If you are ready to start investing in real estate in 2021, you need an action plan that gives you clear direction. Developing a plan can be challenging, especially if you are new and need help figuring out where to start. I’ve interviewed hundreds of investors and those interviews have uncovered a pattern and framework to help others get started in real estate. These patterns serve as a blueprint to go from complete newbie to real estate investor.
Before we begin, it’s important to know that your plan should be based on your goals and your situation. Don’t feel compelled to copy a strategy because you hear others doing it. Everyone moves at a different pace, so it helps to identify key milestones that facilitate moving on to the next step.
Start Investing in Real Estate
There are various ways to start investing in real estate. The first thing you need to do is select a strategy that works for your time, budget, and risk tolerance. You may be inspired by the house-flipping shows you see on HGTV, but they leave out critical details for first time-time flippers. Spend time researching popular strategies such as wholesaling, flipping, single-family rentals, and multifamily rentals.
A great source for this information is BiggerPockets, an online community dedicated to real estate professionals. Once you have a general sense of the strategy you want to explore, dive deeper into that topic. Podcasts are a great source of information as you can find many that are specifically tailored to that investing topic. Once you understand the terminology, the major parts of the process, and a general sense of your budget and timing, it’s time to move on to the next step.
Assemble Your Team
Real estate investing is a team sport and you are going to need key members to help you find good deals. The first team member to start with is a real estate agent. Real estate agents have great local market knowledge, access to key data, and are experienced in the process. You want an agent that is experienced with helping investors with your skill level, seeking properties with your business plan. If you want to gut-rehab a property, find an agent that specializes in these types of projects. They will be able to educate you on the pitfalls and already have other key members to help you fill out your team.
In addition to an agent, you will need a lender, inspector, attorney, appraiser, and title company. Many of these roles can be sourced from your agent’s contacts. Depending on your strategy, you will likely need a property manager, contractor, partners, or investors. You will want to vet these people closely and find people that have experience executing your business plan.
The next step is to analyze properties. While you may have access to Zillow, Redfin, or LoopNet, working with an agent can grant you access to the MLS. This will allow you to refine your search and gather more info on properties. If you plan to wholesale or find off-market deals, you will need to find ways to connect directly with owners like sending direct mail or cold-calling.
Analyzing properties can be simple or complex depending on your goals. Starting out, you should focus on a couple of key metrics based on your investment strategy and level of risk. Set your return expectations, make sure they are realistic by talking to your agent and other investors. It might take a while to find properties that meet your return projections but remain diligent in your pursuit.
Many new investors make mistakes evaluating deals when they simply plug in the current owner’s financials. Your assumptions should be based on your business plan and what you will have to pay. There’s probably an additional cost associated with any improvements you would make to the property. And remember, taxes and insurance are more likely to go up than to go down.
Make Offers on Properties
When you find a property that fits your criteria, it’s time to make an offer. This is where all that hard work, research, and preparation comes in. You may be nervous to make your first offer, but if you’ve selected a seasoned agent, they can provide the gut check you need.
Your first offer may not get accepted and you may have to put in a few before you reach an agreement with a seller. In a competitive market, price is just one factor to make an offer stand out. Terms are another. Consider a shorter closing window, a higher earnest money deposit, or even a non-refundable deposit in the most competitive situations. You could waive inspection or financing contingencies but this is risky for first-time buyers. Consult with your agent on the best way to structure the offer to make it most appealing.
Close and Collect Checks
Congratulations, you got your offer accepted! But it’s not time to pop the champagne just yet. Now, you have to get all those other team members we discussed before to help you make sure this gem of a deal is actually a diamond, not a piece of glass.
While your lender begins the loan process, you will want to do a physical inspection and learn more about the foundation, roof, mechanical systems, and any big-ticket items that may need repair or replacement. Most properties–even new construction–have items that may come upon an inspection report, so focus on the things that will be costly to correct or any signs of a larger issue.
In addition, you need to dig into the financials. Review the rent roll and match it up against the actual leases. Are there any discrepancies? Review the income statement and ensure the utility bills match the income statements. You’ll want to do the same for other expenses to ensure the accuracy of your financial projections.
If all checks out, you should be all set to start investing in real estate and close on your first property. Even if there is an issue, it doesn’t mean the end of the deal. Discuss it with your team and determine if a concession or reduction in price is necessary and would be acceptable.
If so, the next step is to close on the property and get the keys to your brand new investment. Trust the process and develop a strong team and you’ll be on your way to start investing in real estate and building an income-generating real estate portfolio.