Many people would like to invest in real estate. Housing prices have plummeted; rates are at historic lows. You can actually buy cash-flow investment property in California! It’s a great time to buy real estate. But how do you get started?
There are several ways to invest in real estate. You can buy investment rental property, or purchase in an interest in an investment company. You can buy single family homes, apartment buildings, REOs, fixer-uppers, or even raw land. Or, you can purchase tax liens, options, or notes. Thanks to the credit crunch, you can also invest by loaning money secured by real property. There are several strategies, such as: “buy and hold,” “leveraging,” “flipping,” “wholesaling.” for maximizing profit: flipping, “buy and hold,” leveraging, wholesale contracts. For the new investor, it’s like learning a new language. There are literally dozens of books and articles in the library, the bookstore, and on the Internet – it can seem very overwhelming!
A word (or two) about risk. All real estate investing involves risk. There is no such thing as a “risk-free” investment. You can learn to manage risk, and take steps to reduce risk – you cannot eliminate it. Each individual has their own personal risk tolerance level. While getting started, consider what would happen if you lost your entire investment. As you gain experience and confidence, your tolerance for risk will probably increase, along with your ability to reduce the risks inherent in any investment. An important element of risk management is to avoid problems, whether they are of an economic or legal nature.
There is not enough room here to explain everything you need to know about real estate investing, but a few pointers will help you get started. I strongly recommend new investors should attend real estate investment seminars, talk to other investors, and read books and articles on real estate investing. Learn the language. Consider a low-risk, short-term investment and try it. You will learn more “by doing” than anything else.
First Step: Make a Plan. The most important step is to consider both your personal and your financial goals, and develop a Plan. A good Plan will focus on your goals. Goals must be realistic. Your plan should be flexible, and contain an exit strategy. Be sure to have a Plan before you write your first check!
Your financial goals should support your personal goals, not the other way around! Determine where you want to be in a few years down the road: in a new home; retired; or not worrying about the kids’ college tuition. Your financial goal should be to earn enough to help you reach your personal goals, plus a little extra for emergencies. Remember, good investment plans take time – there is no single perfect investment, despite what some promotional ads try to make you believe!
Second Step: Do your Research. You don’t need to be a genius to make money in real estate investing, but you need to be smart. And you can get smarter. Again, I recommend that you attend real estate investment seminars (like SJREI) and talk to other investors. Warning: Be wary of motivational seminars that try to sell you investment products, books, software programs, and CDs. Listen. Learn. But don’t buy everything they sell -or say! Invest in real estate – not gimmicks!
Remember, there are many different types of ways to invest in real estate. Focus on those that you understand and are comfortable with. When you are getting started, avoid complicated schemes, and stick to simple. Achieving a level of comfort and success with one type of investment activity or another requires practice and patience. Smart people learn from their mistakes. Really smart people learn from other people’s mistakes! (Hint: everyone makes mistakes. Try to make small ones, not big ones!)
As you learn more and gain confidence, you may choose to modify your Plan. Make adjustments to keep your Plan realistic and achievable. Establish a realistic timeline for your financial goals. Modify your Plan to help ensure that your Plan will remain current and relevant. For example, you might choose to modify your plan to invest out of state, or to team up with other investors. The key to survival is adapting to a changing environment, and a smart investor must be prepared to adjust their investment strategy in response to changing economic conditions. Remember: It is important that your Plan include an exit strategy. In addition to doing Research on your strategy and a more specific investment proposal, you should develop a reliable “team” of professionals you can rely upon for timely, relevant advice. Most successful investors have a team of tax specialists, real estate agents, attorneys and other professionals they work with on a regular basis. They are often well-worth the cost of their services. You can use the knowledge you gain from your professional advisors over and over. The rate of return on your investment in professional advice is priceless!
Other steps to take: Research the market and local conditions. Fact-check information you get at seminars. Remember: If it sounds too good to be true, it probably is! Don’t rely on obsolete information. A lot has changed in the past two years – check the dates. Learn as much as you can about the local market, demographics, and conditions. Get local information: use the Internet, but don’t rely on what you see online. Find local newspapers, churches, and realtors, and talk to someone “on the ground.”
Finally, as part of your research, don’t forget to make sure the investment is consistent with your financial and personal goals. If not, STOP. Ask yourself: “Will this investment get me closer to my financial goals?” If the answer is “No,” step back slowly from the checkbook! If you don’t have enough information to answer the question, you need to do more Research, modify your Plan, or find a new investment.
Third step: Action. Invest, don’t spend, your money. If your ultimate plan is to make money investing in real estate, invest in real estate – not in sales pitches. Remember, there is no such thing as the “perfect” investment. When getting started, it is okay to proceed slowly and deliberately, but you need to proceed. Take a deep breath, get going, and keep an eye on your exit strategy!
Getting started is important. Getting started on the right foot is even more important!