The best thing about writing these blogs are the questions and comments I get from new or soon-to-be investors. I really enjoy helping as many people as I can.
With that said, there are a few very common themes emerging about why people have not gotten started in real estate investing yet.
The three most common themes I see are:
- Deal analysis paralysis
- Lack of funds
- Lack of deals
Let us talk about each of them.
Deal Analysis Paralysis
I have to admit, there are quite a few people that private message me, asking me about their deal—which is awesome. I love it. Keep it coming!
However, they are literally doing more analysis over this one deal than I have done on all of my deals combined.
Proper due diligence and running numbers is important. Using a worst-case scenario approach and still realizing a profit is a great strategy. Even forwarding the details of a deal to a more experienced investor is a good idea.
However, stretching, slicing, and dicing a duplex you found on the MLS every which way is not an advisable use of your time. Here, I have included a few quick steps to take when analyzing.
How to Analyze a Deal Efficiently & Effectively
First, make sure you are getting the deal at a discount. Each area of the country will be different, and each investor should have reasonable expectations given where their particular deal is geographically. It really is true what they say: “Your money is made when you purchase the property.”
Next, what will it cost to rehab the property? Get a quote or two from reputable contractors. Take that number and add at least 10 percent onto it. Nobody has ever nailed their budget down to the penny, and most often you will go over. Quite simply, there are many unknowns behind the walls in a house.
After the rehab budget, what will it rent for? As a general rule of thumb, in my area, I want to be earning at least the “2 percent rule.” This means, if you are into a property for purchase and rehab for $150,000, the property should have gross rents per month of $3,000. This is not actually a rule but rather a good gauge to see if you’ll be earning the returns that are commensurate with your market.
Also, to be completely honest, make sure you are being real with yourself and whomever else you are asking for their time. Meaning, if you have $1,000 to your name, houses are trading for $200,000 in your area, and you have not investigated any strategies other than buying a deal off the MLS with an agent, that is not a great way to make friends.
Lack of funds
One of the most common complaints or questions that I hear is about funding the down payment. Funding the down payment, for me, is never fun or enjoyable or easy. It stinks, and it’s hard.
I have always bought deals completely on my own and relied on my own bank account or funding I had set up previously via loans or credit lines. I don’t have any human partners yet.
I have written about one subject previously, which is owner financing. This is really the easiest way to get into a deal on your own. With owner financing, you are working on the terms of the loan with the seller and there are no real rules. You could get the property for $0 down or 2 percent down or 30 percent down. It is all what you are able to negotiate.
Furthermore, you are able to use alternate funding sources like loans and lines of credit. More than likely, they will need to be cleaned up, paid down, or paid off before you close with a regular bank lender, but it will get you into the deal.
Without that low down payment option, it would have never happened. I was making $28,000 a year at the time, and during the process, got a raise to $30,000!
If it is not possible to live in the property, finding a property that needs rehab and using hard money is a good option. I know some lenders that will offer to fund 90 percent of the down payment and 100 percent of rehab. In fact, I know a lender that will do 100 percent financing as long as the purchase and rehab are under 65 percent of the ARV.
Bottom line, you need to find a quality deal and try to owner finance it or live in it, if possible, or find a great lender that will not require 25 percent down.
Lack of Deals
This can get interesting, depending on the market. For the first 75 percent of my investing career, there were deals all over the place. For the last 25 percent, those deals have dried up. Now you actually need to work to find something worth spending your money on.
If this one is a complaint of yours and you are doing no marketing or cold calling or yellow letter campaigns to find motivated sellers, then do you really have anything to complain about? This business takes work.
I will admit, I have not done any yellow letter campaigns mostly because, in the past, I have never really had to in order to find deals. However, now I am always searching for off-market deals or for sale by owner listings anywhere that I can possibly find them, because anything worth buying is no longer sitting in plain sight.
Related: 27 Ways to Find Real Estate Deals
Networking is also huge here. Whether you are going to a crowded meetup on a Thursday night or just talking to the girl or boy at the front desk of your gym, letting people know what you do and what you are looking for is a great way to broaden your search area. Places like BiggerPockets have made it so much easier to do this, too.
Lastly, I do have to admit, there is an element of bliss in the unknown to this whole investing thing. Meaning, if I knew what I know now and was trying to buy my first rental, I might stall for all of eternity. When I bought my first property, I had little money and little knowledge. I did not know what I did not know. With this lack of experience in hand, I pulled the trigger and never looked back. I had hard times for sure, but I thought rationally and logically and worked my way through each instance.
If you are completely serious about making real estate investing a major part of your life, there is going to be a time where you put aside the 12 pages of deal analysis you’ve run and just decide to move forward. Think strategically and do not risk your family’s wellbeing, but do press forward with a degree of confidence and make your move.
What’s holding you back? How can I help?
Let’s talk in the comment section below.