Thanks to the Wall Street Playboys for allowing to shed a little more light on the real estate game. I’ve gained quite a bit from their articles and am grateful for the chance to give a little back. Before we begin, I want to clarify that this is written from the perspective of an individual who started out in real estate the “old fashioned” way: working a job and saving up their first down payment. Some of these rules won’t apply to institutional investors and those with billion dollar trust funds. If anyone reading is involved in RE investing on an institutional level I’d love to hear their perspective as well.
I’ve decided to put together a list of rules that you should follow when contemplating getting into RE to begin with and then a few guidelines for looking at your first investment. I don’t delve much into actually doing deals and building an RE Investment biz in this post because it would take up too much room. If the WSPs ask me, I could potentially do a second post covering this.
Should You Invest In Real Estate?
1) You Must be a Jack of All Trades
Real estate investing requires a broad base of knowledge, so plan on spending quite a bit of time learning the following skill-sets: 1) Managerial: You should be able to manage tenants, contractors, employees and create effective business systems. 2) Legal: Most areas of RE investment require a good understanding of the following: property law, landlord-tenant law, contract law, tax law, zoning, codes compliance Etc. 3) Technical: Real estate investment generally involves purchasing and maintaining some sort of structure, you should be able to understand, evaluate and to at least some extent repair the different components and systems that compromise a building. 4) Sales/Marketing: As the WSPs say, *you don’t want to sell? Too bad*. RE investment involves quite a bit of selling, from convincing people to lend you money or sell their property, to knowing how to effectively market properties for sale or rent.
A lot of the bad advice you’ll read online says something to the effect of “If you don’t like something, you can just hire somebody to do it!”… Yeah, ok Skippy… In addition to this being wrong in many cases, the people who say this are missing the point. You don’t learn how to fix a leaky faucet, write an effective ad or draft an eviction notice so that you’re stuck doing it the rest of your life. You learn it so when you do reach the point that you can afford to hire someone, you can train them to do it or at least evaluate their work. If you think you can make real money in this business without having to acquire any skills you might as well stop reading now because clearly you’ve already got it all figured out.
2) Choose Areas of Real Estate That Cater to Your Strengths
Though real estate requires a broad base of knowledge, we all have a *certain type of intelligence*. To increase your odds of succeeding, figure out which areas of the RE game best utilize yours. Are you “the guy” people call when their popcorn popper stops working? There’s plenty of opportunity in fixer-uppers. Do you always read the “terms and conditions” in their entirety when purchasing a new product or service? After getting your head checked, you should consider some of the more legal oriented opportunities like judgement investing or buying properties with title issues.
3) Go Big or Go Home
Learning the skills listed above takes time. A lot of time. It also takes experience and while some skills are transferable from other professions, you inevitably have to learn many things by actually doing them over and over again. With that in mind, though certain areas of real estate can be tackled as a side hustle (some of the more legal oriented strategies come to mind), the more commonly known strategies like flipping, managing income property or RE development are generally full time gigs.
This isn’t to say you can’t do them part time to start as you certainly can maintain a couple of small income properties while working a full-time job. It’s just that there is so much learning and network building required to become a legit RE investor that it doesn’t really make sense to put in all that effort just to cap your progress at a few apartment buildings or the occasional flip. Do people go to school for 8 years to become part-time doctors? If you want to get into one of the more time consuming aspects of the RE game, plan on dedicating a lot of time and scaling up to a point where you become financially independent from it.
4) Everybody Has Advice When it Comes to Real Estate. Ignore it.
I have worked in a few fields, but none compare to real estate when it comes to regular people telling you how it’s done. Every knucklehead either knows someone that has “made bank” in real estate, or has done so themselves. These stories take on a few variations from “this house was the best investment I’ve ever made” (Oh yeah? So you’ve compared your home’s % increase in value to investments in other asset classes during the time you’ve owned it, making sure to subtract expenses…) to “I just bought a duplex and the rent pays my mortgage” (Don’t Get Me Started). The truth is, the vast majority of the money made in real estate isn’t due to shrewd investing, it’s from boring old market appreciation. The buy high, sell higher crowd that make their money in these situations are the same sheep who get slaughtered as soon as the market turns south. Intelligent investors can hold their own in almost any market.
In short, the only people you should take advice from on RE investing should meet the following criteria: 1) They are financially independent from investing in real estate; 2) They did not inherit it; If you question the second point: There’s a guy in my area who inherited hundreds of residential and commercial units from his father. The last time one of my friends saw him he was wearing a backwards, flat brimmed “Monster Energy” hat. Need I say more?..
When You’re Ready to Buy
5) Cash is King
The get rich quick gurus that dominate the RE advice biz love to talk about “nothing down” deals. You know why? They know there are a lot of broke clowns out there who are willing to swipe their credit card because they think they can get something for nothing. In the real world, nothing down deals do exist, but they are rare and often aren’t a bargain to begin with. Which gets me to my next point: Cash is king.
Though different investment techniques require differing amounts of cash, the general rule is: the more cash you have on hand, the easier your life will be. If you have a significant down payment, it will not only be easier to get a loan (lower LTV), the seller will take you more seriously. I know this first hand as I’ve lost a deal where a cash buyer paid significantly less than what I was offering with bank financing. Also, bargain purchases often require quick closings. Applying for a loan, waiting for an appraisal etc is rarely a speedy process… And don’t forget to have some of those greenbacks left over after the closing as well, because bills need to be paid and stuff breaks.
6) Cut Out the Middle Man
I’d be lying if I said real estate agents haven’t brought some good deals to my attention. They have. Also, since I’m on good terms with a couple of them (IE: referred them clients that made them $$$) if they are selling a property that they think I’ll be interested in, they’ll reach out to me before listing it publicly, which is nice (this benefits them as well, since if I buy they can now work both sides of the deal).
Those benefits aside, I think it’s usually a good idea for buyers and sellers to deal with each other directly. This is due to: 1) Better communication between parties; 2) Lower transaction costs (don’t have to pay agent commission); I can’t stress enough how important #1 is. As I’ve mentioned in my comments on prior posts, real estate can be a very emotional arena and the less direct communication the two parties have the more potential there is for misunderstanding, which can kill deals. Having agents involved turns a real estate sale into a game of telephone which benefits no one (well no one except the agents!)
My actionable advice is: 1) Learn to sell: This will help you convince the other party to like you and ideally swing the deal more in your favor (“Aww shucks, he’s a nice guy, I guess I can hold a $500k note for him”). 2) Direct Contact: Regardless of whether there’s an agent involved in the deal, get in direct contact with the other party and get on good terms with them. 3) Be Nice to Agents: Don’t totally ignore or piss off RE agents as they can be useful, especially in the beginning when you’re still learning how RE transactions work.
7) The Real Money Often Lies in “The Borderlands”
Yeah, you might impress your date if you’re walking down 5th Avenue, point out a building and say “Check dat out girl. Alllll mine.” But the fact of the matter is, prime properties rarely offer the best returns and though many owners wouldn’t admit it, are often bought for status rather than pure profit. Ego is a powerful thing… The inverse is true as well. You could buy some beat-to-hell 20 cap on the corner of Skid Row and Mug Street, but then not only are you going to have to earn every cent of that rent money (and then some) managing your property, your prospects for adding value are limited as regardless of how nice you make your building you won’t be able to increase rents or attract decent tenants.
So with that in mind, often the easiest places to realize a decent return (Double digit cap or close to it) without dodging bullets are The Borderlands. I’d describe these as areas that are generally run down, but show some signs of turnaround. They are usually located near the real bad neighborhoods, but within a reasonable commute to the more desirable areas of town.
Credit to commenter RE Guy for “The Borderlands” term, it articulates perfectly the type of area I’m trying to describe. See his excellent discussion of this concept in the previous real estate post for more details.
8) Real Bargains Are Tough to Find and Are Rarely Pretty
When you hear words like “foreclosure,” “OREO” or “short sale” do you automatically think “bargain?” If you answered “yes” then get your credit card out, because I have a bridge to sell you… What I’m getting at is: properties priced significantly below market value are rare. Just because a property for sale is owned by a bank doesn’t mean it’s a good deal. Oftentimes it just means it’s a POS and this is already reflected in its price being lower than nicer properties for sale in the same area.
For a deal to truly be a bargain it usually has to meet one of the following criteria: 1) Nobody knows about it; 2) There is no market for it (in its current form) 3) There is something about it that scares most buyers away, which can be corrected for a significant amount less than the discount that it’s currently selling at… Where do you find these types of properties? All I’ll say is: don’t bother asking me in the comments section. (Why give away a business, no one would!)
9) The Numbers Don’t Lie
In the RE game it’s easy to get irrational, you may have just walked through a beautiful property that you would love to own or you could have heard a trendy new bar or coffee shop is opening up in a particular neighborhood. Maybe you just met a seller and he’s willing to give you some sweet financing terms… Regardless of any of this, it’s imperative that you run the numbers on a deal. And I don’t mean “what the rents might look like once all the nanobrew swilling hipsters with their trust funds move in to live near that bar with the chalkboard drink list that may or may not open up down the street.”
I mean what you can rent the place for currently. This doesn’t mean you can’t factor in increased return (along with the associated costs) due to improvements you plan to make in your hypothetical numbers, you certainly can and should. It’s just that you need to stick with known variables, not bank on an uncertain future event to increase your property’s value to a point where the numbers make sense. If you do that you’re just a speculator, not an investor.
You may ask “how do I know what a property will rent for or what the utilities cost?”… Well, if you’re a fool you could take the seller’s word for it. But I’d recommend doing the research and learning independently (finding out what utilities cost in your area, how much energy it takes to heat/cool a given amount of sq ft, Etc). Again, these are hypothetical numbers, so you’re just trying to get in the ballpark. This becomes far easier once you’ve done a few deals as you will have access to data from your existing properties.
10) What’s the Best Way to Learn RE? Doing Your First Deal.
Commenter Nixon brought this up when discussing Real Estate in a previous post and it couldn’t be more true: The best education you can get is doing your first deal.
I’ve noticed that there is a loose pattern that most first time investors follow when searching for their first property:
-They figure out the geographic area they want to work with
-They establish their ideal criteria for what they want to purchase
-They look at a bunch of properties, making a few offers, none of which are accepted
-They get frustrated “Why aren’t any of these jokers signing on the dotted line?..”
-The become fired up and look at a few more properties and make some more aggressive offers, oftentimes bending their initial criteria a bit
-Someone finally bites and the have a property under contract
-They haggle about small stuff “I need $1000 cash back to fix this AC condenser because the building inspector that I just paid $500 said so.”
-They may or may not have trouble getting financing “Whaddya mean I can’t only put 5% down?”
Welcome to the Jungle.
Anyway, there is quite a bit to be learned during all of the above steps. So if you’re interested in getting started this is generally what I would recommend: 1) Work at your current job until you have enough for a decent down payment all the while studying different RE related topics in your downtime (Law, finance, building trades Etc); 2) Figure out where you want to invest and the logistics surrounding it (if you have to move or not); 3) Do your first deal
Good luck, you’ll need it.
Note: The outline above has had formatting edits made by us (Wall Street Playboys) with 99.99% of the content unchanged. We have confirmed OwnMyHood’s background and he is financially independent off of real estate investments (well over the multi-millionaire level). We thank him for his contributions and hope to grow a community full of people similar to his caliber.