6 Steps to Your First Real Estate Win
Over the years, I’ve come to appreciate that real estate investing makes everything better. Unlike other investment vehicles, real estate plays by its own set of rules, and the game is stacked in favor of investors for so many reasons.
People worry that you have to have a wealth of knowledge to succeed in real estate. They think you must have a fantastic college education, or have it all figured out before you ever get started. Nothing could be further from the truth. In fact, I started my real estate education as a kid playing a children’s board game.
When I was young, my rich dad taught me his real estate strategy by playing Monopoly — four green houses, one red hotel. In the game of Monopoly and in life, the more houses and hotels you own, the better. The more properties you own, the more you cash flow. That’s how you win the game.
Now, most people can’t just purchase a big red hotel outright. Most people don’t have the financial education to do so. But, if they plan correctly, anyone can purchase a single-family residential home.
How Kim and I Started
In 1987, the stock market crashed. The savings and loan industry went bust, and the real estate market crashed. This is when I said to my wife Kim, “Now’s the time to invest.”
Early on, like many people, she had no idea what investing was, especially investing in real estate. On top of that, most people around us were crying the blues and complaining about the bad economy. Fear and pessimism were everywhere. Despite that, she trusted me, and we began looking at distressed properties.
Our plan was simple. We would buy two houses a year for ten years, which meant we would have twenty homes to provide us income. She studied, did her research, and looked at house after house. Finally, she bought her first property. That investment changed her life. Within eighteen months, we had achieved our ten-year goal of twenty properties. From then on, Kim was hooked on real estate. She has never looked back.
This is the same euphoria most real estate investors feel after they get started. It’s why I love it. It’s like playing Monopoly in real life.
Minimize the Learning Curve
It’s amazing the number of life lessons as well as the hands-on knowledge you can learn from a single investment property. The lessons below are the lessons that Kim and I have taken from each of our properties and continue to follow today.
#1 Buy your own property first
If you’ve never purchased real estate, I always suggest buying your own property to live in first. It will give you front-row seats to everything you need to know about real estate investing. You’ll never know all the nuances until you’ve experienced it first-hand. Also, the financing is easier and you’ll get the best tax write-offs. A few years later, you can upgrade to a new home if you wish, keeping your original property as a rental for cash flow.
#2 Seek an area close to home
Especially if you’re a beginner, it’s important to concentrate on an area close to home — one that you can get to know well. Drive, walk, or bicycle around that area regularly. Is it growing or dying? Are there many “For Sale” or “For Rent” signs? Also, find two or three brokers who operate in that area. You can find this out simply by seeing who has the most “For Sale” signs posted. Call these brokers and ask them about the area. What has sold recently and for how much? What do properties rent for, and who rents here? How long are properties typically on the market before selling?
Why do you want to do this? Because when a property comes on the market, you’ll know very quickly whether it’s a good deal or not, and you’ll be able to move quickly. If you get to know an area well, you may even hear about a new property before it comes on the market and get a real jump on the competition.
Kim’s first real estate investment was in an area close enough to our home that we could jog there. She’d walk, run or drive through the area at least three times a week to pick up any changes happening in the neighborhood.
#3 Start small
I can’t emphasize this enough — when you’re starting, start small. Invest a lot of time and a little money in your first deal. Most people do just the opposite — they invest very little time and a lot of money and wonder why they lose! You want to keep your risk small because you’re on a learning curve. Why risk a lot when you know there’s a lot to learn?
#4 Know what you can afford
First of all, this means finding out how much it’s going to cost you for the amount of cash flow you want. In other words, what will it cost you to get a 15%, 20%, or 30% return on your cash investment?
Secondly, remember that your primary investment goal is to improve your financial statement.
So ask yourself these questions about a potential purchase:
- If the tenant moves out and the property sits vacant, how long can I afford it?
- If there’s a costly maintenance problem, can I afford it? This is another reason to start small. If my friends with the 4-plex had started with a 12-unit apartment building, that driveway would have cost them much more and would probably have caused them a much bigger financial problem.
#4 Look for properties with problems
It’s 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 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!
#5 Expect to make mistakes
You’re bound to make mistakes — everybody does! Just remember that mistakes aren’t setbacks: they’re forward steps in the learning process. The fact that mistakes happen is one reason that positive cash flow is important right from the start because it can help buffer those mistakes.
For example, two friends recently purchased their first investment property — a 4-plex. Within a month of taking ownership, the city issued a citation that demanded they pave their driveway. They were able to pay for this unexpected expense out of their cash flow. This meant that their property paid for their education, not themselves personally.
#6 Practice and perfect your patience
Your best investment strategy for 2021 and beyond is not to flip a property and grab the one-time profit but to turn it into a rental property that will deliver ongoing cash flow straight into your bank account every single month.
Focus on your long-term game when it comes to real estate investing, and that means buying and holding. The same goes for choosing the right investment opportunity — if something seems too good to be true, then it probably is. Don’t be in such a rush to nab your first investment property that you overlook red flags and ignore your gut instincts.
Real estate, similar to many other industries, is dynamic. It’s a living, breathing force. If you’re light on investment experience, then make sure you’re being conservative as you increase your knowledge and build your self-confidence. Once you gain a better understanding of the intricacies of real estate investing, then staying abreast of new changes will be much easier.
I firmly believe that real estate investors who can adapt will thrive, and it’ll also put you much further ahead than the competition.
Editor, Rich Dad Poor Dad Daily