Why should entrepreneurs invest in the first place? The answer is: to have enough money to live on when we no longer can or wish to work. To put that money aside, however, we have to accumulate enough to offset inflation and the taxes that erode our savings. And for that purpose, real estate is an excellent solution.
The great thing about real estate is that even in a bad economy, it will usually fare better than stocks. Land, after all, is a finite resource. People need a place to live, work, shop and play — so real estate is really just a matter of supply and demand.
What’s more, real estate will continue to appreciate despite occasional slow-downs in the economy. In fact, it’s proven to be the best way to create wealth, and an investor need not be a genius or a millionaire to succeed. Here are some tips, then, for entrepreneurs on getting started and succeeding in real estate investing:
1. Do — plan your financial goals.
Before you buy that first property, or do your first analysis, determine what you expect from your investments. What are your financial goals? We often discuss the “time vs. money” concept: The more you have of one, the less you need of the other to reach your financial goals. This means that you shouldn’t shy away from taking the time to understand your goals and make sure each investment is a step toward achieving them. If you are unsure exactly how to create financial goals, meeting with a financial advisor is an excellent first step.
2. Don’t — spend a fortune on books, tapes and seminars, then just put all that information on a shelf.
You absolutely do need to learn some basics before venturing into investing. So, be sure to do some studying, but don’t let “buying and collecting” information become your endgame. Again, having goals in mind will make the process much more straightforward. It’s easy to get so tied up in the “research” phase that you never actually take action. Instead, write down specific questions you want answered or goals you want to meet before delving into the latest book/seminar/etc.
3. Do — look at plenty of properties.
Don’t just grab the first property you look at. Too many investors buy properties because they “look nice,” or the investors don’t want to put the work in to look at what’s really out there. Remember, you won’t be living there, so don’t make your investment decision based on your personal preferences. While you shouldn’t fall into the trap of analysis paralysis, make sure you are thorough in looking through properties. Give yourself a wide range of options, then narrow them down based on the criteria (goals) you have set for yourself.
4. Don’t — postpone starting your investment program because you’re waiting for that perfect “unicorn” deal.
That’s the flip side to number 3, of course. Plenty of beginning investors suffer from “a-better-deal-may-be-just-around-the-corner” syndrome. This can backfire in a big way, and you could potentially let a great deal slip just because you’re holding out for something better. Your task may feel difficult if this is your first property, but you must realize that the “perfect deal” rarely (if ever) exists. Better to execute on a deal that meets most of your criteria than wait for another that may never come.
5. Do — a thorough financial analysis.
Be realistic. Look at different alternatives to determine which makes the most financial sense. And never buy property at a higher price or on less attractive terms than your analysis says made sense. Be wary of sellers that try to over-estimate the value of the property through pro-forma (estimated) data. While you can certainly use a pro-forma to start the conversation, make sure you know the real numbers before closing. Look at previous years’ tax returns, property-tax bills, maintenance records, etc. to get a good idea of the real income and expenses.
The most important figures you should know are:
Net income (income/expenses)
Cash flow (net income/debt financing payments)
Return on investment (cash flow/investment)
Cap rate (net income/property price)
Cash-on-cash return (cash flow/investment)
Total ROI (total return/investment)
In each case, “investment” refers to how much you invest in the property. “Debt financing” refers to any loans you may have to take out to buy the property. And “total return” refers to cash flow, equity accrual (i.e., equity gained from your tenants paying their rents), appreciation and taxes.
Once you have understood these figures, you should have enough information to determine whether or not acquiring the property fits with your financial goals.
6. Don’t — try to buy property that the seller is not motivated to sell.
If the seller is motivated to sell, you’re not likely to get the price best aligned with your financial goals. So, how do you know if a seller is motivated? Look at the asking price. For example, If the property has been on the market for a year for, say, $200,000, with little-to-no price reduction, the seller is clearly not very motivated to move the property. However, if that same property has been on the market for a year and has had its price moved down considerably, the seller most likely wants to do whatever it takes to get the property off his or her hands. Of course, this raises the question of how to find motivated sellers. There are many approaches, and not all of these will work for you, depending on what property you want. But a few trusted methods include:
Attending open houses
Looking for vacant/unattractive properties that are for sale
Spreading the word about yourself and what properties you are looking for — truly
Going the old-fashioned route and looking in the classifieds of your local paper
These are just a few ways to find sellers, but there are potentially dozens of other methods, depending on what type of property you’re looking for.
7. Do — know the difference between real estate investing and the business of real estate.
As an entrepreneur, you already have a business, and real estate investing is best used to support that business, not replace it — unless that’s your intention. In other words, don’t get so caught up in executing transactions that your core business falters. If that happens, you’ll be facing a bumpy road to get back to stability. Unless your business is itself real estate, or you’re looking to get into the business full-time, always remember that pursuing these deals is a means to an end, not an end unto itself.
So, if you’re interested in staying ahead of taxes and inflation while building security for the future, real estate investing may be for you. What are you waiting for?
Source: Entrepreneur.com
I really appreciate your tip on not waiting around for the “unicorn” deal. I’ve been thinking about getting into real estate investing, but have been unsure whether it is more profitable to just start getting experience with smaller things or wait for the golden opportunity. Thank you so much for the real estate tips!
I like your comment on avoiding spending a lot of money on information that you won’t necessarily use in the future. I think it is wise to brush up on new information but only if it is practical for the investment. I’ll have to consider your real estate tips if I ever decide to do some investing of my own.
I loved when you mentioned how you should take the time to carefully go through several real estate properties and invest only on the ones that align with your goals. It makes sense that taking the time to do this can help you invest in real estate that can provide a good return and will help you with your financial situation. My brother was talking about how he wanted to invest in real estate, so I wanted to look into it too.
My cousin is an entrepreneur. He wants to invest in real estates because of its profit stability. He’s now looking up some real estate properties and agents who can assist him.
I like that you mention looking at multiple properties before making a decision. My brother is looking to hire a real estate company but needs tips. I’ll be sure to talk to him about finding a professional who can help him look at multiple properties before making a decision.
I really like what you had to say about looking at many different properties and not settling on a home that you do not like. Just like you said, you should never just grab the first property you look at, but you should find a place by opening up your options. My fiance and I are looking for a place this spring, and I think that opening up our options to apartments, homes, and even condos would be a good idea for us. Thanks again!
I never thought out going the old-fashioned route and looking in the classifieds of your local paper! My younger brother wants to get into real estate with his wife this year and is looking for ways to start. I think I will talk to him about looking through the local paper and working with a professional.
My husband and I are thinking of investing in real estate, but we don’t know a lot about this field so I am glad I found this article! I like that you say to look at plenty of properties because you want to make sure you know more about the house than just if it “looks nice.” Also, I agree that you should not wait to invest because you are waiting for the perfect deal because you could let good deals slip while you are waiting. I will have to tell my husband about these tips!
It really helped that you talked about looking at multiple properties before making a decision. My dad is looking to buy into real estate but wants a bit of help. I’ll be sure to talk to him about working with a professional to compare properties before buying.
I agree that you should first make sure you plan your financial goals. You want to make sure you know how much you can afford when buying a home as well. I like that you said you should make sure each investment you make is a step toward your goal.
I have been thinking about getting some real estate and I wanted to look up some information. I really appreciated how this article talked about looking at plenty of properties. I agree that its smart look at all of the options before jumping into a deal.
Couldn’t agree more. Investment in real estate is more stable and stress-free as compared to investment in stock. However, a lot of factor needs to be taken into consideration prior to investing in real estate and I would like to thank you for highlighting such information. One should conduct a lot of research to gather in-depth knowledge regarding such business prior to the investment. By doing so, one could make a profitable deal.