Written by Victor E. Bomi, ATLCO REAL ESTATE ADVISORS
1. Don’t Speculate – A lot of beginner investors watch shows like HGTV and think that it is as easy as buying a property for $80,000, putting $30,000 and somehow they will sell it for $300k and make a $189k profit. The key for you to be a successful investor is to set a reasonable expectation from the beginning. You need to know what properties in excellent condition within a 0.5-1 mile radius of your target investment property are selling for. We call these COMPS. You also need to know what properties with the same bedroom/bathroom as your investment property are renting for if you intend on renting.
Invest based on real numbers that you can actually see, not based on what you “want” them to be. Also, when it comes to renovating homes always be conservative with your repair estimates. Get bids from licensed contractors and add a 10-20% contingency for unexpected expenses to that estimate. If you do these things – you will sleep better at night when investing in real estate.
2. Not All Agents Understand Investors – Real Estate Agents are great to have on your team, however a lot of them don’t understand the real financials that go behind actually investing in real estate. Most of them come from a traditional retail background and don’t actually invest in real estate themselves. So it is important to work with experienced real estate professionals who can educate you on the market and professionals that understand key metrics such as cap rate, vacancy rates, return on investments, holding costs, cash on cash returns, net income, cash flow and some of the other financial metrics that investors need to know.
Ask the agent and professional what types of returns have they been able to get their investors? Do they even have experience working with investors? What type of investors do they usually work with? These are 3 simple questions you can ask to qualify your agents before ever deciding to do business with them.
3. BUY GOOD DEALS! – Don’t Pay Retail for an Investment Property – You make your money when you “buy” – this is an age old saying in the real estate investing industry. It is important as an investor that you focus on buying “good deals” because this increases your overall return on investment. Good deals can be defined as any investment in which you are acquiring the property at steep discount to retail.
Typically most of our investors look for 65-70% “all-in” discounts off the retail price. all in means the purchase price + renovation costs added together can not equal more than 65-70% of the actual retail value of the home. Regardless of whether you aim to be a landlord or a rehabber, this rule of thumb will keep you in business longer and leave you with a lot of equity in your investments.
This rule works mainly for single family residential acquisitions but for commercial acquisitions the key to understanding if it is a good deal is to pay attention to the net cash flow of the investment and look at the expenses / debt service. To determine the value and overall returns for those types of investments. At ATLCO, we specialize in finding this types of opportunities for our investors and educate our clients on a lot of these key financial metrics to make sure that they understand the profitability of each investment. The key here is to be patient and not jumping on the first opportunity you get just because you really want to do a deal.
4. Teamwork Makes The Dreamwork – Don’t try to do it all by yourself. The most successful investors have a team of people around them that work together to help them accomplish their real estate investment goals. Who is your real estate attorney? Your licensed agent? Real estate investment advisor? Your contractor? Insurance agent? Your asset manager?
The key to being a successful investor is to focus on your own strengths while letting the real estate professionals around you focus on their strengths. When you have a great team working with you then you will be able to accomplish your real estate goals in a much more efficient and prudent manner. Since its inception, ATLCO has spent a lot of time building relationships with key resources that our investors would need in order to be successful; all in house.
5. Learn Your Market. – It is also good to be proactive and educate yourself. Don’t just rely on the information other people give you. The real estate market is cyclical. It goes up and it goes down. Pay attention to which market cycle you are in. Educating yourself about the market is key when you first decide to invest in real estate so learn what areas are hot, what areas to stay away from, and where the market is trending.
Pay attention to where corporations are moving into in your market, where there are a lot of cash sales going on, where there is a lot of construction activity and positive percentage of population growth, where the schools are great, and upcoming plans by the city to create new developments, commercial centers, in the area. Those are some key indicators to notice when trying to educate yourself about your market and trying to decide what areas to invest in.
6. Don’t Get Emotional – It can be very easy to fall in love with a project that you are a part of however this is where most beginning investors start to lose their money. Focus on your numbers when investing and your key financial metrics that must be met for you to generate the most profit and most net return on your investment. Basically, don’t take on a project like it is a house that you will be living in. Instead, know what amenities other retail homes which have recently sold in your area have. There is no need to reinvent the wheel or try to be “super extravagant” when it comes to flipping / renovating homes, because it can cost you money and increase your project costs.
Don’t ever fall in “love” with a deal, just because you really like the house, or love the area . Make sure that numbers actually work first before deciding to move forward with any prospective real estate investment. Don’t OVER-RENOVATE your projects. its okay to save money by going with mid-grade appliances or fixtures if it means you will get to keep some cash
in your pocket. Always remember, it is better to pass on a deal because it doesn’t fit your required return on investment than to OVERPAY and buy a bad deal.
7. Have A Realistic Plan – It is important for beginning investors to set realistic expectations for what they can accomplish in a given period of time. Have a good understanding of your current financial situation, your monthly income, monthly expenses, and what you can realistically afford to invest into real estate investment projects. Real Estate Investing, like other investment strategies, involve risks and is not for everybody. One of the things I enjoy the most at ATLCO is being able to sit down with each investor, learn about their story, their background, discussing their financial goals, and putting together a practical and executable real estate investment plan that can help them accomplish their financial goals.
8. Define Your Key Strategy – There are many ways to make money in real estate such as wholesaling houses, buying tax sales, renovating houses, buying rentals for cash flow, developing new construction, acquiring commercial properties to lease or flip, etc. These are just a few of the ways that investors we work with at ATLCO tend to invest. The key tip here is to make sure that you have a focus and a niche.
Don’t try to be a jack of all trades in the beginning of your investing career. You will be better off picking a specific investment strategy and surrounding yourself with the resources needed to be as successful as you can in that investment strategy. There is a lot of money to be made in all those niches I mentioned above. When first starting out, pick a strategy and give 110% to be successful at that strategy, then move on to newer strategies if you desire to do so.
9. Be Flexible – Yes, I may have said having a “defined” strategy is important, which it is, however something that is also equally as important is to be flexible. What will you do if your primary strategy is flipping and you decide to invest in an area that is more suitable for is more suitable for buying & holding properties? Will you give up or will you look for an alternative?
The correct answer is to look for an alternative, such as considering another market that may be more suitable for that strategy, or consider implementing a new strategy such as buying & holding. The key here is to not think small and limit yourself to just one place or one market and consider expanding your horizons (and working with people who are local experts in those new horizons in which you are considering).
10. DON’T OVER LEVERAGE YOURSELF – Did you hear about the slaughter that happened in the 2008 housing crisis? If you did, you are not alone. Many investors lost everything, their entire net worth, cash flow, and wealth were wiped out during the housing crash. A lot of the investors who were wiped out over-leveraged and speculated, believing the market was going to keep rising (speculation / counting on appreciation). Instead of over-leveraging, try to maintain a good mix of properties in which you have financed and work towards adding a few free and clear acquisitions to your portfolio as well. That way in the event of another financial crisis you won’t lose “everything” because you can still count on the monthly cash flow from your free and clear investments, especially if they have a low vacancy rate.