Anyone who has ever invested in real estate started somewhere, from the 9-5er who owns a second home and rent it out to pay for their gym membership, to the world-famous toupee-wearer Donald Trump himself. Perhaps the most common question asked among potential real estate investors is “how do I get started” and as with most basic questions there is no simple answer.
First you have the old-school, hardcore, Nike motto quoting gunslingers yelling “just do it already!” On the other side you have the analytical, bow-tie wearing scaredy cats cautioning “be careful, you are going to get burned.” So, what is the right way…trial by fire or careful planning? While I lean towards the planning side (I also wear glasses and have been known to sport a bow tie on occasion), I have great respect for those who can throw caution to the wind and take big risks. By respect, I mean the same respect I have for stunt drivers…they are fun to watch and I admire their guts, but they are flat-out crazy.
Speaking of crazy, how about those people (you know who you are) who have been “meaning” to get into real estate investing for the last ten years, but just cannot seem to find that jewel of an investment property they stay up late at night dreaming about? Many people dream big and execute nothing, but hey, there is always later…right?
Wrong! Having only been investing for a few years I am frequently asked how to get started, but the answer is never an easy one to give, in fact I usually end up rambling for 20-30 minutes and asking “does that make any sense at all” (am I rambling yet)? In an attempt not to ramble here are SOME critical items we completed prior to buying our first property…
Ten key steps my business partner and I took before investing in real estate:
- Discussed what avenue of real estate investing we would like to pursue. Deciding we needed to raise more capital, we planned to start rehabbing and selling single family properties.
- Devised a business plan. We took several weeks to write out a detailed business plan and a five-year investment strategy.
- Solidified the details of the partnership. We wrote an operating agreement to outline the capital contributions, business ownership and responsibility of each member.
- Got licensed. Because we were both recent college graduates with no business or real estate background we decided to get our agent’s licenses to learn the basics of real estate transactions and save on commissions.
- Made it official. We came up with the name/structure of our business and registered it in our state. Additionally, we applied for and received a federal tax id number.
- Developed our team. We talked with everyone we knew who had anything to do with real estate to come up with a primary contractor, sub-contractors, an accountant, a broker and other key members to help us find success.
- Secured Financing. We took our business plan on the road to community and regional banks until we found a bank that was willing to lend to us (rehab costs included in the loan).
- Learned our market. While we were doing it all along, we focused our efforts on learning our market. We made note of neighborhoods in high demand, low crime, good school districts and the occasional great deal.
- Nailed down rehab costs. We frequently visited home improvement stores to price common rehab materials. We visited the contractor’s desk and began forming a relationship with the employees.
- Started making offers!!!
Keep in mind, not all of these were pre-planned events, they happened naturally as we progressed closer and closer to purchasing that first property. This was not a cross one-off and on to the next list either. Most of the time 4-5 of the items above (along with some things I did not mention) were occurring simultaneously, overlapping and blending together. Depending on who you talk to some people will argue we took too long and could have learned more by starting sooner. Others will say we could have found better returns if we would have passed on the property we bought and waited on a better one. We will never know what could have been if we had done things differently, but I am satisfied with the path we chose.
While I was never overwhelmed, I certainly felt nervous as we worked our way from our first offer to closing that first deal. I cannot imagine how I would have felt if we did not take the steps we did to prepare for our first project. At the same time, I am glad we got started when we did. While we certainly could have learned more before we jumped feet first into investing, nothing can replace experience.
The moral of the story is BALANCE. Only you will know when you are prepared enough to make informed decisions and handle the inherent risks of investing in real estate. There is no magic guideline to tell you when you are ready, just that gut feeling telling you to go or hold back. So don’t be the investor who learns the hard way and don’t be the sideline sitter who is always “meaning” to invest…
Be a savvy, well prepared real estate investor!
Lookout for follow-up articles that focus more closely on some of the specific steps, how we accomplished them and how they tie into the overall plan.10 Critical Steps to Take Before Investing in Real Estate by James W. Vermillion III