Introduction: We have found that there are some common worries that many new real estate investors experience. In this post, we outline some of the most common concerns we hear from our clients and share some of the solutions that successful investors have found to help them overcome those concerns.
1. Risk Aversion:
New investors often grapple with the fear of losing their hard-earned money. The unpredictability of the real estate markets can be intimidating, causing anxiety about the potential for significant financial setbacks and in some cases, this fear causes them not to invest at all. Understanding and managing risk is a crucial aspect of investing, and overcoming this fear requires education and a well-thought-out strategy. Some of the most successful real estate investors we work with have told us that they believe a key to their success was having a strategy. It’s important to know what you want to accomplish and work with people who are committed to helping you accomplish your objectives. We have seen investors who are successful with many different strategies, but what successful investors all share is that they have a strategy, and they take gradient steps to achieving their goals. Once you understand the type of strategy you want to employ (it can be fix-n-flip, fix-to-rent, buy-n-hold, etc.), you then want to be sure you have the pieces that you will need to make it come together. Those pieces could include things like secure funding, contractors (if you are doing renovations), cleaners for your rentals, and licensed trades (like electrical, plumbing, or HVAC). It is usually a good idea to have those pieces in place before you acquire your first property. That way, you are not scrambling for help after the fact. Some other tips we received from successful investors were to always be sure you have sufficient available credit and cash reserves, and since there is a lot of misinformation online, it is important to always consider the reputation and track record of the source that is providing the information. Only seek guidance from reputable sources. Having a strategy and a sound game plan can help you get past the initial risk aversion that many new investors face.
2. Financing:
Many new investors express concerns about getting the financing they need to acquire investment properties. They are either concerned that their score isn’t high enough, or they express concerns that their income isn’t high enough, or they assume they will not be able to get financing anywhere simply because their bank turned them down. What the experienced real estate investors know is that you do not need a high credit score to get investment financing and you do not need to make a lot of money to get approved. In fact, many private lenders do not require W-2s or tax returns at all. Since the collateral is the investment property, the property income is what drives the approval (not the borrower’s personal income). While there are typically some liquidity requirements, the threshold for approval for an investment property is very different when you’re working with a private lender as opposed to when you’re working with a bank. We routinely see situations where an investor is turned down by their bank but are approved for multiple investment properties through private lending. There are many lenders who will work with first-time investors and first-time buyers. The most successful real estate investors establish relationships with proven lenders who have lending standards that are more lenient than the banks and they align the criteria with their investment objectives.
3. Entity Set-Up:
One important aspect of real estate investing is having the right entity in place. Too many times, we see new investors try to start out doing deals under their personal names, but veteran investors know how bad of an idea that is. Not only does that expose the investor to additional liability and financial risks, but it also means any loans you close on your personal name will appear on your credit report every month as a personal mortgage loan, which makes it more difficult to get additional financing afterwards. It's like the opposite of getting a new credit card. When you get a new credit card (before you ever swipe it), the ratio between your credit available and your outstanding credit usage is better. In this example, the amount available goes up, but the usage has remained the same. However, if you get a mortgage loan in your personal name, the ratio of available to outstanding is worse. The usage goes up, but the available does not go up at all because what was available (or approved) is already being used from day 1. When you get an investment loan through your LLC, the loan balance is not factored into your personal debt to income ratio (also known as DTI). This is a key distinction that many new real estate investors do not fully understand. We often have conversations with new investors explaining the benefits of establishing an LLC (or similar business entity) for their real estate investments because it can make a significant difference now and in the future. The peace of mind that comes with having the correct entity structure in place can help new investors get the confidence they need to get their real estate investment journey off to a great start.
4. Choosing the Right Investments: With numerous investment strategies, property types, and investment options available, newcomers may find it challenging to identify the most suitable ones for their financial goals. Successful real estate investors have shared that having the right people and having the right software can make all the difference. When selecting investment properties, it starts with identifying properties that are in line with your chosen strategy. Once a property has been identified, having a process for simple, fast, consistent, and reliable due diligence is critical. Usually, good deals don’t last very long, so it’s important to be able to identify potential issues and opportunities quickly before putting in a bid. Once the property is under contract, it is important to conduct a thorough value assessment of the property. This is normally done in the way of a full appraisal. Sometimes, a secondary appraisal or something similar (like a field review, CDA, or BPO) may be necessary to support the findings. Important decisions, like whether to buy or not, or whether to sell or refinance are based on the value of the property currently or after some future renovation(s). Having plenty of verifiable comparable sales and a complete report about the property, including pictures, market conditions, and detailed observations from a licensed professional can give new real estate investors the confidence they need to get off the sidelines.
5. Speed to Acquire: Newer investors have expressed concerns about missing out on the right opportunity. Too often, investors miss out on good opportunities simply because they did not react fast enough when the opportunity presented itself. To get around this problem, experienced investors understand the importance of establishing relationships with the right lending source ahead of time and getting pre-approvals before the opportunities are even available. That way, when an opportunity does present itself, you are able to swiftly react and take advantage of the opportunity quickly. Some lenders will allow you to submit your approval documents ahead of time. This can save time for new investors. Seasoned investors usually already have an established relationship with a lender who may have their documents on file from prior deals. Whether you plan to use private money or hard money, you want to be sure to have a pre-approval discussion with your funding source long before the opportunity presents itself so you can be sure you’re ready to move fast when the time comes.
Conclusion: Embarking on the journey of real estate investing is undoubtedly a learning experience filled with challenges, opportunities, risks, and rewards. Acknowledging and addressing concerns is the first step, but it must be followed with careful planning and preparation. The most successful real estate investors we work with have told us that having a strategy, establishing the right relationships, incorporating the appropriate entity structure, doing due diligence on investment opportunities, and getting pre-approvals ahead of time have helped them to overcome the worries and concerns that prevented them from getting started at the beginning and these same principles have continued to be crucial to their success. By staying informed, seeking guidance from reputable sources, and embracing a patient and disciplined approach, new investors can navigate the complexities of real estate investing with greater competence and confidence.
