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The 5 Things You Need to Know Before Getting Started in Real Estate

by Matt Faircloth on July 13, 2014 · 29 comments

  
Here Are the 5 Things You Need to Know Before Getting Started in Real Estate

Hi All – this is my first blog post!  Thanks for reading and a HUGE thank you to BiggerPockets for the opportunity to share some ideas with you. I hope you find this and our future posts of value.

I’ve been investing for over 10 years now, at first part time (while I had a day job) and then transitioned to full time.  I learn on every deal and do my best to apply these lessons as I move along.  That being said, it’s hard to not have some hindsight and look back to when I was just getting started, wishing I could have known a few key things that would have steered me away from a few obstacles!  In many instances, the only way to truly learn a lesson is to have it hit you in the head after a mistake.  The lessons I want to share with you today were learned on big mistakes that I made, and it is my hope that you don’t have to learn them the hard way!  Here we go…

Lesson 1 – Run Every Major Decision by Someone with a Different Perspective

Too many times I took on the “Lone Wolf” approach when it came to making major decisions.  I would move forward based on a combination of data collected, my interpretation of the numbers, and my gut.  I was right in many instances, but unfortunately not all of them.  We all have areas of “who we are” that influence our decisions; things that taint our perspective.  These areas could be ways we instinctively view situations, how we interpret data, our ego, and the list can go on and on.  These areas continue to serve me very well, but I am limited to my own perspective (if I am the only vote on moving forward on a new deal).  To get a full spectrum and make sure I am not missing something, it is imperative to vet out deals with those that look at things differently than we do.  These people may not always say what we want to hear, but it’s the only way to make sure we are not missing something.  Don’t get me wrong, I still make the final call, but after learning Lesson 1 – I always make sure I get at least one other point of view.

Every investor should have some advisors in their corner.  I look for advisors that have real estate experience and I make sure they are willing to put my interests in front of their own (especially if they are getting paid).  These advisors could be CPAs, real estate attorneys, realtors, mortgage brokers, or just other real estate investors that you trust.  And they should be people willing to give you their honest opinion regardless of how it affects the deal, or their commission.

Additionally, your advisors should keep up with your growth.  As you grow and your business becomes more sophisticated, so should they.  Constantly evaluate the people you have on your advisor team to make sure that they are up to snuff to support you today and in the future.  I first started with realtors that worked with home owners and also did some dabbling with investors, which was fine at first.  I was just getting started and just needed access to the MLS and someone to help me understand the overall market.  I now have a realtor that helps me find investments and another realtor that helps find as well as lists all of our fix and flip houses.  We have also upgraded our accountant several times over the years.  We started out filing our tax returns ourselves with some help from tax preparation software. Every few years we have elevated our tax advisor and are now with a high end CPA.  He is not the cheapest guy in town, but he owns rental properties himself and represents clients with larger portfolios than ours.

Lesson 2 – Pick a Niche

I am sure there are over a thousand ways that one can make money in the real estate business.  I know this because I tried the first 500 when I got started!  One week I was looking at raw land deals, the next week I was off making offers on dilapidated commercial properties, then off to wholesaling single family homes, then trying my hand at short sales – you get the picture.  I met a lot of people and had a lot of fun, but I didn’t get anything done or make any money!

Not having a niche caused me to be distracted for most of my first year of investing.  I call it “Investor-Attention-Deficit-Disorder.”  Many of the avenues of real estate investing sounded exciting, so I was pulled in too many directions.  I was listening to too many of the “gurus” that were all preaching different strategies, and taking too much advice without considering where it would take me.  I was always off chasing the next shiny nickel, the “deal of the day”.  Not being focused and centered, there was always something that looked better and more profitable than what I was working on.

In order to pick a niche, a new investor needs to take a hard look at their resources and goals. I consider resources to be what you have access to that would benefit your business.  New investors should make a list of all the resources they have access to.  These include but are not limited to money, contacts, time, your skill set, and industry experience.  Then consider your goals.  Where do you want to go with your investing business?  Do you want to do it full time?  Are you looking to create some passive income on the side while you keep your day job?  With a well thought out list of the resources you have at your disposal and where you want to go, you can then listen to the gurus and advisors in your community to decide which real estate path makes the most sense for you.  Then focus all your energy on that path and don’t get pulled off!

Had I spent the time to learn about the different types of investing and evaluate my own skills and resources, I would have had the data I needed to pick a niche and stick with it. After I banged my head up against the wall for year or so, I figured out that residential landlording was my home.  More specifically, single family homes and small multi families.  In choosing a specific direction, I was able to focus my energy, network, and resources in that direction and make much more progress as compared to spreading myself around.  Once I got moving, I was able to do regular course corrections to stay on path.  And once I got some stability with that strategy, I was able to expand.  We are still active residential landlords, but have expanded into commercial properties and fix and flips.

Related: The Ultimate Beginners’ Guide to Real Estate Investing

Lesson 3 – Don’t Bite Off More Than You Can Chew

Once I settled into residential landlording as my niche, I decided to take my business to the next level and get us involved in a deal to develop a tract of land into residential apartments.  It was a big jump and I was focusing on the money I would make if the deal went through. However, I should have been thinking about the logistics required to pull the deal off.  It was too much for my company to handle at the time, and it really slowed us down from the progress we were making in our niche.

In baseball, there is nothing wrong with hitting a single or a double.  Both will get you on base and a few in a row will get a scored run.  An investor who goes for the “home run” every time looks cool but also puts themselves at risk of striking out or getting into trouble.  Taking on too large of a deal too early in your career is like swinging at a fast ball when you could just bunt and get on base to start!

Don’t lose sight of the big deals, because they can be game changers.  Just take an honest look at your capacity and run it by some people you respect before moving forward (See Lesson 1).

Lesson 4 – Know your Exit Strategy

One of the “7 Habits of Highly Effective People” by Steven Covey is to begin with the end in mind.  This applies to our business as well.  Unfortunately too many investors do what we did when we got started – jump into the deal and figure it out!

This lesson showed up as a result of our first fix and flip.  We purchased a very dilapidated home in the town we live in.  We purchased it directly from an out of state owner and did not have access to the house until after closing.  Once we took ownership, we jumped right in and started repairing the house without thinking about what the end product would look like.  We started with a new roof because there were water leaks all over the house.  Made sense right?  Once we removed the plaster covered walls, we saw that the entire house had been eaten by termites.  To make it worse, some areas of the house were sitting directly on dirt with no foundation beneath the walls.  It became evident quickly that the house was not structurally sound and needed to be torn down.  We had purchased it for such a good price that we could have easily built a modular home or stick framed house on the site and made money.  The problem was I had a house with lots of work done to it and a shiny new roof that needed to be torn down…

After tearing the home down we rebuilt a new one on the site and learned the ins and outs of stick framing a home from scratch. The house sold quickly, and we were able to move on and live another day. We didn’t make a profit and actually lost a bit on that deal.  I attribute the loss to not doing a deep dive evaluation of the opportunity that was in front of us and developing a clear plan with a clear exit strategy.

It was a hard lesson to learn, and you can bet that every deal I’ve done since then has a solid plan and lots of due diligence to find the things that could trip us during construction.  We’ve made the money we lost on this deal back many times over on the lessons we learned from it.

Related: 5 Smart Exit Strategies For When Things Go Wrong Flipping Houses 

Lesson 5 – Double Check your Numbers

Real Estate investing is all about the numbers.  Numbers are all over the place – rental income/expenses, acquisition costs, construction after repair value for fix and flips, and the list goes on.  Real estate investors live and die by the numbers, so it makes sense to really vet those numbers out before you do a deal.

We learned this the hard way on our first landlording deal which was two (4) unit apartment buildings.  We had solid rental projections, utility bills from the current owner, current tax bills, and an insurance bid from our carrier.  The one thing we were missing was a solid projection for maintenance.  The prior owner had been doing most of the work himself so he didn’t have true expenses to show.  We also didn’t ask him how much time he spent maintaining the buildings, which would have given us a point of reference.  We ended up moving forward and projected a small budget for maintenance.  Unfortunately, the buildings were older and required regular plumbing repairs, which we did not anticipate.  The dollars we had projected in cash flow for ourselves needed to get pumped back into the buildings almost every month to keep up with maintenance issues.  Over the years we have replaced the old plumbing and brought the buildings up to a much higher standard.  We were able to turn the buildings around over time, but I can assure you that a few of my grey hairs came from the first two years of ownership of those buildings!

Note from the Editor: Hey folks – if you want to run the numbers on your next investment and avoid buying a property for too much – don’t miss the BiggerPockets Property Analysis Calculators at BiggerPockets.com/calc!

In closing, I am always learning.  I hope that I learn something new on every deal because that keeps it interesting.  I hope you are able to apply the lessons above and they benefit your business as they have mine.

Take care!

Matt

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{ 29 comments… read them below or add one }

Austin Davis July 13, 2014 at 6:52 am

Great first blog post, Matt. As a new investor, I am always looking at others mistakes to hopefully minimize the ones I make starting out, so thank you for sharing. Also, I thought I would make my first ever blog comment your first blog comment as well.

One question: I am looking at a deal right now where I could purchase 4 properties that are each over 100 years old, and like your lesson 4 example, I don’t think I will have much access to the home before. The homes definitely need some work on the outside and I expect the same is true for the inside. If you were me, how would you approach this deal? Would you just walk away?

Reply

Matt Faircloth July 14, 2014 at 8:31 am

Hey Austin,

Thanks for your comment – I’m glad you found some value in the lessons!

It sounds like an interesting deal you are working on. You definitely shouldn’t walk away, not yet anyway! Many times investors buy houses without gaining access beforehand. Sometimes those are the best deals (sheriff sales, tax foreclosures, estates in probate, etc…) For deals like this you really need to focus on the potential “worst case” for construction costs. Aside from remediation from environmental hazards like asbestos and oil tanks, the some of the items that will cost you big money on a rehab are plumbing, electrical, roofing & windows, heating & cooling, and kitchen rehab.

You first want to make sure that the houses weren’t heated with oil. In NJ and PA where I do most of my work the local township has record of what heating source each house has. Start with that. Since the houses you are looking at are 100 years old it would be safe to assume that you will need a full rewire on each. You can probably do a roof and window inspection from the outside. You should then go with the worst case for the rest of the repairs.

Bottom line for taking that kind of a risk you should make sure you offer justly compensates you for taking that risk and gives you some flex room for unknowns. I hope that helps!

Good luck and thanks again for reading!!

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Austin Davis July 14, 2014 at 5:40 pm

Great advice! Thanks for the reply, Matt!

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Brandon Turner July 13, 2014 at 8:41 am

AWESOME post Matt! This is one of those evergreen posts I’ll be sending people back to time and time again. Thanks for sharing your thoughts with the community – I couldn’t agree more on all 5 points! :)

I look forward to having you and Liz writing for us!!

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Matt Faircloth July 14, 2014 at 8:33 am

Thanks Brandon. It’s an honor to be a contributor!

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Joshua Dorkin July 13, 2014 at 8:46 am

Great stuff . . . welcome to the team, Matt!

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Matt Faircloth July 14, 2014 at 8:34 am

Thanks Josh! We are excited to be on board!

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Jimmie Adams July 13, 2014 at 9:55 am

I enjoyed your story and the things to look for before going head long into a deal. Thanks!

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Matt Faircloth July 14, 2014 at 6:29 pm

Thanks Jimmie – I am glad you enjoyed it!

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Toni R. July 13, 2014 at 10:44 am

Thanks so much for this post Matt. I haven’t started on my first invest ent yet but this article really helps with keeping things in perspective and not gettingtoo excited over the pretty dollar signs! Thanks!!

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Matt Faircloth July 14, 2014 at 6:31 pm

Hi Toni – I hope you find what you need here on Bigger Pockets to get moving on that first deal. Good luck!!

Matt

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Michael Limina July 13, 2014 at 10:57 am

Great post! Thanks for sharing!

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Christian Bors July 13, 2014 at 11:31 am

Great article! I really appreciate your insight. As a new investor it is so easy to chase the shiny object. Sometimes I have to rethink about why I decided to get involved in real estate. Reminding myself of my long term goals helps me stay on track.

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Matt Faircloth July 14, 2014 at 6:38 pm

Hi Christian,

Thanks for reading. It’s all about the WHY. Its easy to lose track of it in this business because of all the Shiny Objects, LOL. It should be beyond the money and the perceived glamour of this business that can distract us and pull us into deals that are either a distraction or a trap. My wife and I get reconnected once every 6 months to our long term goals and our WHY. If you haven’t already, sit down and do a goal setting session and write down some reasons WHY you are doing this that are beyond the money. Then check in with that regularly…

Good luck!!!

Matt

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kris July 13, 2014 at 12:57 pm

In 1981 when rates were sky high, took a contract for 12 units to my attorney. She asked me, if I wanted honest opinion, said yes, she torn and trashed it. Thanks for that, rates were13%.
My goal was to own a Walgreens in the end, not to sale, let kids have it stepped up basis. Achieved, and now full time tennis!!

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Finney July 14, 2014 at 12:08 am

great post Matt appreciate the insight

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Patrick Marsiglia July 14, 2014 at 7:24 am

Interesting article. I am new to this business and appreciate reading up on new material. Your article provides a lot of insight and a great perspective.

Thank you

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Siva A July 14, 2014 at 7:46 am

Great post. Thanks for your insight.

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Amanda July 14, 2014 at 3:11 pm

Great article. Real estate is (indeed) easier said than done!

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Matt Faircloth July 15, 2014 at 10:14 pm

Hi Amanda,

you are correct – many people are out there “saying” what you should do with out actually doing it themselves. I heard a long time ago that there is money in doing real estate deals and also money in talking about them… I am a fan of Bigger Pockets because most of the people here are talking about deals they did themselves.

Thanks for reading!!

Matt

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Prit Pal July 14, 2014 at 7:44 pm

Very useful info Matt.
Looking forward to your next post.

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Matt Faircloth July 15, 2014 at 10:34 pm

Hi Prit,

Thanks for reading. Our next post will be from my wife Liz, I hope you enjoy!!

Matt

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John July 14, 2014 at 10:00 pm

Good stuff! Truly informative for a newbie!

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Matt Faircloth July 15, 2014 at 10:36 pm

Hey John,

Thanks for reading! I hope Newbies and Seasoned Vets find some value in the post.

Matt

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John Roll July 14, 2014 at 10:52 pm

Great advice about deliberately picking your niche – just what I needed now. Look forward to your next article.

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Matt Faircloth July 15, 2014 at 10:38 pm

Hey John,

Going through the motions to pick the Niche is imperative – evaluating Goals and Resources to determine which direction to go. I am glad you found some value!

Matt Faircloth

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Howard Koor July 18, 2014 at 10:57 am

Good article.
I would add:
1, Have goals and be open to adjust things
2, Be consistent
3, Talk to people outside of your regular circles
4, Learn your market
5, Take smart people to lunch

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Matt Faircloth July 23, 2014 at 12:00 pm

@ Howard Koor I completely agree. Thanks for these. I love number 5 by the way!

Take care,

Matt

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Howard Koor July 23, 2014 at 1:26 pm

Thank you…..

Reply

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