Real Estate Investing (Part 1) – An Introduction
Why on earth would you want to be a real estate investor? I’m half-kidding with this question… but I mean really: you’ve got some thinking to do. Real estate investing is not for the faint of heart. It is a discipline; a path that requires hard work, patience, and toughness (plus, a million other things). It is a long, arduous journey that will give you bloody noses and black eyes with every harsh lesson it teaches you. Ask me how I know. No, seriously… ask me.
So, if I’m not able to completely talk you out of it altogether, hopefully the few humble lessons I’ve learned can be shared with you.
We will be covering this topic in 3 separate sections:
Part I – Introduction
Part II – Fix-and-flip real estate investing,
Part III – Long term, buy-and-hold real estate investing.
To begin, our introduction to real estate investing will cover my original question: why do you want to be a real estate investor? This is where the idiot-in-the class’s hand goes up and says, “To make money.”
Ok, good! But what does that look like? How you wish to make money off the real estate market will determine which type of investing you do. Do you want to make a couple big splashes on some properties by fixing them up and selling them? Or, do you dream of walking out to your mailbox after the first of every month and collecting rental income checks? While there are numerous ways to make money in real estate, these are the 2 strategies we will cover in this 3-part series: fix-and-flip and buy-and-hold.
All real estate investing is based on a deal.
Without a deal, there can be no real estate investing.
Repeat after me: “All real estate investing is based on a deal. Without a deal, there can be no real estate investing.”
What I mean is, there has to be an advantageous situation whereby you gain from the sale of real estate. To be advantageous to you, the person selling the property must want to sell it worse than you want to buy it. I cannot stress this enough: THE SELLER HAS TO BE MOTIVATED. All real estate deals depend upon this.
What are we talking about? Motivation is the reason the seller wants to sell a property; specifically, it is the reason the seller wants to sell the property (usually quickly) at enough of a discount that an investor can make money from it- i.e. impending foreclosure, divorce, rising unaffordable property taxes, etc. As you can probably guess, a lot of these situations can be quite ugly. Sometimes they’re downright heart-breaking
Once a motivated seller makes the decision to sell a property, then real estate investment can occur. Quite often, I’ve seen a seller strike up an agreement to sell the property to a real estate wholesaler. A real estate wholesaler is someone who finds the motivated seller and convinces them to sell the property, then sells their stake in the deal to a 3rd party (typically, the end investor) for a markup or fee. A wholesaler could probably best be understood as a scout for deals who receives a finder’s fee for their discovery from the end investor.
Often, it requires some imagination to see a distressed property’s potential. How is someone going to realize that potential so an investment in the property can show a return? What that potential is, depends on the property, and it depends on the investor. As I mentioned earlier, their investment strategy will determine their use for that property.
If an investor is looking for a quick, higher-end return: a fix-and-flip project would probably be preferred. If an investor is looking for a long-term return that will offer passive rental income and property value appreciation: a buy-and-hold strategy is best.
Before you begin your journey into real estate investing… you need to make 2 decisions:
How are you going to find motivated sellers: use a wholesaler or find them yourself?
What is your investment strategy: fix-and-flip or buy-and-hold?
Let’s dive into the first question. Using a wholesaler certainly has a lot of perks; they bring you a deal, having sorted through all the leads and prospects beforehand. The catch is, not all wholesalers do their job. It is vital that you check their homework! MAKE SURE the numbers work, and the value of the deal is there (more on that in the next 2 parts of this series). What if you plan on generating your own leads, sorting through them and find the deals yourself? How will you do this? Direct mail marketing, web marketing, telemarketing, are all methods successful investors have used to find motivated sellers.
Now the second question. What type of investor do you want to be? Do you want to make some nice chunks of cash intermittently? Or would you rather build a portfolio that generates small steady streams of income for you? Your chapter in life can have a lot to do with what you need out of your future real estate income. Most older individuals are looking to establish some type of retirement income, so they could be more partial to longer term investments like rental properties. If you’re like me when I was starting out, you needed to make some cash quick; a fix and flip project can accomplish that for you.
Please keep in mind, I am writing about my own experience. Obviously, there are plenty of other methods real estate investors have for finding and developing deals.
(PLEASE write about your experiences with those methods in the comments; I would love to hear about them!)