Step By Step Guide On How To Get Started Investing In Real Estate

The number one question I get asked is "I want to start investing in real estate, where do I start?". The problem with that question is that it is so general that it's always difficult for me to answer, and when I do answer it always results in more questions. The questions I ask people are:

1. What goal are you trying to achieve with investing?
2. What is your time frame for achieving this goal?
3. What unique skill sets, knowledge or connections do you have?
4. What funds do you have available?

No matter what the answers are, anyone with any background has the ability to become a successful real estate investor.

Though until you get clear about your goals, time frame, time investment, knowledge and funds, it's more difficult to pave a clear path to achieving your goal.

For example, I have a background in construction and land development, I also started out very young with a lot of available time. I had little to no capital to start, so I had to work around that but I was able to achieve at a high level of success by focusing on my strengths. So I focused on the properties that needed a lot of work, and new builds.

Someone with time constraints and lack of knowledge in construction would have a very hard time recreating my portfolio in the way that I built it.

So no matter what you have (or don't have) to work with there are still many ways to achieve the end goal. I put together the following steps that I believe are the best steps to get started.

Step 1: Get Educated

Getting educated about real estate investing is the number one key to success. I was fortunate enough to get educated on the job when I was working for a builder, and I dedicated extra time outside of work to learn about how financing works and the operational side of real estate investing.

For anyone who has a career outside of real estate, there are some fantastic options for getting educated.

Udemy Courses

Biggerpockets

Podcasts

Step 2: Figure Out Your Financial Freedom Number

I'm always surprised when I ask people what their investing goal is and I get very vague answers. You will not arrive at your destination if you have no clue where the final destination is. Even if you pick a number that seems far fetched, if you give yourself enough time you'd be surprised what can be accomplished. You also want to decide if you're going down the debt free path, or the financially free path. They are very different strategies.

10 years ago I set a goal of earning $10,000 per month in cash flow from my rental properties. This was a time when most people would be happy to buy investment properties just to break even, so I had no idea how many properties I really needed in order to hit this number. As I'm writing this post, we just broke the six figure mark and with the projects we already have planned in 2017, we will reach this goal.

By setting this goal up front, it helped me filter properties. I continued to raise the bar on what I wanted the monthly cash flow to be on new purchases, and now we will not buy a property unless the monthly cash flow is over $1,000 per month.

The only regret I have is that we set the bar too low. At 31 years old we still have a lot of time and room for more in our portfolio, so our new goal is a net worth of $50 million by the time we are 50 years old.

Step 3: Create An Opportunity Fund

Even if you are able to use little to no money down options, I still recommend creating an opportunity fund. An opportunity fund is a bank account setup for investing opportunities. There is nothing worse than finding great deal and not being able to act on it due to a lack of funds.

This opportunity fund should be on some sort of direct deposit or auto withdraw. I take 10% of my paychecks (I pay myself a salary from my S Corp) and direct the funds to my opportunity fund account, and I have a weekly withdrawal set up from my personal account. If I know I'm saving up for my next property, then I'll also auto transfer funds from our rental account to fund it as well. You'll be surprised at how quickly you can build up funds if it's being funded from multiple sources.

Step 4: Pick Your Strategy Based On Your Skills Or Knowledge

I can't stress enough how important it is to take an inventory of your skills and/or knowledge and find ways to play up those strengths when it comes to investing. Here are some examples of strengths that are important when investing:

1. Are you excellent at numbers and running projections? Knowing the numbers and running the projections are important to investing. If this is not an area of strength, consider having a spouse or friend/partner handle this side. This side is pretty easy to learn too. You just need an excel spreadsheet to throw the numbers into.
2. Construction estimating - This skill was hugely beneficial for me. if you have no idea what repairs will cost that's okay. You'll just want to make sure you have a trusted contractor who will give you detailed bids and walk through properties with you and give a ballpark.
3. Rental operations - No idea where to start? Hire a great property manager and ask a lot of questions.

If you do not have any of these skills, you may want to start with turn key rental property. Many of the turn key providers will provide you with a some basic return on investment numbers (still crunch your own though, they are notorious for under estimating vacancy and repairs). These properties should be fully remodeled as well. No matter what the stated return on investment is, you have to remember that you are paying a premium for a turn key property. Be extra cautious if the turn key provider tells you that they will only accept cash, but that you can refinance later. Many times they do this because they know the property will not appraise for the value they are selling it for, but to an out of towner it looks like a great deal.

If you have some construction skills/knowledge then I would recommend looking for a value add property. These properties need some sort of strategy re-work or repairs. Sometimes the property just needs a fresh coat of interior paint, new flooring and a tenant turnover to get much higher rents. Remember, the higher the net operating income (rents - expenses) the more the property will be worth so if you increase the income and/or reduce the expenses you will automatically make the property appreciate in value.

Step 5: Decide What Your Return On Investment Criteria Will Be

Some investors set a capitalization rate, debt coverage ratio, gross rent multiplier or cash on cash return for their investment criteria.

Other investors are only concerned with a current market discount. It all depends on an individual investor's personal goals, and I prefer the cash on cash return method for residential with 30 year fixed mortgages and cap rate on commercial properties.

My criteria is a 15% cash on cash return with a minimum of $1,000 per month in cash flow in 2-4 unit properties. My criteria is built around my desire for high cash flowing properties, and if I can buy a property that will cash flow that high I am confident when I want to sell that an investor would pay me a premium for something with great cash flow. So I do have some control over the overall asset value.

I honestly don't care if I get a discount on the purchase price or not. If it meets this criteria and is in a good area then the property moves to the next stage of analysis. You can read more about my steps for investing here.

Step 6: Pick A Market

Is it easier to invest near you? Yes, of course it is. But if you live in a high priced market you may not be able to find a property that will cash flow.

I believe the return on investment is a more important measure than investing in any given area. You also need to be realistic.

Someone who wants a 15% return on investment in Seattle has a very, very low probability of making that happen. Though a 15% return on investment in Indianapolis is possible.

You also need to make sure you are accurately accounting for a vacancy rate in the area you're looking in. I typically use a 10% vacancy rate.

Step 7: Build Your Team

I always recommend starting with one of the big three players- Agent, Lender and Property Manager. If you are able to find an investor friendly contact in any of those three professions, it is likely they will be able to connect you to the other two.

I prefer to start with an investor friendly agent, since they are usually the most connected. It can be really difficult to find investor friendly agents because they literally do not have to advertise, if they are good. They are so valuable to their investor clients that they do most of their business by referral and it can be tough at times to get on their list. I've actually compiled a list of investor friendly agents across the US that I have relationships with for this reason. If someone asks me for an agent referral in good rental market I likely have someone to recommend.

Finding a good mortgage broker is also extremely important. I actually use one mortgage broker who has the ability to close a loan for me in all 50 states. This has saved me a ton of time and effort. If you want to learn more on how I am able to get so many mortgages, you can read more here. If you do not have much capital saved up for investing, that's okay you'll still want to get approved for a mortgage you'll just need to change up the strategy like we did. You can read about that here.

On the property management side, I prefer that my manager owns rentals or has owned rentals in the past. I want them to treat my property like they would treat their own. I also want my property manager to give their opinion on rents before I buy a property. I want to make sure what I think the rents are matches up with their thoughts.

If you plan on buying any properties that require a rehab before they can be rented out, you'll need a good general contractor. Getting referrals for good contractors is key. I also recommend paying in draws after you've looked at their work. If you're doing this out from out of town, you can have your agent or PM check the status of the rehab for you like we did.

Step 8: Make Offers And Be Picky

Once you have your investing goal in mind, your area picked out, and your team in place it's time to start making offers. Here are my tips for deciding what to write offers on:

1. Run all properties through a return on investment spreadsheet - be conservative
2. Don't fall in love with a deal, fall in love with the numbers and opportunity
3. Don't let anyone talk you into a deal that you are hesitant about; trust your gut
4. Use a minimum 10% vacancy rate for your calculations
5. Budget for repairs and maintenance and capital expenditures
6. Check the Trulia crime statistics

Step 9: Get More Efficient And Repeat The Process

After you own a property for a while it's easy to make it more efficient. Even though I've been at this for 10 years I still find ways to improve our rental business and every year I feel like I become a better investor. Remember, my first three properties were terrible investments so if you don't get it right on the first one that's okay.