An (Impatient) Beginner’s Guide to Real Estate Investing

If you’re new to real estate investing and you just want to get out there and start making offers, the absolute very last thing you want to hear is to be patient. So, let’s just skip right to the end—be patient. OK, we understand that this is a tough one. Frankly, we don’t like it either. Look, we want to be rich. We intend to be rich. We want you to be rich. But, while we are open to suggestions on this front, the only method of becoming instantly wealthy that we are aware of is attributed to Richard Branson, the owner of Virgin Atlantic Airways, who offered this sure fire way to become an overnight millionaire: “Start as a billionaire and then buy an airline.”

Absent sufficient capital for an investment in the friendly skies, some time will be involved, both in preparing for your first investment in real estate and in reaping the financial rewards from your investments. But perhaps we can modify the approach somewhat.

Maybe the problem with being patient is that it implies inactively waiting for something to happen. So, instead of being patient, may we suggest that you exercise tempered impatience. Actively learn, actively plan, and actively execute your plan. Do so with all speed and impatience. Just don’t skip over the first two parts. Learn impatiently; plan quickly. Here’s a Quick Start Guide to help get you moving in the right direction.

Set some goals—maybe, even “the” goal

We can write multiple articles about why we think it’s necessary to set goals and how we’ve set them (and, in fact, we will). For now, we’re going to assume that you are reading this because you want to consider real estate investing as a method to achieve something else. Either that, or you’re one of those Real Estate voyeur types (“Property Peekers” in the common vernacular). TwoWiseAcres will be directed mostly to the former group. For the latter, may we suggest RealEstateHotties.Com or UnderTheClapboard.Net.

So, consider the “something else.” We suggest starting from “the” goal, sort of a financial end-game, and working backwards. For many (all?) people, this should involve defining for themselves their own concept of financial independence. Thinking in terms of the end result will allow you to determine how real estate investing will help you achieve this result. This will allow you to develop specific goals that will lead you to better decisions in buying, managing, and selling.

Determine the type of real estate investment

We’re going to answer this one—single-family homes. There you go. Check this one off your list. “Wait, wait, wait,” you say. “Doubles are a much better investment.” Or perhaps, “Commercial real estate. Now, that’s where the real money is.” Indeed, doubles, commercial real estate, apartment buildings, etc. can all be great investments. But we suggest at least starting with single-family homes. For the average new investor, single-family homes will enable you to use your existing knowledge, be easier to finance, and be easier to manage.

Start to evaluate properties

Let’s start with the assumption (and we think the right assumption) that you’re going to buy a property and hold it, at least for a period of time. In other words, you’re going to lease the property. Here we suggest, as a starting point, understanding cashflow. Cashflow simply means cash received less cash spent for the same period. Cash received is your rent payment. Cash spent includes your mortgage payment, taxes, insurance, and maintenance costs.

A quick example: You’ve determined that you can buy a house in a nice neighborhood and fix it up to rent-ready condition for $120,000. You determine that similar properties rent for $1,300 per month. Let’s assume, for the moment anyways, that you borrow all $120,000 on a 30-year loan. Your mortgage payment will be about $798. (There are about a trillion of these free mortgage calculators on the internet. Oh, look. Here’s one now: Mortgage Calculator). You determine taxes and insurance will be $245 per month and you estimate maintenance costs at $100 per month. Your monthly cashflow will be $157 ($1300 – 798 – 245 – 100).

Learn the Area/Where you will (might) buy

Again, you’re not starting from ground zero here. You already know the area where you live. You know something about school districts, “good” areas versus “bad” areas, where people work, etc. From that knowledge, narrow the search.

When we started looking for properties, we chose several areas based on what we already knew. We chose areas with good schools and nice neighborhoods, in many cases with single-family homes that had been built in the past ten years. We did some preliminary research on home prices and rents in the neighborhoods. Then we drove the neighborhoods. When we started out, we set aside two days to do nothing but look. The time spent was invaluable in gaining a picture of the neighborhoods where we would start making offers.

Look for Values in the Area

Our real estate investments have all been single-family homes, generally less than ten years old, in the “starter home” category. By “starter home”, we mean subdivision homes in nice middle-class neighborhoods. We buy this type of home because they have the broadest rental and sales market among single-family homes, and we have been able to find good buys.

So, when we started out, after determining several areas that met these criteria, we did further research on what houses in those areas were selling for and identified some for sale properties on the lower end of the price range for the area. Frequently, these were vacant and foreclosed homes. In considering whether we would buy a particular property, we considered whether we could resell the property for a profit and whether the property would have positive cashflow. While we have spent countless hours improving our analysis, consider for now a simple starting principal: “First, do no harm”. Sort of the Hippocratic Oath of real estate investing. (Rob’s editorial: While arguably attributable to Hippocrates, this quote did not actually come from the Hippocratic Oath)(Mike’s editorial: Rob’s a dork). A well-analyzed property that can be resold for a profit and be rented at a positive cashflow meets these criteria.

Setting a Budget for Improvements

If you can buy a house for $20,000, is that a good deal? Indeed, we have seen properties that we wouldn’t take if they were giving them away. Obviously, the condition of the house and, more specifically, determining the costs of putting the house in rentable or sellable condition is critical. If you are starting from little or no knowledge on this front, consider limiting your search to homes that need less work to increase value. Then learn about the costs of these improvements.

Every property that we have bought at minimum needed cosmetic improvements. These improvements almost always include new carpet, painting, and cleaning. From the square footage of a potential property investment and some general information about its condition, you should be able to start talking with potential contractors/laborers about price. Consider purchasing materials yourself. Even for cosmetic improvements, this may help save money and the process of shopping for materials will provide valuable information to help determine a budget for improvements. Talk to friends for contractor referrals and real estate investing mentors to help set a budget. Then budget for contingencies.

This part is certainly a learning process, but with some time, you will be able to estimate repair and improvement costs

Determine where the money’s coming from

Well let’s see. You’ve determined that you can buy a house in a nice neighborhood and fix it up to rent-ready condition for $120,000. You’ve also determined that other similar houses in the same neighborhood sell for $150,000. Great. Now, all you need to do is determine where you will get the money—checking or savings. OK, we understand that there is just the slightest possibility that you may not be able to cover the full nut by writing a check, so you’ll probably want to learn a little about financing.

Real estate investors use a variety of methods to finance purchases–private investor funds and partnerships, seller financing, and options, to name a few. We suggest that, if possible, you begin with the somewhat more conventional approach and learn about financing that will be available from traditional lenders–i.e. banks. The “if possible” part means that you have good (or at least reasonably good) credit and sufficient income to justify the loan. The less traditional approach, often called “creative financing”, may offer opportunities to expand your real estate investments in the future (or to start quicker when the “if possible” simply is not), but is probably best after gaining additional experience.

So, here are some quick thoughts on more traditional financing to help you get started. Instead of, or at least in addition to, contacting larger retail banks (i.e. all the national banks that you’re familiar with and where you probably have your checking account), speak with a few smaller local lenders. They are more likely to handle real estate loans for smaller investors as “portfolio loans” with less rigid down payment requirements. Largely, this is because they are frequently willing to loan based on a percentage of the (higher) improved value of the property rather than the purchase price. In other words, they may require 20% equity in the home, but part (maybe all) of the equity will be derived from the improvements that you do rather than cash out of your pocket.
Finally, learn what rates and terms are available for real estate investment loans. Then shop around. We’ve found that terms vary widely among portfolio lenders and, after all, learning these terms will provide the largest component of costs in determining cashflow for a potential investment.

Now that you’ve patiently read through the (Impatient) Beginning Investor’s Guide, we hope we’ve provided some useful direction to get you started. We’ll continue to post to each of these topics, and we’ll wait for your comments–impatiently.

Tagged as: Beginner's Guide, real estate investing