4 Simple Steps For Buying Your First Investment Property
If you think real estate is right for you, there is a deal out there that will fit your investment plan and profile. And ready to jump right into your first real estate deal, that’s great! But before you dive into the deep end, let’s cover a few important basics:
Real estate investments offer both tax advantages and the advantage of appreciation—the tendency of a property to increase in value over time. But the biggest advantage is leverage—using other people’s money (OPM) to purchase an investment worth many times what it costs you to buy. Using OPM in the form of a loan, you can buy a property that generates passive income for you even though you’ve invested very little.
Remember the magic words—cash flow. It’s really a balancing act. You want the greatest return on your money and you want to leverage your money well. For example, if you’re just starting out and only have a small amount of money to invest, then the most highly leveraged investment (the least money down) that still gives you positive cash flow may be best for you at that time. If you have a large sum of money to invest, you still want to leverage your money effectively, but you may be willing to put down more money in order to get healthier monthly cash flow on your investment. It all depends upon your personal investment plan.
Below are some of the most important aspects of buying your first investment property:
First, you’ll learn how to figure out what types of property fit your plan. You’ll learn rich dad’s most important guidelines that apply to any situation, but you’ll also learn how to set other criteria based on your own particular circumstances and goals.
Then you’ll get some very practical advice on where to find those properties you’ve targeted.
Along the way, keep in mind that cardinal 100-10-3-1 rule. For every single property you end up buying, you should expect to: Look at 100. Make offers on 10. Have 3 accepted. Buy 1.
1.Start small: Start with a small property—a single-family home, a duplex, or 3-plex. Mistakes are part of the process, and you should expect to make them. With each mistake, you become smarter and your next investment easier. So make your mistakes on small properties, learn from the mistakes, then move on to larger properties. This is also why you want positive cash flow properties: The cash flow can buffer the mistakes you’ll make along the way.
- Stay close to home: Ideally, look for properties that are near where you live. That makes it easy to drive around the neighborhood and see what new properties are on the market, watch the selling prices and purchase prices, talk with the neighbors, and keep a pulse on your particular market.
- Establish cash flow as soon as possible: Your goal is positive cash flow, ideally from day one. Sometimes you’ll need to take a few steps before the cash starts flowing, but make positive cash flow your top priority.
- Hold on to the property as long as it produces a reasonable income stream: Or hold on until it appreciates and you can sell it, moving the gain to a larger property with even stronger cash flow. As far as rich dad is concerned, the best investments are those that keep the cash flowing year after year.
Know a Good Deal from a Bad Deal
As you look at properties, you’ll be forming opinions based on what you see. But to pick out the good deals from the not so good, you also need to look deeper. You need to look at the numbers. learn how to review a pro forma—a good tool for evaluating properties in terms of the return they might generate on your investment. You’ll look at several examples and learn how to get a better fix on a property’s potential by completing an upside checklist. And to prevent “analysis paralysis,” you’ll also learn about taking shortcuts to a deal.
What is a Pro Forma?
A pro forma is a type of financial statement for an investment property. But unlike a cash flow statement representing current income and expenses, a pro forma is a projection of anticipated income and expenses. Most pro formas don’t show actual operating numbers.
Where do you get pro formas?
Ask the agent, whose job it is to gather the information on a pro forma in order to market the property to potential buyers. You can even ask a real estate broker for pro formas for the general types of property you’re interested in. You’ll soon see that they come in all shapes and sizes, but if you understand the basic elements, you’ll always be able to get to the information you need.
Remember, pro formas are selling tools, and they typically paint a rosy picture. They may assume an increase in rents, as well as decreases in the vacancy rate and in expenses. On the next three pages, we will discuss the components of a pro forma, look at a sample pro forma, and analyze it.
The numbers on a pro forma will tell you whether a property qualifies for further review. If you decide to pursue the property you will then use the pro forma numbers as a starting point for the financial analysis
Build Your Team
The natural question is, “What is the difference between a B-quadrant business and an S-quadrant business?”
My reply is, “The team.”
Successful real estate investors realize the value of surrounding themselves with experts. When these experts come together out of trust, respect, and a mutually desirable outcome, they learn from and support each other, effectively improving the outcomes and streamlining the process.
As you advance in your understanding of real estate investing and become more successful, your team of real estate brokers, attorneys, CPAs, property managers and the like may evolve and change. You may add team members, or replace members who simply aren’t fitting with the direction of your investment team. And if you decide to branch out into other areas or types of real estate, you may find you need professionals with a new set of credentials and experience.
Overcome the Fear of Failing
For years I have traveled the world, speaking on entrepreneurship and investing. My intent is to highlight the importance of financial education and how financial education is essential to financial freedom and financial security. When asked what I personally invest in, I say, “I became financially independent investing in real estate.”
Regardless of where I am—the United States, Australia, South Africa, Europe, or Asia—or to whom I am speaking—rich or poor—what I hear back are similar responses to the idea of investing in real estate.
- “I don’t want to fix toilets.”
- “I don’t have any money.”
- “I don’t have the time.”
- “Real estate is risky.”
- “What if I lose money?”
- “You can’t do what you do here.”
It is my opinion these responses are simply excuses. Excuses that mask a deeper, darker, hidden, unexpressed reality.
In my opinion, most people who use these excuses are:
- Not educated in real estate
- Afraid of failing
- All of the above
I say this because most people want to be financially free. Most people would love to have financial security. Most people would love to have money coming in regardless of whether they worked or not. Many people would love to stop working and do something they really wanted to do.
To me, real estate represents that freedom. Real estate means control over my life and my future. I am not depending upon a retirement plan filled with stocks, bonds, and mutual funds—investments that someone else manages. I want control of my financial destiny. This is why when I hear such excuses as “I don’t have any money” or “I don’t want to fix toilets.” I know these excuses are just that. I know people are looking at the journey, not the destination. A friend of mine has two sayings about this human failing. His first saying is, “Everyone wants to go to heaven, but no one wants to die.” His second, “Many people will not start the journey until all the lights are green.”
Editor, Rich Dad Poor Dad Daily