I would have to write a book to even begin to properly cover all the things a new real estate investor would need to know to get started. I am going to try to do it here in just a few hundred words.
I thought long and hard about how to address the topic and provide an end result that is still useful and not just trite clickbait like so much we see these days. I figured I needed to boil this down to the very basics. I had to really think: What are the fundamentals of real estate investing? What is it every aspiring real estate investor needs? It can be different for everyone, and it depends on what motivates you, your expectations, current financial status and more.
In general, however, there are three things that every real estate investor needs no matter what: education and knowledge, a good network, and money. But not necessarily your own money.
Education and knowledge
This is more important than anything else, by far, including money. It is much easier to find money than it is to find a good deal. If you have a good deal, getting the money to fund it is easy if you have the knowledge.
Unlike some other fields, you do not need education for the sake of education. Real estate is a great equalizer. It does not care where you came from. It cares what you know and how hard you hustle. You just need to know a good deal when you see it, how to find it, how to share it, how to close it, manage it and exit — or sell it — for a profit.
Luckily, there are many sources of information on this subject. There are books, videos, websites, webinars, seminars and more. They are not hard to find. Finding the good ones are a little more difficult. To find the good sources, start with the real estate investor networking websites such as Biggerpockets.com and ConnectedInvestors.com. Find out what other investors recommend and start there. You should be able to get a very good video course for around $1,000. Also, find and attend local real estate investor meetings. These groups can also be found on the same investor networking websites. Many groups have websites, and you can find them with a simple Internet search or on Meetup.com, Facebook or LinkedIn, just to name a few. Network with other investors and ask lots of questions.
I recommend your first investment property be a simple one- to four-unit rental property. You can purchase these with conventional financing from any bank. This financing provides the best rate and terms. However, it also means you will need a down payment equal to about 20 percent of the purchase price. If that is a problem, then you need to learn about seller financing, private lending, partnerships and other nontraditional financing options. If you do not have a lot of cash, then tailor your education to gain this knowledge. If you have a fat savings account, you can skip this for now but, eventually, every investor should know about these creative financing options.
Buying a rental property will give you real-world experience navigating the purchase process, and it is far more forgiving and less complicated than flipping a property. You can learn a good amount about real estate from books and courses, but there is a lot that can only be gained through experience. Get educated, and then tiptoe gingerly into the business.
An income property simply boils down to income and expenses, so focus closely on those aspects during your education and subsequent search and evaluation. As a new investor, keep in mind expenses will probably be more than you think, and the income has to support the price
Your operating expenses — taxes, insurance, management, maintenance, vacancy, HOA fee, etc. — are typically between 35 percent to 55 percent of your gross rent. (Note: Your operating expenses do not include the payment on your loan.) Your gross income minus your operating expenses equals your net operating income (NOI). Subtracting your mortgage payment from your NOI equals the money you get to keep — that is your net income, or cash flow. Most new investors underestimate their expenses in their initial estimates. That can be a costly mistake.
As a general rule, I like to get at least $1,000 per month in rent for every $100,000 of purchase price. So that means if I buy a house for $100,000 (that includes purchase price, closing costs and any fix-up costs before the renter moves in), then I need to be getting at least $1,000 per month in gross rent. That is hard to get in the D.C. area, but that is about what you need to have any hope of making money on a rental property if you are financing it. Even if you are an all-cash buyer, you still need to be close to this ratio to make a worthwhile cash-on-cash return. If you are not making at least a 10 percent cash-on-cash return, then there are much safer, more liquid and less stressful investments for your money
It is a good idea to focus on one type of real estate investing when you start so you can focus your education on that area and get as smart about that as fast as possible. Once you have closed a few rental properties, you will have a lot of the basics of real estate investing down, and it will then be easier to branch out into flipping, wholesaling, note investing, development or any other subcategory.
You know the old saying, “It’s not what you know but who you know”? In real estate it’s what you know and who you know. When a deal falls into your lap, do you know who can finance it or provide capital? Do you know who can structure the deal and handle the legalities? Do you know who can handle the repairs? Everyone thinks they know a contractor, but you do not really know a contractor until you have worked together. Believe me, I have used close friends and family and learned the hard way that a strong personal relationship does not translate into a good business relationship.
A strong network is one of the most valuable assets in real estate investing, and it is one of those things you cannot learn in a book or seminar. It can only be developed on the job.
To build your network, you have to get out there. Go to as many networking events as possible. Talk about what you do with everyone. I personally hate marketing. I hate pitching people, and so I do not. But I love talking genuinely about real estate, and I find most other people do as well.
Yes, you need money to invest in real estate. But it does not have to be your money. If I find a good deal, I can buy it without a penny of my own money. It has taken me years of investing to build up that network and reputation. It is not easy. Anyone who tells you real estate investing is easy or risk-free is someone you should avoid
If you have a healthy savings account and your real estate investing motivation is to simply get a better return on your investment, then your path is going to be much easier than someone who is broke. You might also find partnering with a reputable operator might be a better option. Let them handle all of the day-to-day nonsense if all you are looking for is a better-than-market return. As always, be careful and make sure you protect yourself.
If you don’t have a lot of money to start with, then you need to make money a big part of your networking focus. You need to know local bankers, private lenders and high-net-worth individuals, and talk to your friends and family. You need to reconnect with that wealthy uncle if you have one. There is no wealth anywhere in my family, but I kept chugging along, piecing deals together the best I could. I talked a lot about what I was doing. I kept my promises and good things happened. In one case, an acquaintance took notice in what I was doing and invested in one of my deals. The deal worked out, and he made a good paycheck. He was happy. He was not a wealthy man, but he knew a wealthy lady. He brought her in on a deal, and it snowballed from there.
My process was slow but if you have wealthy connections then you could move more quickly. The bigger point is there is money all around you. You just need to look.
Real estate investing is not easy, and it is not quick money. But if you have the knowledge base, a good professional network and access to money, then you have everything you need to get started as a real estate investor.
There is one final point to keep in mind: There are a lot of scammers in real estate. Always protect yourself and do your due diligence on every property you are considering buying, and every person you are considering investing with.
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