10 Critical Steps to Take Before Investing in Real Estate

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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:

  1. 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.
  2. Devised a business plan. We took several weeks to write out a detailed business plan and a five-year investment strategy.
  3. Solidified the details of the partnership. We wrote an operating agreement to outline the capital contributions, business ownership and responsibility of each member.
  4. 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.
  5. 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.
  6. 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.
  7. 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).
  8. 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.
  9. 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.
  10. 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.

Image: Rawich / FreeDigitalPhotos.net

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About Author

James (G+) is a Principal Member of K&V LLC, a real estate investing company in Lexington, KY. His firm focuses on distressed property rehabilitation in the Bluegrass Region. He is also a licensed real estate agent.

35 Comments

  1. Excellent post and points. I am in Arlington Texas so the demand in my area for rentals is really strong. I get quite a bit of web contacts from investors that are really gung ho about real estate however have absolutely no plan in place at all. They literally are ready to buy a property before asking all of the right questions and planning for results. Really a common thing and I find myself slowing people down a bit.

    • I am sure they end up appreciating you slowing them down a little bit, as long as they understand the difference between being slowed and being held back. It sounds like you have probably saved several people a lot of money and agony.

  2. Fantastic first post, James! Thanks for sharing your experiences and the wisdom you’ve learned with us. Welcome to the BiggerPockets Blog! I’m very pleased to have you as our newest contributor.

  3. Nice post, James. A follow up blog might be a discussion of how you found a bank to lend to you including rehab costs when you had not done a deal. I’m sure lots of people would love to know that.
    Again, good job.
    Ann

  4. James: Thanks for the article. I started investing full time 7 years ago. You never know at the beginning where the path will lead!
    I now coach and train 45 other companies here in my area how to invest in real estate. Yup, that’s always the first question – “how do I get started?”
    We start them out with goals. Everyone’s are different. You can’t know how to get somewhere if you don’t know where you’re going. Then, we set up their company so they’re ready when they begin to market and start getting those phone calls!
    Very exciting stuff, this real estate investing.
    Congratulations and continued success to you!

  5. James, you nailed it– balance. Don’t fall victim to Analysis Paralysis, but don’t dive headfirst into shallow water. Plan, but plan to take action. For what it’s worth, when I got my start, I think I accidentally reversed your list…. a lot more danger that way…

  6. James, I really enjoyed your post. The only comment I would make is that, to a beginner, all of these steps might seem a bit overwhelming and add to the paralysis. I agree wholeheartedly that you must be prepared in order to succeed, but for the beginner real estate investor who is working alone and thinking about taking the plunge with one residential property, some of these steps could be omitted or postponed. I’m talking specifically about needing to turn it into a full fledged business right from the get go. I think I’m just trying to clarify that an individual looking to purchase their first property might be going down a bit of a different path than someone who is setting out to build a real estate empire.
    And for those looking to build an empire – these steps are fantastic:)

    • Thanks for the comments Shannon…you are correct, this is aimed towards someone looking to start a real estate investing business and be a real estate investor, not someone who simply wants to own a property. I try to be as business-minded as possible, because I am running a business, but everyone is in a slightly different position and has slightly different goals. As for the analysis paralysis that is always a concern with beginning investors, but I felt like most items on the list are somewhat simple and/or necessary (and require some analysis) for someone looking to start a real estate investing business. I will be posting some follow up blogs about how we accomplished several of the more daunting items on the list.

  7. Great Points James and Shannon makes good sense. Every one of James’ points should be considered in the thought process and there are more as you move to your first property. Once simply thinking about his points then sit back and start from scratch. Read Karen Rittenhouse post. She makes your first step clear. Think of where you want to go. What is your end goal. Don’t even make it complicated, just think of your end goal on just your first property if you want to. Once you have that goal then make you basic list of things what you need to do to accomplish that goal.

    I came into the real-estate investment game almost by accident. I had started an electronics biz 27 years ago. Needed a building. Bought it at auction, fixed it up and made an apartment upstairs for my mom. Moms gone now so I rent out the apartment, because most of my electronics biz is repeat customers and someone wanted to rent my commercial space, I moved my biz to my home office, I split the commercial space and now have 2 commercial rentals, built an addition on the building and added one more commercial space and one more apartment, I have a guest house I built and rent that out. So, I have 3 commercial rentals and 3 residential rentals.

    I now pick only the good electronics jobs that come along and buy wholesale properties. Fix them up, Find folks that are currently renting that should really be owning, help them with financing and sell them one of my completely remodeled homes for below retail. I like it when I can provide a home with equity build into the sale.

    Just as a side note: When I rehab I pay particular attention to the heating cost of the unit. I go to great lengths to super insulate the buildings and provide the most efficient heating system possible. With fuel costs up, the last thing I want to do is sell someone a home they can’t afford to heat. They must stay happy customers. Hey, that’s where I get my absolute best referrals from. (It can get cold here in NH)

    Sorry for blabbing on,

    Tom

    • I love hearing about how other got started in real estate and so many people started by accident or via other businesses. Knowing where you want to go is absolutely critical, as it will drive your next steps. Thanks for the comments Tom!

  8. Thank you very much! I am very new to this but this is.the first article ive read that gave me a real step by step idea how to plan. I want to make sure im absolutely reading and have a complete business plan before i jump out there. Im curious though,how did you go about finding a partner? Was it someone that was interested at the same time or is it someone you have known for a while?

    Thanks!

    Casey

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