Pick your strategy, build you team, but don’t fall in love.
The real estate industry is in a state of flux and investors need to pay close attention. Now more than ever, you need to understand your strategy and be a student of the market. If you’re a true real estate investor, it’s time to sharpen your pencil and pay attention because I have some important information for you!
Those who don’t learn from past mistakes are doomed to repeat them
Remember when having negative monthly cash flow was offset by immense appreciation? Today’s market is exactly the opposite. Cash is flowing but appreciation is a huge variable. The real estate market is making history and you may never see this again—there are unprecedented opportunities and if handled correctly you will be able to participate successfully in the largest wealth building era in our lifetime.
Buy and hold is a strategy but you need to know the answers to these questions. Are you renting the property, offering a lease purchase or using owner financing? Your exit strategy will determine transaction success. Each strategy has slightly different consequences in terms of contracts, repairs and long term responsibility on your part.
Build your investor team first
I see so many investors purchase a property and then try to put their team together. You need to have this in place prior to purchasing the property. Who is the real estate expert on your team? What about an attorney, appraiser, title agent, contractor, accountant, handy man, property manager and mortgage broker? What other team members should you have? It’s so much easier to put together a deal once you have your team to consult with. Having this team in place will also give you credibility. When asked how many people you work with, you now have a team of 5-10 experts.
Once your team is in place, it’s time to find some property. Here’s where you really need to drill down and define exactly what you’re looking for.
- Are you in the condo market?
- What about duplex, triplex or fourplex?
- Are you looking for single family homes? If so, I would recommend a one story as they appeal to a larger group of tenants, less maintenance/painting on the outside and usually has less carpet if you need to replace it. Is it a functional floor plan, with little or no wasted square footage?
- What are the city, zip code and neighborhoods you’re going to work?
- Are you looking for 3/2 or a 4/3?
- How many square feet?
- Pool and two car garage?
- What are the rents in the area and what are the prices?
- Are the prices going up, down or stabilizing?
- What does the neighborhood look like? Are there lots of rentals you’ll be competing with?
- What about curb appeal in the neighborhood (Cars parked in the front yard on blocks or is there a sense of pride of ownership? Are the surrounding area’s better than the area you’re looking at, if so could those areas impact your neighborhood)?
- What are the population trends, the crime statistics and local amenities?
Become local expert
You will definitely need to know the geographic where you wish to invest. I like to comprise a list of my “dirty thirty” or top homes to research in my target neighborhood.
The final step, once you’ve narrowed down your “dirty thirty” is to analyze the deal. Be sure to ask yourself:
- What improvements will need to be made and what is the potential profit of the subject property?
- Figure the potential cash flow of the property. What are the mortgage payments, taxes, HOA fees, and vacancy periods you budgeted for the subject property?
- What did you budget for repair and maintenance issues verses the average rental prices for similar properties?
I like to come in with a high estimate—I don’t like surprises when dealing with my properties.
All this information we have discussed should be in a formal business plan and you should have at least thirty hours invested in it. After you’ve logged your 30 hours start looking for holes. Nothing is perfect and you should always have 2 or 3 contingency plans up your sleeve.
Don’t fall in love… with any real estate deal. Yes, that’s what I said. There’s always another deal and no deal is better than a bad one where you either lose money or end up with a property that is a disaster—unless that’s your specialty.