Have you ever driven down the road looking at the homes, apartments, or projects under development and asked yourself how to get started in real estate? If so, you’ve come to the right place, because real estate investing represents an compelling opportunity for wealth building.
Learning how to invest in real estate will:
- Produce monthly cash flow
- Increase your net worth through debt pay down and price appreciation (increases in the property value)
- Give you insane tax benefits (mortgage interest write-offs, depreciation deductions, etc.)
- Provide you with protection against inflation
- Allow you to utilize leverage, which can further accelerate your returns
For these reasons, more millionaires and billionaires have been made from real estate investing than any other approach. Clearly, investing in real estate is a skill you should learn.
The only people who will tell you that real estate investing is complicated are those who aren’t doing it or who (for some reason) are trying to keep you out of the game.
Keep reading, because getting started in real estate is easier than you think and it may just be the single most important financial decision that you ever make in your lifetime.
My First Real Estate Deal
The picture above is of the first house that my wife and I purchased. It’s a brick townhouse in Alexandria, VA, just outside of Washington, DC, with 3 bedrooms, one bathroom, a front and back yard, and a little over one-thousand sq. ft. of living space.
When we first bought it, we lived there for two years, during which time we rented out a bedroom to a close friend. This decision turned the house from a liability (a property that costs money to live in) into an asset (a property that puts money back into our pockets). After two years, we moved to a different property and turned the house into a full-time rental property.
Since that time, tenants have been paying down the mortgage on the house, which in simple terms, means that other people increase our net worth each month.
The rent has also increased year-after-year, sometimes substantially due to the property being located within a couple miles of Reagan National Airport, the Pentagon, and a new Amazon Headquarters going in down the road in Crystal City (Arlington, VA). Known as “Amazon HQ2″,” this new Amazon headquarters is bringing 25,000 new employees to the area, most of whom will be renters.
For these reasons, that humble townhouse has had dramatic price appreciation.
Of course, investing in real estate also has incredible tax advantages, including being able to write off the mortgage interest, and in most cases, take deductions related to depreciation.
Between the cash flow, price appreciation, mortgage (debt) payment, and the tax advantages, this is how we learned first-hand the incredible power that comes from getting started in real estate.
How to Get Started in Real Estate: Your “Dream Team”
Have you ever heard people describe real estate as hard, difficult, or or dangerous? If so, these statements have likely come out of the mouths of people who aren’t active real estate investors. Here’s the reasons I disagree with these statements.
First, real estate is definitely not trickier than geometry or calculus, which they made us take in school. It’s way easier than learning a language. It’s also one of the rare fields where experts are present to help you at every step of the process, beginning with your real estate agent or broker and extending into your broader real estate “dream team”.
Your real estate team will include your:
- Lender (usually a bank)
- Home Inspector
- Title Company
- Property Management Group (if you don’t want to take calls from tenants)
Best of all, once you choose a realtor, this person can usually recommend everyone else to join your team, because they are working with these types of people on a regular basis.
Meaning, find a good realtor first and the rest of the pieces should fall right into place.
Doing Your First Real Estate Deal
For the first real estate deal that we did, my wife and I used a realtor that we were introduced to by a friend. Today, this realtor has become our very close friend, as well as our trusted confidant and co-investor in many different markets. We’ve done a series of ongoing deals together, most recently closing on a beach investment property earlier this week.
Best of all, our realtor introduced us to each person who now composes our real estate “dream team”.
When you select your realtor, I’d recommend that you look for these traits:
- Choose a “Go Getter” – Your realtor is going to need to work evenings, weekends, and deal with surprises that could come up during the due diligence process, so they’d better be on top of their game.
- Choose Someone You Like – You’re going to spend a lot of time with this person, so choose someone who will make the process fun.
- Choose A Realtor Who Dominates Their Market – I’d recommend you hire a realtor who has sold a lot of properties in your market, because they’ll know nuances others won’t. This will give them leverage when negotiating your purchase offer, home inspection terms, etc. People may also bring them off-market deals and they’re more likely to spot properties the moment they come on market.
Once you find a property that you like, these professionals can walk you through every step of the process.
Is Real Estate Risky?
To delve deeper into the conversation about the risks associated with real estate, I would hardly call real estate dangerous, as all investment vehicles involve risk. More importantly, what is 100% certain is that your money is decaying every single year at the rate of inflation.
To make this point hit home, the U.S. dollar has lost 90% of its value in the last century.
As Robert Kiyosaki, author of Rich Dad Poor Dad, states:
“Many people are financially struggling today because they are simply too slow – they cannot make money faster than the banks are printing it. When it comes to financial transactions, most people are still in the stone age, getting paid by the hour, by the month, or per transaction.”
Find Funding for Your Real Estate Investments
Did you know that there are a variety of ways to fund your investments in the real estate industry? To begin, it’s often possible to buy first real estate deal with a very small amount of money. For example, a Federal Housing Administration (FHA) loan is a mortgage that only requires a 3.5% down payment.
If you negotiate when making an offer to have the seller pay your closing costs, this means you could get into your first real estate deal for extremely little money. For example, you could buy a $150k property for only $5,250 down or a $300K property for only $10,500 down.
FHA loans get issued by approved lenders (here’s a list of them) and insured by the FHA. The purpose of them is to support low-to-moderate income borrowers, since they require small down payments and typically have lower credit score requirements than conventional loans.
Additionally, family members are often willing to help you with your first deal, by lending you the down payment.
Of course, if you’re partnered or married, the costs of buying real estate also get cut in half, since you can both contribute.
Renting Out Your First Real Estate Deal
While lenders typically require you to live in properties bought with low down payments (i.e., use them as a primary residence), you are allowed to have other people live in the house and rent from you as long as you live in the property too.
For this reason, a great way to get started in real estate it to buy a property with a small down payment and have friends, colleague, or strangers rent out the extra bedrooms from you. Since you can list your bedrooms for rent for free on Craigslist, Zillow, and other sites on the internet, if it’s priced right, you’ll quickly find people who are ready to move in.
Having said this, buying a property with a small amount down does put you at higher than average risk of going “underwater”, a term which means that if the property decreases in value you will owe more on your loan (mortgage) than the property is worth.
On the upside, this situation isn’t that bad, as long as you can keep making your mortgage payments, since you’ll have a nice place to live and with a long enough time, the market will likely correct. Being underwater only becomes an issue if you need to sell, so always make sure to have the cash flow available to make your mortgage payment on time.
This is one of the many reasons that I recommend having one or more people rent from you when you buy your first deal. The math is simple. If a friend pays you $600 a month to rent a room from you and your mortgage is $1,200, then you only have to pull together $600 instead of $1200 to pay your mortgage.
Even if you lose your job, get surprised by a health issue, or experience a financial crisis, you’re likely to be able to keep making mortgage payments until the market corrects.
On the flip side, if everything goes well, then you can pocket your rental income and start saving it up to buy your next real estate deal. That is precisely how wealth accelerates.
With each property that you acquire, you’ll be producing more income, and therefore, more rapidly be able to acquire new deals.
Additionally, having other people rent bedroom(s) from you when you buy your first deal teaches you how to create cash flow from your real estate. This is much more powerful than buying a primary residence, because it feels good and you were told it was the “American Dream.”
Learn How to Analyze Profitable Properties
One of the key skills you’ll want to develop will be finding good deals in your local real estate market. To start, you’ll need to know the average rental rates in your area and the spread from high to low. This will let you predict a fair rental rate for potential tenants.
You’ll also need to know how to use a mortgage calculator, which is a tool that lets you plug in a purchase price and the loan terms that you plan to use. It will then automatically calculate the mortgage payment you should expect to pay each month.
When you start searching for investment properties, your goal should be to find properties where the rental income will substantially exceed the mortgage you will have to pay.
In short, this is the equation to know:
Rental Income – Mortgage – Maintenance = Net Cash Flow Each Month
This spread between the monthly rental income and the monthly mortgage will make the property that you buy an income-producing asset.
Analyzing “Hybrid” Real Estate Deals
Of course, if your first deal is going to be a “hybrid” deal (as I described above) where you both live there and rent out extra bedrooms, then the math becomes a little different.
In this case, one approach is to count yourself as a renter too and include a contribution from you in the total monthly income that you can anticipate collecting. After all, you’re likely paying rent to someone else right now.
For example, if you’re currently paying $800 in rent that you’ll save by owning your own place and you’re going to rent out a bedroom in that place to someone else for $800, then your anticipated monthly rental income would be $1600 ($800 from you + $800 from a renter = $1600).
If you can buy a property with a monthly mortgage of $1000, then your net cash flow each month could be as high as be $600 ($1600 in rent – $1000 for mortgage).
However, there’s a high likelihood that you’ll need some of that cash flow to cover repairs and maintenance on the property from time to time.
Accounting for Property Repairs and Maintenance
As a good rule of thumb, I’d suggest that you budget around $100-200 per property per month and direct these funds into an “emergency repairs” account. Hopefully, you can pay for this out of the cash flow produced by your rental property.
While you won’t have things to fix every month, moving some of your cash flow each month into a separate “emergency repairs” account will keep you from being stressed out, because you will always have a pool of money available when you have to cover a large expense. Examples of large expenses that can come up from time to time are a roof replacement, water damage restoration, or HVAC repair.
Alternatively, another approach you can take is to purchase a home warranty. A good home warranty will cover about 95% of the things that break or need to be replaced within your property, including appliances, heating and cooling systems, plumbing and electrical issues, and more.
For about $50/month and a $100-125 co-pay per visit on a single family residence, you can get a home warranty to cover most of the problems that will go wrong within your house. This approach can let you limit (and largely predict) repair costs.
Having said that, one thing that a home warranty usually won’t cover is secondary damage, such as water damage after a pipe leak. You also need to be prepared to cover general costs associated with a house, such as periodic roof replacement, tree trimming and removal, etc.
Real Estate Investing is about Cash Flow
I always know when someone forgets to budget for repairs and maintenance, because it shows up as them being emotional and panicked when repairs hit, instead of calm and prepared.
Would you be surprised if you got sick once a year? Of course not. So, don’t be surprised by getting hit by a major property expense on occasion too.
Unlike collecting a pay check from an employer where you get to keep the whole amount, real estate is about cash flow.
When you purchase real estate that produces income, what you are doing is purchasing a business.
With businesses, there is money that comes in and money that goes out.
The goal is to keep the spread, known as cash flow.
Track and Stay Involved with Your Target Market
It’s also a good idea to consider features that could positively or negatively impact the value of real estate in your area, such as school districts, surrounding attractions, and infrastructure investments being made by county/city/state government or local real estate developers.
With practice, you can learn how to buy a property and make significant profit without too much stress. Still, it takes time to develop those skills – especially as a beginner investor.
Fortunately, plenty of real estate experts love sharing their knowledge of the industry. For one, I enjoy sharing my expertise with others looking to enter the real estate game.
Plus, now’s a good time to get started in the industry, because there are more real estate investment options than ever.
Don’t Waste Time Before Making an Offer
Instead of putting it off, set a goal for yourself to invest in your first real estate property. Of course, give yourself a couple of months to learn everything you can and build up financing. Set a 90-day goal, for example, to work up the funding and the courage to invest in your first real estate project.
When that deadline approaches, don’t continue to overthink the situation like many people do. Find a property you think has potential for cultivating profit. Then, take the leap and make an offer. In my opinion, what is way worse than making a mistake is never getting started.
Be willing to negotiate as much as you’re comfortable, and remember, if you never make an offer, you’ll never make a profit!
How to Make Fast Money in Real Estate
When possible, a good rule of thumb is to submit an offer price around 10% under market value, because it will give you some instant equity in the deal.
For example, if you submit a $180K offer on a property priced at $200K and the seller accepts it, then you have made $20K in one day in the form of equity in the deal. Seriously, how often do you make that kind of money in one day?
Even if you subtract your closing costs of $5K (you could ask the seller to pay them), you’ve still earned $15K in a single day.
Having said this, some properties are occasionally listed under market value for what you’re getting or the market they are in, which can happen when a seller wants to offload a property quickly or a realtor doesn’t know a local market very well. If this is the case, it can be smart to offer the seller’s asking price. The reason is that you’ll want to “lock up” the deal before other savvy buyers realize the situation.
My wife and I have bought properties both ways (at asking and underneath asking price), depending on the characteristics of the deal—and we’ve made big gains both ways. The key is to be savvy about your local market and knowing whether you should push on price negotiations or secure the deal fast.
Make Your Offer Fast
On that note, if you want to get the best deals, you will need to make your offers quickly. We nearly always submit our offers within 24 hours of a property coming on the market, and at most, within 48 hours.
The reason is that you don’t want the seller to collect other offers and then be able to compare your offer to theirs. This is how price escalation occurs. Rather, you want to be the one and only offer, and therefore, be in a strong position to negotiate good terms.
When it comes to real estate, speed is power. This means you have to know your buying criteria ahead of time and be ready to pounce when the right property comes on the market.
To make an offer quickly, you’ll also need a pre-approval letter from a lender. The process for pre-approval is easy (it’s simple paperwork), and I’m happy to recommend a great lender to anyone that needs one.
Know Your Local Market
At this point, you should have a good understanding of how to get started in real estate. Doing so could be the best path for securing your financial freedom.
You deserve the peace of mind that comes from knowing you’re optimizing your profits from real estate. If you want to make the most of your investments, you’ll want to stay informed, because real estate throughout the country is constantly shifting.
Keep up with the trends to ensure you don’t get left behind in your local market. This is easy to do by reading city planning website, chatting with other investors, and generally observing the area around you.
Things I like to note about a market in which I’m considering investing are:
- Who tends to live there?
- What kind of jobs do they have?
- What salary range are they making?
- Are more people moving into or out of the neighborhood?
- Is new construction being built in the area?
All in all, you should have a positive gut reaction about any market that you enter. Your gut pulls together a broad range of different stimuli and observations (like a supercomputer), so it can be more powerful than you might think.
Finally, narrow in on specific properties that you like and run your rental and mortgage numbers to assess your monthly cash flow.
Then, do the deal! Most importantly, have fun, enjoy the process, and reach out to me if I can help.