The number one question I am asked the most is “I want to start investing in real estate, where should I start?”.
For every person, the where to start will be different. I usually respond with the following follow up questions:
- What goal are you trying to achieve with investing?
- What is your time frame for achieving this goal?
- What unique skill sets, knowledge or connections do you have?
- What funds do you have available?
No matter what the answers are, anyone with any background has the ability to become a successful real estate investor.
Though until you get clear about your goals, time frame, time investment, knowledge, and funds, it’s more difficult to pave a clear path to achieving your goal.
For example, I have a background in construction and land development, I also started out very young with a lot of available time. I had little to no capital to start, so I had to work around that but I was able to achieve my goals in 5 years by focusing on my strengths. I focused on the properties that needed a lot of work, and new builds.
Someone with time constraints and a lack of knowledge in construction would have a very hard time recreating my portfolio in the way that I built it.
No matter which skills you have (or don’t have), there are many ways to achieve the end goal. Read on for my 8 steps in getting started with buy and hold investing.
Step 1: Get Educated
Getting educated about real estate investing is the number one key to success. I was fortunate enough to learn about investing when I was in my early 20’s though my job working for a builder-developer. Even though I was working full-time in the space, I dedicated extra hours outside of work to learn about financing and the operational side of real estate investing.
Here at Addicted to ROI, we take a full-immersion approach to learning about real estate investing through our membership group ROI Inner Circle. In addition to training videos, we have a community forum for Q&A, we host weekly Q&A calls, we send viable investment properties every week, and we make connections to our investor agents. Our goal is to have our investor community get results faster!
Step 2: Figure Out Your Financial Freedom Number
It’s always a surprise when I ask someone about their investing goals, only to learn they hadn’t figured that part out yet. You will not arrive at your destination if you have no clue where the final destination is.
Even if you pick a number that seems far-fetched if you give yourself enough time you’d be surprised what can be accomplished. You also want to decide if you’re going down the debt-free path or the financially free path. They are very different strategies.
10 years ago I set a goal of earning $10,000 per month in cash flow from my rental properties. This was a time when most investors would be happy to buy investment properties just to break even, I had no idea how many properties I really needed in order to hit this number.
By setting this goal upfront, it helped me filter properties, gain clarity on my investing criteria, and spot markets that I could find deals that met my criteria.
Step 3: Create An Opportunity Fund
The next step is to determine how much money you have to invest, and put those funds into a dedicated bank account. Even if you are able to use little to no money down options, I still recommend creating an opportunity fund. An opportunity fund is a bank account set up for investing opportunities. There is nothing worse than finding a great deal and not being able to act on it due to a lack of funds.
This opportunity fund should be on some sort of direct deposit or auto withdraw. I take 10% of my paychecks (I pay myself a salary from my S Corp) and direct the funds to my opportunity fund account, and I have a weekly withdrawal set up from my personal account. If I know I’m saving up for my next property, then I’ll also auto-transfer funds from our rental account to fund it as well. You’ll be surprised at how quickly you can build up funds if it’s being funded from multiple sources.
Step 4: Pick Your Strategy Based On Your Skills Or Knowledge
I can’t stress enough how important it is to take an inventory of your skills and/or knowledge and find ways to use those strengths when it comes to investing. Here are some examples of strengths that are important when investing:
- Are you excellent at numbers and running projections? Knowing the numbers and running the projections are important to investing. If this is not an area of strength, consider partnering or focusing on properties that do not require renovations to start.
- Construction estimating – This skill was hugely beneficial for me. if you have no idea what repairs will cost that’s okay. You’ll just want to make sure you have a trusted contractor who will give you detailed bids and walk through properties with you and give a ballpark.
- Rental operations – No idea where to start? Hire a great property manager and ask a lot of questions.
Step 5: Determine What Your Return On Investment Criteria Will Be
Other investors are only concerned with a current market discount. It all depends on an individual investor’s personal goals, and I prefer the cash on cash return method for residential with 30 year fixed mortgages and cap rate on commercial properties.
My criteria is a 10% cash on cash return with a minimum of $400 per unit in cash flow on 2-4 unit properties. My criteria are built around my desire for high cash flowing properties, and if I can buy a property that will cash flow that high I am confident when I want to sell that an investor would pay me a premium for something with great cash flow. So I do have some control over the overall asset value.
I honestly don’t care if I get a discount on the purchase price or not. If it meets this criteria and is in a good area then the property moves to the next stage of analysis. You can read more about my steps for investing here.
Step 6: Pick A Market
Is it easier to invest near you? Yes, of course, it is. But if you live in a high-priced market you may not be able to find a property that will cash flow.
I believe the return on investment is a more important measure than investing in any given area. You also need to be realistic.
Someone who wants a 15% return on investment in Seattle has a very, very low probability of making that happen. Though a 15% return on investment in Indianapolis is possible.
You also need to make sure you are accurately accounting for a vacancy rate in the area you’re looking in. I typically use a 10% vacancy rate.
Step 7: Build Your Team
I always recommend starting with one of the big three players- Agent, Lender and Property Manager. If you are able to find an investor-friendly contact in any of those three professions, it is likely they will be able to connect you to the other two.
I prefer to start with an investor-friendly agent since they are usually the most connected. It can be really difficult to find investor-friendly agents because they literally do not have to advertise if they are good. They are so valuable to their investor clients that they do most of their business by referral and it can be tough at times to get on their list. I’ve actually compiled a list of investor-friendly agents across the US that I have relationships with for this reason. If someone asks me for an agent referral in a good rental market I likely have someone to recommend.
Finding a good mortgage broker is also extremely important. I actually use one mortgage broker who has the ability to close a loan for me in all 50 states. This has saved me a ton of time and effort. If you do not have much capital saved up for investing, that’s okay you’ll still want to get approved for a mortgage you’ll just need to change up the strategy as we did. You can read about that here.
On the property management side, I prefer that my manager owns rentals or has owned rentals in the past. I want them to treat my property like they would treat their own. I also want my property manager to give their opinion on rents before I buy a property. I want to make sure what I think the rents are matches up with their thoughts.
If you plan on buying any properties that require a rehab before they can be rented out, you’ll need a good general contractor. Getting referrals for good contractors is key. I also recommend paying in draws after you’ve looked at their work. If you’re doing this out from out of town, you can have your agent or PM check the status of the rehab for you as we did.
Step 8: Make Offers And Be Picky
Once you have your investing goal in mind, your area picked out, and your team in place it’s time to start making offers. Here are my tips for deciding what to write offers on:
- Run all properties through a return on investment spreadsheet – be conservative
- Don’t fall in love with a deal, fall in love with the numbers and opportunity
- Don’t let anyone talk you into a deal that you are hesitant about; trust your gut
- Use a minimum 10% vacancy rate for your calculations
- Budget for repairs and maintenance and capital expenditures
- Check the Trulia crime statistics
Step 9: Get More Efficient And Repeat The Process
After you own a property for a while it’s easy to make it more efficient. Even though I’ve been at this for 10 years I still find ways to improve our rental business and every year I feel like I become a better investor. Remember, my first three properties were terrible investments so if you don’t get it right on the first one that’s okay.
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