Getting invested in real estate is not always easy, especially when you don’t have a clear-cut path. Here are four basic steps to consider when looking into investing in Real Estate.
To hit a bullseye, it helps to know where the target is. Here are a few questions, everyone should consider when putting together their business plans.
- What are your goals? Can you live with an investment that doesn’t generate immediate returns or do you need cash immediately?
- What kind of diversification do you want to have in your investments?
- Do you want to control your deals as a property manager and only decision maker or are you willing to invest with others and be a passive investor?
- Investing always involves risk. What will you do to minimize your chances of failure?
- Are you going to focus on a specific asset class or are you going to look at everything?
- Do you have heirs you want to leave assets to? How does retirement influence your decisions?
- Where do you want to invest; big cities or rural locations?
- Do you want to invest in development deals, leased out single tenant retail properties, or some sort of residential play; i.e. condo for rent, multifamily?
Although it is essential for every business plan to pivot according to changing times, life events, or regulatory developments, always keep your business plan in forefront of your mind. In every investment decision you face, ask yourself what is right for your specific plan.
2. Purchasing Power
When you find a great opportunity, you usually have to act fast. Therefore, you have to position yourself for when that happens, before it happens. Capital for real estate can come from :
- Your own resources including your Savings & IRA.
- Partners or private-money investors.
- Traditional mortgage.
- Hard-money lenders—high interest, but they act fast.
- A syndication, fund, or REIT – this will give you opportunities you may not encounter on your own, management for a fee, and a pool of partners capital.
3. Target an Investment
If you plan to be your own investment manager and not go the syndication//fund/REITs route, you need to get plugged into the market for knowledge and intermediaries for opportunities.
Real estate brokers are the most obvious resource, but the best ones will understand your strategy and help you understand what you are purchasing. They can be invaluable because the good ones will also tell you not to buy a property if they don’t think it is for you.
You have to be careful. Brokers work on commission, so some brokers focus more on the commission than on you. Contact other landlords. Often times, a seller you know will want to sell you a property over someone else because of the relationship and your reputation.
Lawyers, architects, contractors, and anybody active in the real estate world can bring you an opportunity. They are, after all, in touch with landlords. Keep yourself available to connect with potential opportunities and be patient for the right opportunity.
4. Assemble your team
Be quick in tying down a property, also you must have a team to get you through escrow and then to help you navigate your management. Here are a few key team members to build relationships with now …
Inspectors help by giving you assurances as to the status of various parts of the property, including the HVAC system, plumbing, and electrical. They also can sometimes point you to other inspectors if they suspect additional concerns like mold or structural problems.
Contracts are a huge part of doing any real estate transaction. Having a trusted lawyer by your side is essential. Even when you have great relationships with the people you do business dealings, you should seek the advice of a lawyer.
This applies from the time you write up an offer, through the escrow period, and including but not limited to loan contracts, lease agreements and all escrow papers. Once you close on a property, you will have tenant agreements generating income. That contract should be reviewed and sometimes drafted by a lawyer as well.
Depending on what you are purchasing and how, different lawyers should be utilized. Land use attorneys may help with zoning and potential development/regulatory questions. Business attorneys help you get an LLC together. Estate and tax attorneys help you structure your investment as well.
Your relationship with a loan broker or lender is key for many reasons. Besides helping you figure out what your purchasing power is and putting you in contact with the right lender for your deal, you will be going through escrow together. You need to pick the right lender in relation to your strategy and keep an eye on terms in loan documents that don’t work for you.
Although your inspector may give you a list of the defects of your potential acquisition, your contractor can tell you how much it will cost to repair. This includes any additional construction you plan.
If you have a bookkeeper, you may have some breathing room before you need an accountant. That said, the tax benefits of real estate can be huge. Depreciation, expensing legitimate capital improvements, distributing income, and preparing tax returns are all essential parts of owning a property. An accountant will help to do this according to GAAP protocols.
Whenever you buy a property, you should be talking to brokers about property values and income potential in order to understand the market demand in that particular area. Although brokers may differ greatly in their opinion, listen to their rationales and then make your own assessment. If they are active in the market, they can accumulate a wealth of knowledge by hitting the street and seeing what the demand is like.
Once you have this organized, It is imperative that you understand how Real Estate Purchase contracts work. Read this to learn more.