3 Essential Steps to Start Investing in Real Estate
It can be confusing to know where to start after you have decided to invest in real estate. Everywhere you look someone is telling you to read this book or attend that conference. I have found that there are 3 essential steps to getting started. These steps are only the beginning, but the beginning can be the most important place to start!
Have your finances in order. There are some who claim you can buy real estate with no money down and I’m sure there are instances where that is true, but I believe sustainable growth and proper management of financial risk requires starting with a secure financial foundation. Whether partnering with an investor or using private money, just know that purchasing real estate requires a financial transaction. To me the most straightforward way to acquire real estate is based on your own finances. This approach requires cash reserves or assets that can be used as collateral, a strong credit rating, and a clear understanding of how much you can really afford. Some areas of your finances to examine include:
Minimize your credit card balances and outstanding consumer loans.
Maximizing cash saved and access to emergency funds.
Reduce the lines of consumer credit you have open. Watch out for store credit offers!
Define your target property. Understanding exactly what you want to purchase is important before you begin actively looking to buy real estate. This takes research and practice so you can narrow down the type of property you want to buy and the area you want to buy it. You can waste a lot of time chasing every listing or wholesaler email if you are not clear on your search criteria. For example, my target property when I was searching for my first purchase was a single-family home for around $100,000 that was turn key in one particular ZIP Code. I also knew I wanted it to rent for around $950/month. This information gave my realtor and me a very clear list of requirements to search by and saved us time by avoiding properties that were outside those criteria. Some ways to define your target property:
Drive the neighborhood and understand what it would be like to live there.
Research available properties to learn what you can get for your money.
Conduct online searches to learn typical rent for the area.
Know your bottom line. If you don’t know what you want to get out of your purchase you won’t know what you need to put into it. A way to solve this is by practicing financial analysis on multiple properties and discovering the metrics that are important to you. You will then be able to quickly analyze available properties and know if they meet your performance requirements. But which metrics are right for you? There are a lot of financial metrics that can be used to evaluate property, but what matters to you depends on your financial goals. For me, operating margin and monthly cash flow are my two most important criteria when evaluating properties. Yours might be cap rate, gross rent multiplier, or something else. The important thing here is to align your financial criteria with your investment goals.
Once you have completed these three essential steps, you will be ready to start building your team and create relationships with professionals who can help you begin investing. The knowledge you will gain by completing these steps will help others take you seriously. They will be more willing to work with you and help you build your portfolio.