Every real estate investor is an idealist in the beginning. While the prospect of large profits and huge income streams is always appealing, possessing a working knowledge of what you are getting yourself into is essential to success. Even if you are a seasoned real estate investor it is unrealistic to assume you know everything. Due diligence and continuing education are critical to making money as a real estate investor. Here are five basics that every new investor should consider:
1 – 9 to 5 Does not apply: Investing in real estate requires putting in the time. You may need to knock on doors, attend after hours networking meetings and do some reading to educate yourself. You will need to call, email, direct mail, network, follow leads and be ready to act when an opportunity presents itself. It will require consistent effort to be successful. Often, deals will go to whoever is willing to outwork everyone else. You should expect to work nights and weekends just to keep up with your competition. As simple as being an investor is at times, it takes persistence and hard work to be successful.
2 – Wrap Your Head Around the Process: No one can be an expert in every area of real estate investing, but you must possess an understanding of the process. While an understanding of the process is crucial for the offer and purchase, it is equally important for what your plans are after the deal is done. If you are looking to flip a property, you will need a thorough inspection to know what the rehab costs will be, have a reliable contractor, correctly assess resale value etc. If you want to add rental properties to your portfolio you will need to know what’s happening in the current rental market, what is required as a landlord and what the current tenant, landlord laws are in your area. It may save you money in the long run to hire industry professionals such as a real estate agent or real estate manager to assist you. The better you understand the process, the better investor you will be.
3 – Find Your Comfort Zone: While large income streams and huge profits are entirely possible, it takes time to learn the industry. Finding traction may mean taking smaller deals at the start. Working on smaller deals may lower your risk while giving you an opportunity to learn the business and still make a profit. In most cases, you will not be able to retire off the income from your first investment. You may need to temper your expectations at the beginning. Making less money to get a deal done is not a bad thing when you are just starting out. Focusing on smaller deals inside a geographic area you’re comfortable with is one of the easiest ways to get your feet wet and learn the business.
4 – Only Take on What You Can Handle: It may not be realistic to go from zero to hero overnight. Even seasoned real estate professionals find handling multiple projects a challenge. Growing too fast can be as detrimental to your business as not growing at all. Taking on a deal that you aren’t prepared for increases risk and could potentially cost you money. There is a big difference between following leads and closing deals. It can take months or even years to get the hang of real estate investing. In growing too quickly, you can damage your business in a way that may be difficult to recover from especially if you do not have large cash reserves. If the speed of your growth exceeds your ability to perform due diligence or effectively assess the risk of potential investments, you’re growing too fast.
5 – Be a realist: If you have been bitten by the real estate bug you will always be on the lookout for more deals. Successful investors make decisions based on the facts and strive to not allow their emotions to get in the way. This requires a system to provide you with an accurate picture of the costs, risks and financial benefits of a property before you close. Manipulating the data to convince yourself that a property can make money when it can’t won’t be a good business practice. Enough negative cash flow will eventually destroy your business. True numbers do not lie. A cash flow analysis will be a great help in determining the potential profitability of a prospective property. Once you own the property you will need to have a system to evaluate key metrics to ensure sustainable property performance.
In my 18 years as a property manager, I’ve seen these concepts, as simple as they may be, make or break many neophyte real estate investors. Though this list is far from exhaustive it may provide the new investor with some “food for thought” and a starting place for further discovery.
At Kinetic, we are always looking to improve and welcome your suggestions. Please give us a call if you’re looking for a property to own or rent or if you need a management company with your best interest in mind.
16570A SE McLoughlin Blvd Milwaukie OR 97267