When I first started working for BiggerPockets, I can honestly say I didn’t know the first thing about real estate, let alone real estate investing.
I didn’t know what an FHA or 203k loan was. I didn’t know how to calculate cash flow or how to analyze a property. I didn’t know anything about “house hacking” or “live-in flipping.” All I knew was I loved those flipping shows and that those guys on HGTV were making BANK!
(I quickly realized that is actually very far from the truth.)
In other words, I was the quintessential newbie.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
From One Newbie to Another
As a former newbie (let’s not kid ourselves here, I am still one) I understand the frustrations of wanting to get started in real estate investing, but not quite knowing what to do!
As a new investor, embarking on the path to financial freedom can’t happen fast enough.
However, let me tell you that this path doesn’t start with the first purchase of a rental property. It starts the moment you tell yourself you want a better life for you and your family — followed by action.
When you signed up for BiggerPockets or even when you opened this post, you consciously made a decision to invest in your dreams of financial freedom. That’s a huge step! It’s small when you look back on it, but right now, it’s the best thing you could’ve done.
Little actions when multiplied daily and consistently can and will create tremendous results!
So, now that you know you’re on your way to financial freedom, let’s keep going.
Looking back on my short journey as a newbie investor thus far, I can’t help but think of all the time I would’ve saved if I simply knew what needed to be done or what I wanted. I spent so much time trying to figure it out when I could’ve been taking action.
For example, for the first three to four months, I spent my time listening to podcasts, reading everything I could on BiggerPockets from articles about multi-family investing, wholesaling, flipping, and mobile home investing to those covering BRRRR, house hacking, and even commercial real estate investing. I read every forum post that caught my eye or seemed to have a good conversation going.
I learned a little about EVERYTHING, but at the end of the day found myself in the same spot where I started four months prior. No real progress. Do I regret learning what I had? Not at all. There’s a famous quote by Benjamin Franklin that I find true to its core: “An investment in knowledge pays the best interest.”
However, if I had a better sense of what I needed, I wouldn’t have learned a little about a lot of things, but a lot about a few.
What Do You Want & What Do You Need?
So, before you start reading every single blog post and spend 165 hours listening to every episode of the BiggerPockets Podcast, I encourage you to do one thing that I believe will help you decide your path.
Write down every single expense you have in a given month. Don’t leave out anything!
Rent, car payments, gym membership, food, utilities, phone bill, health, dental, baby food, fun activities etc. –anything and everything that you find yourself paying for each month.
Now, look at this number. Remember it. Say it out loud. Say it out loud again. Get it tattooed on your forehead so you never forget it! (Please do not actually do this.)
This number is, however, that important. This is what you need every month for you to maintain your current lifestyle. This is known as your Freedom Number.
Once you know your Freedom Number, you can determine the number of properties or “units” you will need in order to produce enough passive income to cover your monthly living expense (X).
# of Properties = Freedom Number ÷ Average Cash Flow Expected from a Single Unit
X = FN ÷ CF
So, if my expenses are $3,000 a month (no wife, no kids, 22 years old) and I expect to receive $350 cash flow on a property, I will need roughly 9 properties to reach financial independence. That is a beautiful thing! Now, given some properties will produce more cash flow than others, this is a solid goal to aspire to.
Like the majority of you, my goal is to achieve Financial Freedom. Some people want much, much more than me, and that’s perfectly fine. Maybe down the road I will build an empire and leave a footprint in the history books, but for now, I simply want freedom.
Don’t Waste Your or Your Agent’s Time
After you’ve determined your Freedom Number, it’s time to figure out the next and possibly most important thing — finding out what you pre-qualify for.
I found an incredible real estate agent who has helped me so much along the way. Unfortunately, I made a huge rookie mistake and wasted a lot of his time. I had been looking at a few homes in a great neighborhood that had room for sweat equity, appreciation, and cash flow. Little did I know, I had no business looking at these homes. I was about $100-150,000 out of my league, and this ended up changing my entire game plan. (Thanks, Bill, for not dropping me as a client!)
I know the idea of purchasing a duplex or triplex is exciting and inspiring, but unfortunately it’s not always possible. Many investors I know assume everyone is making $70k a year with $20k in savings and a 800 credit score and should have no problem getting started investing.
I’m not one of those investors. You may have 3 kids making $40k/year with a 680 credit score, which might mean that duplex in Capital Hill, Denver, Colorado is a little out of reach for now.
It was eye opening for me when I called to get pre-qualified. I went from looking at 2-bed 2-bath single family homes in the perfect neighborhood to 1-bed 1-bath condos because, well, that’s what I qualified for.
Also, the majority of lenders out there will not lend without 2 years work history and a minimum credit score of 640 which may throw a curve to your investing career.
(If this happens, don’t give up! Save that money, build your credit, study your market, learn, and be ready to go when the time is right.)
Now, there are ways around this if you can get a family member to co-sign or decide to invest with a partner. It’s my personal choice for now to stay away from that. I want to have a few investments under my belt and know what I’m doing before I start sharing income, expenses, and decisions with someone else. I wanted my start to be as simple and straightforward as possible.
Note: Whatever advice, article, or book you read, please explore the options. Remember that there is no one way to accomplish your goals, and there is almost always a way to achieve what you want — it just may take a little (or a lot) more creativity.
Once you know what you can afford, it’s time to figure out where.
Know Your Market
I recently moved to Denver, CO, which is currently one of the hottest markets in America. A lot of my time has been spent driving around, walking around, and exploring on Google Maps to get a feel for this new city.
Like all cities, there are good neighborhoods and not-so-good neighborhoods. Drive 15 minutes North, you’re in the hood. Drive 15 minutes East, you’re in the ‘burbs, and drive 5 minutes West, you’re in the heart of the busy city — all of which provide their own culture, lifestyle, and investment opportunities.
Identifying your market area is crucial and takes time. You should drive through each street, look at the homes, the residents, the lawns, and the cars. What grocery stores are nearby? What’s the closest shopping center? Are there schools nearby? And most importantly, is it somewhere you can see yourself living?
Most newbie investors, myself included, will probably utilize the FHA loan, which in accordance to its terms and conditions, means you will be an owner-occupant. As an owner-occupant, this property will be your primary residence. So make it somewhere you will want to live for at least 2 years.
The great Warren Buffett said, “Only buy something that you would be perfectly happy to hold if the market crashed for 10 years.” Meaning, is the property you plan to buy going to satisfy your lifestyle? Is the commute too long? Is the neighborhood not safe? Will you dread your time there because there’s nothing to do? These are all fair questions to ask yourself. If the answers to these questions seem too daunting, it’s probably best you don’t invest there.
On the other hand, if you’re not in a financial position to have your cake and eat it too, you may need to allow some wiggle room for compromise. I know I had to.
Analyze, Compare, Repeat
You have a goal, you know where you stand financially, and you know where you want to invest. Now you’re ready to start analyzing properties!
This is the part that really excites me and shows the potential of REI. It may seem hard and intimidating, but I promise, it’s not. Also, with the help of BiggerPockets amazing calculators, it’s never been easier!
Brandon Turner also has a great video out that shows in detail how he analyzes a property for cash flow. These will explain how to analyze properties better than I can, so after you finish reading the rest of this (thank you for reading, by the way!) scroll back up and check these out.
- Read: How to Really Calculate Cash Flow on Your Next Rental Property by Brandon Turner
- Watch: How I Quickly Analyze a Rental Property for Cash Flow | BiggerPockets
I noticed I began feeling the most comfortable when I started analyzing properties daily. Going on the MLS and searching various types of properties in various neighborhoods to see what areas and what kinds of homes are producing the best cash flow and cash-on-cash returns really made me feel like an investor, not just a 22-year-old seeking financial freedom.
It will help you get a feel for your neighborhood and city as well. That way, you’ll know when a property pops up what the max you can pay for is and what kind of returns you can expect. In Denver, if you aren’t one of the first to make an offer, you don’t stand a chance. That said, no matter what, always run the numbers on the property. You know what they say about those who “assume”? Well, yeah — just don’t assume.
When I first started working here at BiggerPockets, for some reason I had this notion that investing in real estate required a PhD in Economics and you had to be 50 years old with an endless amount of cash. The truth is, ANYONE can do it. It isn’t hard, folks, I promise. If you commit to learning the basics, to controlling your personal finance, and to taking action, you can invest in real estate. It’s simple math, you just need to know what numbers to look for.
Until you get into the big leagues with the Brian Burkes, J Scotts, and Serge Shukhats, investing in real estate is essentially very basic.
In its simplest form — you find a neighborhood, find a property, do the numbers, make an offer, get the home, and repeat until freedom is reached. Each of these steps have sub-points that should be considered, and all have their own situations attached, but BiggerPockets provides everything you need and more to help you along the way.
So don’t be scared or overwhelmed with the process. Step by step, knock it out, and before you know it, you’ll be investing in your first property, then second, then third, then a few more down the road… Freedom.
(P.S. If you EVER have questions, please ask me. I will do all I can to point you in the right direction!)
“If everyone is moving forward together, then success takes care of itself.” — Henry Ford
- Where are you in your investing journey?
- What challenges are you overcoming now?
- Any advice you’d add to this article?
Leave your comments below!