You may have every intention of getting started in the real estate business, but unless you know how to get off the ground you won’t get very far. One of the worst things you can do is to blindly buy without having a firm strategy in place. All it takes is a few bad deals and you will quickly find yourself out of the business. Conversely, if you know how you are going to buy, in what areas and what your end goals are, you will be a much more efficient, effective investor. Before you make your first offer, there are a few basic steps every investor needs to take.
Be sure to start with a plan. The real estate business can be very overwhelming if you don’t have a plan. There are many different ways to close deals and numerous options once you do. Between flipping, wholesaling, foreclosure auctions, short sales and commercial properties, there are literally dozens of different scenarios that can come your way every day. The first thing you should do is to develop an idea of what kinds of properties you want, in what location and for what price point. When you are just starting out it is best to pick a certain area or property type and make that your focus. This way you will be able to quickly evaluate a property that comes your way. It really doesn’t matter what you decide to do – as long as you give it a fair shot for a prolonged period of time. Everything from condos to mobile homes can be profitable if you are educated and passionate about them. Start with a plan and be willing to stick to it.
- Have an action plan: After you know where and how you are going to buy, you should be ready to act quickly. The more you know beforehand, the easier the process will be. Not every investor wants to rehab. There is nothing wrong with flipping property, but if your goals are more long term, you can focus on property that you can buy and hold. Your action plan should be directly in line with your goals. There will be plenty of people in your ear telling you what you should do or how you should do it. Stick to your guns and stay true to your vision. Certainly listen to everyone along the way, but never get off track based on someone’s opinion.
- Know you exit strategy: Before you go into a project, you should have a good idea how you are going to get out. There are many new investors who think that if they buy low enough the will be able to make a profit. Not every deal you get is going to be a home run. You need to do your homework and look at true comparable sales. Just because you put work into the house doesn’t mean you will get the number you desire. You need to be realistic and accurate with what you want to, and can do, with the property once it is ready. Investors can always shift gears, but you should know if you are doing rehab work for an end buyer or with the intent to rent. This will have a direct impact on your budget and ultimately your bottom line.
- Secure funding: This can arguably be the first thing you need to have in place. The only reason it isn’t is because if you are looking for hard money they will ask you what your plans and exit strategy are. If you have funds for a down payment and are looking for traditional lender financing, you should have a preapproval lined up. Depending on how you document your income, this may not be as easy as you think. Show your lender all of your income and assets and don’t move forward until you know you have a preapproval in place. Hard money lenders don’t necessarily look at this information: they look to see that you have an idea of where you will get deals and what you will do with them after you do. If you have deals you can find funding, but you won’t be able to do anything unless you can close.
- Build reserves: Regardless if you are using your own money or a hard money lender, you will need some of your own reserves. Everything on a deal can cost money – from a title search to an inspection. You will also need money depending on what your goals are with the property. You don’t need tens of thousands of dollars to get started, but you should have enough to cover every day expenses and to generate business. Even inexpensive marketing methods like bandit signs will cost money. You don’t have to use all of your reserves but if you don’t have them it will cause you to struggle finding or closing deals.
Once you close your first deal, it will likely lead to many more. You may wait months for your first deal, but it is important to practice patience. If you don’t have everything lined up, you will get involved in deals that will be more trouble than they are worth. Your first investment deal is something you will remember throughout your business. If you want to remember it fondly, take steps to ensure you are ready to buy.