5 Smart Tips For First-time Real Estate Investors
President Donald Trump made his name and fortune in real estate. He once said, “It’s tangible, it’s solid, it’s beautiful and it’s artistic, from my standpoint. I just love real estate.” Regardless of how you feel about his politics, you have to hand it to the man—he’s certainly learned how to handle all the pros and cons of investing in real estate.
I also know and love real estate. Kim and I began investing in small, single-family homes in the late 1980s. Once we were ready to graduate to larger properties, we purchased a six-unit apartment building. Today, we own more than 1,000 apartment units. As you can see, we started small and grew with time. Nearly every successful real estate investor I know started small, too.
To be clear, when I speak of real estate, I’m talking about rental real estate that produces a positive cash flow—things like single-family houses, a duplex, a triplex, an apartment building, an office building, retail stores, shopping centers, storage facilities, warehouse, mobile homes, etc. It’s important to realize there are many options beyond a traditional house to invest in.
There is a lot to learn, which means mistakes will be made. It’s all part of the process. When starting out, it’s a lot easier to make mistakes on smaller properties with smaller amounts of money.
Here are the top five things you should do if you are a first-time real estate investor:
Select a Market
There will always be a real estate market. In a civilized world, a roof over your head is as essential as food, clothing, energy, and water. Real estate investors are essential to keeping this vital human need available at a reasonable price.
There are many different ways a person can participate and prosper with real estate. For most people, their only real estate investment is where they live.
Keep your eyes peeled for areas that are up-and-coming. Real estate, in general, tends to appreciate over time, but you want to find areas that are appreciating even more. A good idea is to look not just at the residential area, but nearby commercial areas as well. Are there new or high-end stores opening in the area? Are there new office buildings being built or companies moving in? These could be signs that the neighborhood is improving or in demand, and you may be able to get in on the ground floor of a booming market
Select the Property
It’s really true: One of the best things to look for is a property that someone else has walked away from because of a problem. Figure out how to fix that problem, and you can instantly increase the value of that property.
One of my favorite examples is when my wife, Kim, and I came across an apartment building in Phoenix, Arizona, with a 37% vacancy rate—a pretty high number. Nobody else would touch it. But we asked ourselves the following question: “How can we solve this problem?” It turned out the property was being run as a hotel: People could rent a fully furnished apartment for anywhere from a week to a year. One not-so-small problem—no one wants to be in Phoenix in the summer, so most of the units sat vacant during those months. To make a long story short, we did our research and converted the property from short-term hotel rentals to regular long-term rental apartments. The vacancy rate went from 37% to 3%—and the property’s value soared. We were winning on both cash flow and capital gains!
As my rich dad often said, “Think with your calculator, not your heart.” So once you understand the area you’ve chosen to invest in and you know what it is you’re looking for, be sure to follow through by looking closely at the numbers on your chosen properties. The numbers will almost always tell you whether you’ve found a good deal.
Especially when you’re starting out in real estate, there’s just no substitute for going out and looking at properties. It’s the best way to get a realistic feel for the market you’re entering and to spot trends you might be able to take advantage of.
Build Your Team
You’ve probably heard before, “It’s not what you know, it’s who you know.” This simple premise is the reason why networking is the number one way that people find jobs and clients, and it’s a key Rich Dad principle.
My rich dad taught me, “Business and investing are team sports.” By their nature, E and S people—people on the left side of the CASHFLOW® Quadrant—operate individually and autonomously. Their own efforts provide them with their own rewards. But B and I people, by their nature, capitalize on the power of teams, which can accomplish far more than can be accomplished by a single person.
Here’s a typical list of advisors and experts that you might want to consider adding to your investment team:
- Real estate brokers: Brokers or other agents are your eyes and ears to the real estate market, so they’re essential parts of the team. They know the trends, they recognize patterns, they know the market, they have access to the information you need, and they can tip you off to deals.
- Real estate lenders: These people might be mortgage brokers or loan officers at financial institutions, or they may simply lend money as private individuals. Your lender can tell you what you’re qualified to invest in, and, hopefully, is prepared to support you in your purchase. It’s a good idea to get quotes from several lenders, to be sure you select the one best for you and your situation. On a side note, you may opt to find other sources of investment capital, including friends and family members. Sometimes this is a great solution, but sometimes it ends up making things worse. Money has a way of interfering with relationships.
- Real estate attorney: Some states and jurisdictions require real estate attorneys to preside over real estate transactions—the laws vary by location, so be sure you select an attorney who is familiar with the area and type of real estate in which you plan to invest, and who actually specializes in real estate.
- Bookkeeper: A bookkeeper is a valuable resource to have, as he or she will assist you with the day-to-day oversight and management of your books and records. You might opt to tackle this yourself as you get started, but what often happens is that investors quickly realize that they’re spending valuable time on these administrative tasks that they should be devoting to their investment activities. Hiring a bookkeeper is an investment into accurate accounting, as well as your valuable time, and it is well worth it.
- Real estate accountant: Your accountant will analyze the records that your bookkeeper provides and ensure that your financial records are in order and compliant with the law.
- Tax accountant: This may also be your real estate accountant, but he or she will not only know the law as it pertains to your taxes, but also the tax ramifications and loopholes inherent in real estate investment. A good tax accountant is an invaluable member of your team, and in the case of an IRS audit, he or she will represent you.
- Insurance agent: You’ll need to find an agent who specializes in real estate to make sure you have insurance coverage on your properties to cover risks and liabilities.
- Property manager: Although many people manage their own properties, especially as they just begin investing in their first properties, a property manager is a wise investment that can save you a lot of time and money.
One of the great advantages of real estate is, of course, leverage—using other people’s money to make money for you. And it all starts with how you finance the deal on the property you’ve now got under contract. Financing investment real estate can seem like a daunting proposition: talking to lenders, comparing interest rates, getting together all the paperwork necessary to apply for a loan.
Some of the more popular financing sources include:
- Local banks, mortgage companies, and savings and loans
- Private funds
- Assumable mortgages
- Owner financing
Do some basic research so that when it comes time to contact actual lenders, you’re prepared to move, and move fast. Remember, the more knowledge you bring to your endeavor, the more likely you are to have a successful outcome. Learning about loans and the loan process is part of your overall financial literacy—take it seriously and start early!
Find a Mentor
Just like the other members of your team, a mentor is just as important as your accountant or your lawyer. A mentor is usually someone who has more experience and success in something that you are doing or want to pursue. This is a trusted person who guides you along the way. And because mentors are successful at what you want to be doing, they can relate to what you are going through themselves.
If you want to be successful in real estate, mentors are a must. To me, a mentor is someone who tells you what is important and what is not important in life.
Rich dad encouraged me to always have a coach or a mentor. He constantly said, “Professionals have coaches. Amateurs do not.”
Editor, Rich Dad Poor Dad Daily