up a vacant unit? Do you have web design skills or cold-calling skills? Value is found in many different forms to many different people. Make it your goal to provide solid value to every relationship you have. Additionally, you don't necessarily need to do everything for free for that person. If you are handy, perhaps just being a dependable maintenance person who doesn't rip them off is enough to build that relationship. Maybe a well designed website could be your value proposition. Whatever it is – remember: provide value.
- Don’t expect anything in return. You didn't build your early mentorships (parents, grandparents, etc.) expecting something in return. You built them because you were simply going through life. Provide value and in return – you may receive something back – but don't expect it.
- Always think “win-win” — Don't simply focus on what’s in it for you. Your mentor may be far more successful than you – but that doesn't mean you can't help them become even more successful. As the popular phrase states, "a rising tide lifts all ships."
- Most successful investors are willing to help, but only after you have proven that you are worthy of their involvement. A mentor does not want to waste their time. Being a mentor is a huge undertaking for both sides, and no one wants to devote a significant amount of time and effort building a relationship only to have it fall apart when the student gets bored. Prove that you are in this for the long haul by persistence, building knowledge, and actively growing outside the relationship you are building.
Should You Pay for Mentorship?
The role of a mentor is to make the journey from point A to point B a little quicker and a little easier. For many wannabe investors, paying for a mentor is the quickest and easiest way to find a mentor. But should you?
If you've been around BiggerPockets for any length of time, you'll understand that it is our core belief that you do not need a paid mentor or guru to help you succeed. There is a vast amount of information out there, most of it for free, that you can use to learn and grow as a real estate investor. Furthermore, places like the BiggerPockets Forums give you the ability to ask any question you want and receive answers back from many actual, seasoned real estate investors. Think about it -- there are over 219,000 others on our site, and many of them are active on our Q&A forums -- you can pay a single person thousands to be there to answer your questions or you can just ask it for free and get answers from many of your peers who are active in the field. We tend to believe that the input of many is certainly superior to one person's.
With that said, the choice to pay for mentorship or training is 100% up to you. The role of a product or training from a guru should be to improve your processes and make your journey easier, not necessarily shorter. The theory is, if you spend $500 on a product that helps you achieve $1000 in profit, then the product is worth it. The problem is that most individuals simply choose to buy a product looking for a shortcut and do not actually put into practice the lessons taught.
Before ever paying for training, we recommend that you first exhaust all options for finding a local mentor, as we discussed above. A paid mentor will most likely be unfamiliar with the intricacies of your local real estate market, while a local mentor will usually have a much better grasp. If you cannot find a local mentor, next seek out knowledge via books, forums, blogs, and other sources. Besides gaining knowledge and pointing you in the right direction, this also will help guarantee your full commitment. After all, you don't want to pay hundreds (or thousands) of dollars just to lose interest next week.
When you have a firm grasp on the type of investing you want to get into – then, and only then, should you consider paying for mentorship. Before you do, however, be sure to check out the Guru Review Forum on BiggerPockets, as well as the Better Business Bureau. Be very wary of shining reviews online from members that show up at a site just to defend some program (these are often paid members of the organizations themselves). Additionally, there are many gurus out there who simply exist to re-package free information and sell it for exorbitant amounts, claiming to have secrets or some new methodology. Do your research ahead of time to avoid working with these scammers.
Finally, before paying for a mentor or program, follow this one final step: Wait! Oftentimes, pitches and pressure applied from the individuals promoting a program are effective at striking the emotional nerve and as a result, can encourage you to buy out of fear or on excitement, rather than prudence. Wait a few weeks to see if you are still as interested. Many times, when the daze from the salesman’s shiny new suit wears off, the program is suddenly not as appealing. After all, there is a reason they want you to “sign up TODAY!”
Paid mentors can provide accountability (“I spent thousands... I better make it worth it!”) and good information that is neatly packaged for easy consumption. Many investors do find success working with paid mentors. Many others, however, do not. By focusing on finding local mentors, building your knowledge, and researching your potential paid mentor before paying, you are able to increase your chances of finding success and avoiding failure. Remember: there is not a product, coach, or mentor who can make you successful. That is strictly up to you. A mentor – paid or not – is merely a guide to help you get down the path as safely and quickly as possible. The choice to do so is up to you.
For more information on mentors, gurus, and paid programs check out:
- Life Changing Mentors
- How Do You Find a Real Estate Investing Mentor?
- How to Find Real Estate Mentors and My Eureka Moment
- I Can Do That! No, Sorry, You Probably Can’t – Wannabes and Mentorship
- The Real Estate Guru Trap – How It Works & 4 Ways to Avoid It
- Purchasing a Real Estate Investing Guru Program? Read This First!
- Don’t be hypnotized by the “Guru of the Week”!
- BP Podcast 017 – Finding Mentors, Facing Retirement, and Note Investing with Jeff Brown
- BP Podcast 025: Four Newbies and Their Very First Real Estate Success Stories
Fear: A Roadblock in Real Estate Education
I never worry about action, but only inaction. – Winston Churchill
For every successful real estate investor out there, there are dozens who were too filled with fear and uncertainty to ever actually do a deal. If you are just beginning, chances are you have some fear as well – but don't worry; fear is a natural part of life and is designed to help us avoid bad decisions and the consequences derived therefrom.
However, fear can also stop you from ever getting started, and as a result, you may find yourself spinning your wheels without getting anywhere. This purpose of this section is to address that fear, to teach you how to overcome it, and to help you succeed in spite of it.
Six Steps to Help You Overcome Fear:
1.) Get off Your Duff.
If you are looking to real estate investing to save you from a job you hate, then you had better start working to replace the income from your job with money made from real estate activities. Develop a plan and work that plan everyday -- just like you would get up and go to work everyday for a paycheck. If you expect to do one deal and end up on a beach somewhere with beautiful people all around -- wake up. Successful real estate investors work hard, and you will need to do the same, but instead of working for a company you're not fond of, you're working for yourself -- a blessing and a curse.
STOP buying courses and other materials or seeking out mentors or coaches until you are committed to step number one above. If you are not committed, no course, class, or trainer is going to get you any closer to your goal. Almost every real estate course out there focuses on the mechanics, but the real action is what’s going on between your ears. When you can get that under control, it won’t matter what technique you use; you will find success as a real estate investor! Realize that you could spend a lot of money having someone show the mechanics, but if you are not willing to deal with the “conditioning” issue, you are just wasting money.
3.) Start Participating
BiggerPockets is filled with knowledgeable real estate investors who are willing to share what they know for free. Sign up for an account and interact daily. Don't just lurk; participate, ask questions, connect with others, and build relationships. If you are afraid to ask questions, then you are going to be just as afraid to speak with a seller who needs to sell you their property or to negotiate with a big city developer. Interactions are part of an investor’s life, so the faster you can overcome this fear, the more successful you'll be. Being visible to your peers online and off will ensure you're always at the front of their minds -- and that's great for business.
4.) Learn the Lingo
Without knowing the lingo of a real estate investor, you will always be afraid of sounding like you don't know what you are talking about. Once you build up your confidence in understanding the lingo, your ability to talk with others and understand what is being discussed will grow exponentially.
5.) Learn the Concepts
Once you have the lingo down, you need to start understanding the concepts. If you can't adequately explain what debt-to-income is or why 70% ARV is important in a house flip, you need to spend more time learning. Fear is often a result of being unclear. Look back at chapter three to see ways you can gain more knowledge. Additionally, once you have a good understanding, help teach someone else. Teaching others a difficult concept will cement that concept into your own mind, helping you never forget.
6.) Watch Others
By assimilating yourself with investors who are involved in the same kind of investing you want to get into, you will naturally begin to pick up on the traits that make them successful. If this means working nights and weekends for a local investor for free, then that's the price of admission. You will quickly learn to overcome your fear when you help others accomplish success, giving you the confidence to strike out on your own.
All investment has some degree of risk, and real estate investing is no exception. While risk can’t be avoided, it can be managed through proper preparation, which you have already begun by reading this guide. The hardest thing to do in any new venture is to get started. At some point, you need to follow the advice of Nike: "Just Do It!"
It's easy to get stuck in the world of “Analysis Paralysis.” These are the moments where you research, plan, evaluate, research, plan, evaluate, in an endless cycle and are paralyzed from ever actually taking action. It's the problem of reading books without implementing, reading blogs without engaging, and meeting others without interacting. Typically, it’s due to fear of screwing something up.
It’s easy to convince yourself that you don’t know everything you should know before you start taking action. However, you don’t need to learn about every single niche buying technique, and you don't need to be an expert before getting your hands dirty. You should focus on one area of investing and become an expert in it and then move on to the other techniques and areas. We'll cover the various real estate niches in the next chapter of this guide.
Once you know where you want to start, you need to learn the ropes. The BiggerPockets Forums are an excellent place to learn everything you need to know about any topic. Ask questions. Learn the basics and start planning. You might feel that you are not completely ready to begin, and you probably never will be unless you take action. It will seem scary, and you probably won’t be able to answer all the questions that will be asked by sellers and buyers once you get started. But because you took action, you will be in a position that will force you to learn the answers to those questions -- remember, that's what this site is for -- which will help when those things come up.
It’s so much easier when you're fearful to spend more money and buy another course or to spend another month reading about what other people are doing. Doing so won’t get you anywhere. Get educated, get your plan together and start taking action. As you do, you will quickly get to where you feel right in your new skin. You will actually feel like a real estate investor. Your confidence will skyrocket, and you will become even better at what you do.
For more information on Overcoming Fear and Analysis Paralysis, check out:
- Advice for New Real Estate Investors Just Starting Out
- 3 Words of Advice for New Real Estate Investors
- Overcome Your Fear to Get Started as a Real Estate Investor
- Being Committed to Being Committed
- Paralysis by Analysis
- Avoid Getting Stuck in Real Estate Investing’s Paralysis of Analysis
- Frozen by Paralysis of Analysis?
- 5 Ways to Overcome Analysis Paralysis
Beginning your investment career with a solid foundation based on a good real estate investing education is vital to the success of your career. There are many different ways you can learn and grow as an investor, so choose the method you feel you can grow the most with and start learning.
The next chapter will help further your education by teaching you more important basics of the real estate business, including different real estate niches and the basic strategies available to you. Once you learn these, you'll be ready to start with the all important planning that we've been talking about.
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