This behemoth of a post is meant to be a real estate beginner’s tutorial which aims to cover the basics of real estate investing and outline the blueprints of what is needed for you to be prepared in investing in real estate. After all, let’s be straight about it: investing in real estate can seem complex as all hell.
I spent more than five years studying real estate markets, walked thousands of open houses, and listened to every episode of the Bigger Pockets Podcast at least two times.
It took me that much time and effort to be comfortable to start buying investment property.
Now, my fiancee and I started buying. We bought 13 different apartment units in our first 2 months as investors. We’ll own more than 60 before the year is over.
As a rental property owner, I can now say I probably “overstudied” in the beginning before getting started in real estate. The five years I spent was probably too much. I’m glad I did it though because it led to where I am today, but I also wish I could get some of that time back.
That’s why I’m writing this huge post right now. If you want to spend years studying that I did, you are totally welcome to it. That’s what I did, and it worked for me-I’m definitely a fan.
But as someone who has now “been there, done that”, here’s the big list of what I think actually matters to get started as a real estate investor.
The Why of Real Estate Investing
Real estate investing has great advantages for many reasons. Besides excellent rates of return, investors or property owners can enjoy tax advantages to leverage it as an amazing wealth builder. With enough properties under your portfolio, it can generate recurring passive income which is what I think most upcoming investors would like to achieve in the long run.
Whether you have enough knowledge and are ready to dive into the world of real estate or are a beginner who is learning the odds and ends of real estate, here are a few reasons why you should invest in real estate and see if it is a right choice for you.
Real estate beats the stock market
The stock market is great, don’t get me wrong. I own stocks and will continue to own stocks.
But, stats don’t lie. Real estate appreciation beats the stock market. That also doesn’t take into consideration the cash flow you get from real estate.
Real estate is a highly tangible asset
Other investments such as stocks, bonds, options, and other financial instruments leave you with little to no tangible asset which can dive to zero. Owning a car or any other gadget is also a tangible asset, but the difference between these assets compared to real estate is that cars and gadgets depreciate over time. Conversely, there will always be value in your property and in your home that appreciates over time.
My strategy is to take non-tangible assets (namely, my consulting) and use it to buy real estate specifically for this tangibility. There is a guy I follow on Instagram named Chase Namic who leverages YouTube for his income. Truth be told, he’s very frat star/guru.
However, he’s also taking that non-tangible asset in YouTube and converting it to real estate income. So, I can’t help but respect him for his strategy.
If you have come across a financial planner in the past, you may have heard of the importance of diversifying your portfolio. Basically, it is the principle of not putting all your eggs in one basket, such that when one basket falls or has to manage the risk, you still have other baskets that will help you mitigate your losses.
Investing in real estate will always serve as a safe and tangible asset to spread out the risk in your portfolio.
Tax Benefits from Real Estate Investments
One of the advantages of investing in real estate is the numerous tax benefits provided by regulation. Some examples are tax deductions on mortgage interest, cash flow from investment properties, insurance, property taxes, operating expenses and costs, depreciation, and other benefits. Once you get invested in real estate, every yearend will be a remarkably busy time for you because you surely would want to take advantage of the numerous tax benefits at hand.
The Pros and Cons of Real Estate Investing
Unless you grew up with a lot of money, and certainly most of us didn’t, perhaps you are going to be a little more familiar with real estate than with other financial instruments such as the stock market. In this section, we will discuss more on the pros and cons of getting into real estate investing.
- Tangible asset – When you buy a building or land for that matter, you know exactly what and where it is. It is real, you can touch it, you can see it, you can walk through it.
- Lower risk than the stock market – As mentioned earlier, stock market prices can go up and down day in and day out. It’s a game of emotion where you get greedy when the prices are high, and you start to panic when the prices dip all because of the high risk that investing in it entails.
- Steady cash flow – When you get abreast of investing in real estate and you already know the cuts and ends of the industry, you’ll start to experience steady cash flow from renters, tenants, or appreciation of your property.
- Good tax breaks and tax incentives – You can benefit from both the increase of the property’s value over time, income from rent, you can pull money without getting taxed on, and so forth. Make sure to maximize this advantage to your favor every yearend.
- Long-term returns will usually be positive – This is brought about by the appreciation of your land or property. Also, if the zone or area surrounding your property will be developed, then you also reap the benefits of higher property value.
- Getting started might be much harder than getting in the stock market – Getting a decent down payment for your first property may entail saving up for years. I don’t like that “low down payment” shit-too risky.
- Potential returns aren’t as high as the stock market – The maximum returns are experienced in the long run which is ‘slow but sure.’
- Real estate investment is cash-heavy – Without trying to be redundant, what we mean here is after saving up for the down payment and acquiring the property, developing it is another challenge. Through this, you might face minor and major repairs here and there which can cost minuscule to a large amount of sum on top of the steady amortization you are paying.
- Properties are not liquid investments – The greatest disadvantage of real estate can sometimes be its greatest disadvantage. Real Estate takes time to buy and sell so it would be difficult to access your money in a hurry especially when you do not have a stable credit.
- Managing tenants and building maintenance is a challenge – This is one of the cons that show up after buying the property. You got to do the toilets, make repairs, worry about what the renters are doing to your property, negotiate with tenants who are unable to pay their rent on time, and the list goes on. Some seasoned property owners say that there is nothing worse than dealing with tenants, as it can eat up your time!
Short and Long Term Real Estate Investing Strategies
There are lots of different ways to invest in real estate from both a short term and long term perspective. It depends on who you are for which strategy you should follow.
We personally do long term buy and hold, but people have made money doing other strategies.
- Wholesaling Properties – Say, for example, you know of a property that is desirable and in a prime neighborhood or area whose owner just wants to sell. You can approach the family, negotiate the property price, and have it under contract. The goal of wholesaling properties is finding a property not to buy it yourself but to assign the contract to another potential investor who will develop, renovate, or eventually resell it. What you get is the pre-determined service fee that you negotiated with the family and the investor gets the property that is less than the market value because it is not publicly listed for sale. After securing the contract, you move on and find another property to wholesale.
- Real Estate Flipping – This is a term that you must familiarize yourself with once you get into real estate. The term “flipping” is described as the process of buying, renovating or rehabbing, and selling the property for profit. Some newbie investors in real estate often confuse flipping for wholesaling, but they have a big difference. In wholesaling, you are basically assigning the contract to an investor. Whereas, in flipping, you buy the property, fix it, and sell it at a profitable amount. Flipping properties require a seasoned investor – by seasoned we mean knowledgeable and capable to invest in renovations and contract them if needed.
- Short term rentals
- Holding Properties – The game of real estate excites the players that are in it for the long haul. Because it is the true nature of real estate investment that it will go up in value over time, per Theory of Value. With that said, holding properties is purchasing a real estate and holding on to it for an extended period of time. Owners typically have the intent of selling it down the line, but they would want to maximize the value first – kind of like living off the fat of the land. Investors may wish to build a residential structure and have them rented out, perhaps they want to develop the property for commercial purposes, or just to build themselves a place for retirement. By common sense, the first two are intended to provide value by making money. For the last example, however, the value is for the investor and for his next generation as well.
How to analyze and understand a market
Being able to invest properly and profitably in real estate entails knowing one of the fundamental principles of economics: the law of Supply and Demand. Having fewer risks to the value as compared to stocks, it does not mean that real estate is risk-free. So, in order to have a smooth and resilient journey through the industry, it is a must for investors to understand, analyze, and evaluate the market he wants to deal with. Part of it is knowing whether the values of a particular market are going up, going down, or staying flat. There are a lot of indicators and a valuable source of information for this which we’ll discuss in this chapter.
Oftentimes, the amateur investor takes the risk because they fall short on market knowledge and the lack of understanding inevitably becomes problematic for their decisions on when to buy, when to hold, or when to exit. Here are key indicators that will help you in understanding the property market.
Data is indispensable
The first step in market analysis is to gather factual data of the property you are aiming to buy including data that may indirectly affect the property. This is where you will have to crunch on numbers such as;
- Land Area and surrounding neighborhood
- The actual size of the property
- Number of Floors
- Number of Rooms
- Date when the property was built – this is important in appraising the property as newly built properties are presumed to comply with more updated regulations
- Proximity to Roads, Hospitals, Leisure Areas, Churches, Marketplace, Public Transportation, etc.
- Number of times the property was improved and the most recent time it was done
Other supplemental information which may indirectly affect the property include:
- Comparison between the property you are looking at and a few recently sold properties within the past three to six months and within a one to a three-mile radius.
- Current listings – including pending and expired – of properties that are comparable with your property.
Compare, Compare, and Compare
After determining pertinent information on the property and against others you have found, it’s time to make a comparison. Now the important part of this is to determine the market value of your property. And by doing that, you need to take a look at the property which is worth more than yours – perhaps it is more accessible to a hospital, bus stop, train station, or marketplace than yours. Treat this is as the “Ceiling Value.” Now take a look at the property which is worth less than yours. This is going to be the “Floor Value.”
Now that you got the lower and upper limit of the property value, you got to finally determine the price that falls below the ceiling value and above the floor value, which is the market value of your property.
Join the Community
Another good thing to do when analyzing the market is the awareness that you do not know enough and that you are not alone in this endeavor. That’s why it is also advisable to join the community of people with the same aim and goal as yours. Participate in social media groups, digest podcasts and online materials such as this book, or watch online courses on real estate investing. The best information comes from someone who had direct experience in real estate investing. Who knows, you could even get yourself a mentor.
Have a plan before you get started
A plan is indispensable in every endeavor. As simple as a road trip requires a map to guide in arriving at your destination the quickest and most convenient time possible. The same principle applies to real estate investing. In making the first step, you must have a plan at hand to guide you along the way. The importance of this is for us not to get distracted with things that will inevitably spring up as we course through and also, for you to be able to hurdle unexpected road bumps along the way without getting your eye off the goal. Here are some of the contents that your business plan should clearly have:
- Mission-Vision Statement – This basically summarizes your endeavor’s reason for existence. It must answer the question, what do you do? It should be clearly defined but laid out in a concise manner.
- Goals – Now that you know where you are, it’s time for you to determine where do you want to go. Mind the process at a later part of the plan, just determine what will be your indicator which will tell that you have successfully reached point B from point A. (Be outrageous, it’s free!)
- Method and Strategy – Now that you have set where point B is, here comes the part where you get dirty as this requires tons of contemplation. There are a thousand ways to skin a cat, just as there are a thousand ways to profit from real estate investing. But the good news is, you don’t need to know all of them. Just know a few effective strategies, be good at them, and put it to good use.
- Timetable – At this point, you already know what you are, where you are, where you are headed, and how to get there. The next question to ask is when will I get there or how long will it take for me to be successful in this endeavor. Remember, in real estate investing, time is equivalent to money. If you have a long-term plan which spans a generation – it’s possible – then set milestones so it will be easily attainable.
- Market Research and Definition – This part tells on which market you would want to deal with. Real estate has a broad class of people that it is serving and trying to serve all will lead you nowhere. This is the part where you determine your niche. Is it gonna be low-income households, high-income households, or commercial establishments? Every class has its own market, so determine carefully which one are you most comfortable working with and serving. In the end, you will become an expert in this niche.
- Marketing Plan – This part tells how the people are going to know of the listing you are selling. Will you use search engines? Agents? Advertising Agencies? Answer the question, how are motivated buyers going to find you?
- Finance – Ahh the beauty of numbers. This part determines the method of how you are going to finance your deals. Are you gonna go through conventional bank loans, hard-earned savings, equity partners, lease options, private money, and the like?
- Teams and Functions – Of course, investing in real estate and making it profitable requires you to build a working team with common goals. In this part, carefully outline who will do which tasks and what must they be a master of. Will you need an attorney, a CPA, a contractor, a building manager, etc.
- Backup Plans – This part must illustrate how you are going to get out of a deal. Will you flip, lease, wholesale, rent, and hold?
The provisions stated above are just some of the vital contents that your business plan should have. Should you feel like taking it up a notch, it wouldn’t hurt going the extra mile. Others would also put illustrations, flexibility, criteria, and other financials for various purposes.
Build an experienced team to get started
It is vital for an up-and-coming real estate investor like you to be everything. Remember that all the dirty work is done at the onset of your investment such that you will have a smooth future a few years down the road. However, it is incumbent upon you the awareness that you may have to wear too many different hats at too many different times, but you cannot wear them all at the same time. In such cases, a team will be there to help.
In coming up with a powerhouse team, it is not required that you hire people to work under you. What we suggest is to identify certain individuals in various disciplines who are a call away when the need arises to help your endeavor move forward. With that said, we have enumerated some of the people with the vital functions in real estate whom you will need to contact in the future:
- Certified Public Accountant – Their task is menial and routinary for us, but overlooking some tax and bookkeeping responsibilities may incur you with penalties that are unnecessary. As much as possible, put this person on top of the list. This person must be aware of the ins and outs, the cuts, and ends of real estate. A good accountant will prove to save you more money than cost you unnecessary penalties.
- Contractor and Handyman – Same as the duty of the accountant, a contractor must not be overlooked. They are the ones who fix things and get things done in the soonest time possible under the cheapest budget available. Fixing a broken pipe may be a simple task but when overlooked, dealing with complaining tenants would be pain down there. These guys don’t necessarily have to be the cheapest, but they must be the most dependable, qualified, and licensed if possible. Remember, it’s convenience you are paying for.
- Property Manager – A good person to occupy this post is hard to find. They are the most welcoming, and customer-service oriented types of people. Once you find the right fit for this post, you can manage your properties in the background.
- Legal – This person must be adept at going through and crafting contracts, policies, and memoranda to make sure you will not be exposed to any legal trouble. Make sure they are licensed, and it is best if they are a Real Estate Attorney.
- Insurance Agent – One of the ways in mitigating the risk is to call an insurance agent. We know that their function can be negligible at the start, but the problem is, you don’t know when will problems arise or when you will most especially need them. Also, one important trait of a prudent investor is making sure that all his bases are covered.
- Realtor – This post must be occupied by a go-getter person. Naturally, you will be doing this at the onset of your investment. But there will come a time that they will be needed if you want to scale up your investment.
How to find a good CPA for real estate
How to find a good contractor
How to find a good property manager
How to find a good lawyer
How to find a good insurance agent
How to find a good realtor
Handy and Proven Strategies in Real Estate Investing
Now that we have outlined all the vital information before you plunge yourself into the world of real estate, it is important to note some of the useful and proven strategies of real estate investing. Through this, you’ll have the ability to know on which track you will track and which of these strategies suit your appetite as an investor.
Invest in Properties for Rental Cashflow
Buying an investment property for the sole purpose of renting it out to others is most probably the easiest way to get into the world of real estate and the most popular one for that matter. Investors like you may opt to go either of the two options: Traditional – long-term rental usually for apartment flats or condominium lease – or Vacation – short-term rental usually for resorts, hotels, and other hospitality-oriented establishments. The advantage of this strategy is making money right away! As long as you are able to get all renovation and repairs done, then you can find tenants right away.
One thing to note for this strategy that there must be someone dedicated to answer and resolve tenant concerns such as plumbing, electrical repairs, and even collection so you will have a smooth and reliable source of monthly income. This can be the biggest drawback of this strategy, being an active investment endeavor. But with a well-equipped property management team, this drawback can easily be overcome.
Through this strategy, you will also have the capacity to grow quickly as an investor having the option of making the revenue from your tenants pay for the amortization itself or use it to buy another one, and so on. In a few years’ time, you’ll see your portfolio of properties for rent grow.
The idea, as discussed earlier, is to acquire properties and sell it later on after the market value has greatly appreciated. Obviously, this type of strategy is more suitable for investors who have a deep pocket and can endure a long waiting time for the property to grow in value. They are also the ones who have the capability to weave together the sense of the current affairs and housing market to see where the latest development will go.
When speaking of real estate investing and how you can earn passive income from it, this is the best example. As you do not have to do anything major and time-consuming for it to appreciate in value. For investors who want an even larger profit, they can opt to develop the property which then forces appreciation.
If you are not yet sure whether to engage yourself in real estate investments in the long run or not, then you may opt for this strategy. In reality, you are not buying the actual property, just assigning the contract to a buyer. You only need minimum capital in order to do this.
The main drawback of this strategy, however, is in order for it to work and be profitable for you, you must be comfortable working within tight deadlines under mind-boggling pressure. But the significant profit from just a short span of time can all be worth it. Lastly, this strategy is most suitable for individuals who have a strong real estate network of sellers, buyers, investors, and other professionals in the industry.
Fix and Flip Properties
Somewhat similar to wholesaling is the fix and flip strategy. It is also a short-term strategy of real estate but instead of just assigning the contract to a buyer, you buy the property to be renovated, repaired, and eventually, be sold to another investor or buyer. The upside of this strategy is the wide array of access to financing options that are available for only a short span of time (be aware of high-interest rates though).
A tight schedule is not a problem for flippers as they operate based on their pace. Of course, the faster you flip, the quicker you’ll be able to find buyers and make a profit. In order for this strategy to work in your favor, you must be immersed and involved in actively looking for properties that are below market value, purchase them quickly, make major repairs if needed, then find buyers. And like wholesalers, you must have a strong network of buyers, sellers, agents, investors, handymen, bankers under your helm.
Real Estate Investment Trusts (REITs)
If you are up for the passivity of real estate but thinks that holding properties is still way beyond you, you may opt to invest in REITs. REITs are companies that own and operates – case to case – properties that produce income. These can range from offices, apartment buildings, warehouses, shopping malls, hospitals, hotels, and the like. With this strategy, all you have to worry about is selecting the best REIT that suits your appetite where you can make money in both the short and long term.
REITs, however, are more like a hybrid between real estate and stocks. So if you are the type of person who wants to get their hands dirty in the world of real estate, go for the former strategies
Expectation vs Reality for Investing Strategies
In this last part of the book, we’re going to debunk some of the false expectations that surround the real estate and share with you the reality and what it’s exactly like without sugarcoating or making it sound dramatic, just a real and honest information on what real estate investing is going to be like.
- Expectation: Real Estate is a Passive Investment
- Reality: It’s not really. Let’s think of it more as a tip of the iceberg, but to get the real estate to the point where it is a pretty passive investment, it requires a lot of work to get to that point. Simply put, it is true that there will come a time when the revenues from your investment become passive, but it comes with a condition that tons of hard work must be put at the start.
- Expectation: You need to be your own handyman
- Reality: It’s actually not a requirement to know how to repair all sorts of things that get broken in your property. In fact, some real estate owners only know how to screw a light bulb, nothing more! In cases like these, it is wiser to get a highly dependable contractor to do minor repairs, finish-ups, and other minuscule concerns for you than yourself.
- Expectation: You need to have a lot of cold cash to start investing in real estate
- Reality: It is true that you need a lot of money, only if you are looking at the total investment price of the property you are looking to acquire. Oftentimes, you got to have to spend around 10 – 25 percent in a down payment on the purchase price and will vary by area. It is important to look at the terms because some may have 0 percent down payment but will get back at you in the amortization while others have a certain percentage of down payment but has a more affordable amortization. A good rule of thumb for this is to make sure that your cash flow can handle the down payment, the amortization, and some extra cash to make minor repairs and renovation to the property with the goal of making it pay for itself.
- Expectation: Solving problems in your property is the same as with reality TV shows
- Reality: Nope. The reality is the things you watch from TV shows are nowhere near in real life. On TV, they will show you a manufactured problem – most of the time they are minor and just an inconvenience – and loosely script stories to make it interesting to watch. When you own a property, you must be prepared to face minor and major repairs that spring up every now and then. After all, it’s not always dramatic or exciting as what they show you on TV.
But don’t get us wrong, real estate investing is a lot of fun because there is a lot of creativity and determination involved in your part. One of the most exciting parts of it seeing the property from nothing and then you intervene to bring life to it.
- Expectation: You will make a ton of money in real estate investing
- Reality: Same as with the first expectation, it is somewhat true and depends on a case to case basis. For instance, you shouldn’t expect to cash in a ton of money just by owning one property. The real magic happens when you start to scale-up the number of properties and the value that they have. It will start to add up and come out with something significant.