Getting started in any new business is not easy. You will never know enough, or even have enough money to be completely comfortable. There will always be people in your ear telling you what you should do, and how you should do it. Even if you feel you have a good grasp on the business, there are always things you can do better. Before you make a mistake that can cost you, here are seven tips that every new investor should follow:
1. Do your homework on every deal: When you are just starting out, there is a tendency to go over the top with your due diligence. After a lost deal or two, you may start to do less and less. This is the worst thing you can do. If nothing else, this is the time you need to be doing more. Learn as much as you can. You can never let your guard down and pursue a property you don’t know everything about. One misstep on a foundation or with a roof can cost you thousands. It is imperative you do your homework on every single deal.
2. Stay persistent: As investors are starting out, they are typically filled with excitement and energy. They want to do as much as they can to get their name out there. They vow to attend every local networking meeting and investment club. Odds are, however, that you will not be an overnight success. You need to focus on doing the little things every day. Stay persistent, as it will help you reach your goals faster than you ever expected.
3. Know your numbers: Numbers are the key to everything you will do in the real estate business. There are tons of different formulas that will help you evaluate deals, all of which are based on numbers. Before you pursue a property, you need to know the numbers and where they came from. Never trust the numbers from the seller or on a listing sheet. Verify your own information, and never go into a deal until you are totally comfortable. If you are not a numbers person, lean on your accountant until you get the feel of it.
4. Have a marketing strategy: You are only as good as the leads you generate. Upon entering the business, you will not be showered with more deals than you can handle. You have to go out and get them. After you write out your business plan, the next step is to write up a marketing plan. You do not need a big budget to have a marketing plan. You can start with some bandit signs and business cards, and work your way up to a direct mail campaign. As long as you do something, you give yourself a chance at success. In most cases, you need to do more than you think. A good strategy has multiple streams of lead sources.
5. Understand costs: There are costs with almost everything you do in the real estate business. Little things like business cards, a new printer and updating your phone costs money. Once you start getting involved in deals, you will need money for title searches, inspections, appraisals and all of the various closing costs. You need to know all of these costs, what they are for and where they are going. Furthermore, you need to have capital to pay for them. Without money to cover all the costs, you may get stuck in a deal or be forced to take short cuts you know you shouldn’t. Understand your costs and be prepared to face them.
6. Don’t expect equity: One of the biggest mistakes that new investors make is thinking that values will automatically rise. This is the case whether you are looking at a rehab or a buy and hold rental property. Improvements and upgrades will help, but even they won’t guarantee an increase in value. You need to understand comparable sales for your market and how you property stacks up to them. It is far better to base your buying decision based on monthly cash flow than projected equity. Equity may increase, but it is largely dependent on your market.
7. Invest in good areas: When you are just starting out, you may look for the least expensive properties to get involved in. Typically, these are located in less desirable areas. While it will be easier to get started, you will have trouble finding good tenants and getting top dollar when you sell. It is always better to buy a more expensive property in a better location. Even if you only close half the amount, it will be better for you in the long run. Properties in better areas hold their value much longer.
Focus on the important things when you are just starting out. Eventually, things will start to slow down for you a bit, and you will get a feel for what’s important and what’s not. Your first year in the business will go a long way in determining where you end up. Follow these seven steps to give yourself the best possible chance at success.