Real Estate Investing
Here are seven real estate investing tips to get started!
Helping other people obtain financial freedom is why I became a Realtor, and while many may assume my goal is to build a Real Estate Company, it's actually to build a Real Estate Company that gives me the leverage necessary to invest back in Real Estate.
Raleigh, NC, is the place I chose to build my Real Estate Investing career because it's a 'good' market headed for 'great.' Real Estate Investing is, in my opinion, the best way to build wealth for my family, friends, clients, and you.
Real estate investing is so attractive because you can use other people's money to invest (in this case, you are borrowing money in the form of a mortgage).
Real estate investing is something anyone can do, yet not everyone does. People will always rent because they like the freedom to move. What they don't consider is the freedom of being financially free. That's why investing in real estate young is a great move, you build your own equity.
Here are seven steps to take that, if executed, you will walk away with a highly successful real estate investment. Without further ado, let's jump into seven steps you can take to ensure you're buying a great investment.
1. Location
Whether you're buying a house to live in or a property to buy and hold, location is the most important step you'll take on your path to buying a great real estate investment.
Before you even begin searching for homes for sale, you need to understand where the opportunities are. In Raleigh, the city's nucleus is the Downtown area, and in recent years has become desirable. The influx of millennials wanting to be close to the action in Raleigh is sparking some serious growth and turnaround for an area once less than desirable.
Good Real Estate Investors buy where the market is good, great real estate investors buy where the market will be good in several years.
Aside from the location of the house inside the city is the location of the house inside the neighborhood. You don't want to buy the most expensive home in the neighborhood because there is a 'low ceiling' for appreciation. The properties around you are less expensive, making it harder for your house to go up in price. When you buy the least expensive home in the neighborhood, you have a 'higher floor' and a 'higher ceiling' for your home's value.
One great tip for buy-and-hold investors is to buy where there is a college campus because of low vacancy rates. The need for rentals is much higher when you have a university of 20,000+ students nearby.
In Raleigh, NC, homes for sale near North Carolina State University offer investors a great opportunity.
2. Economy
The local economy will play a factor in both rental prices and appreciation when looking for a single or multi-family home. Look at the city of Detroit. A poor economy will cause real estate values to drop dramatically, making it a bad investment. You want to find a growing city with the infrastructure to continue supporting that growth. There needs to be room to grow.
One of the first things you should consider is where people are moving. What cities do they want to live in? Places like Raleigh, Charlotte, and Austin are all big-time cities in terms of incoming residents and growing real estate markets. All of them offer a great economy with room to continue growing. Looking at real estate prices, Austin is more expensive and has seen a massive run-up in recent years.
Are they building highways, schools, larger airports, and hospitals, these are all indications of an economy that is growing.
Where are big companies moving? When large companies move to cities, they bring jobs, jobs bring money, and money brings a better quality of life to the city.
3. Demographics
Demographics are an important indicator of a great real estate investment since they can influence the housing market and home prices based on buyers' age, income, and regional differences.
The statistical data you should look for includes neighborhood income and the trend of neighboring areas. You can find the statistics on a neighborhood online, whether searching for that information on Google or with the help of a local Realtor. Local demographics greatly indicate the direction the neighborhood and area are heading in.
4. Planning Ahead
Have a strategy before you start investing in real estate.
You wouldn't go into a football game without a playbook, just like you shouldn't go into real estate investing without a strategy of what you want to accomplish.
Having a clear set of goals helps you determine a clear set of criteria that your real estate investment will need to have for it to align with your investing strategy. For some real estate investors, that might be a certain cash flow, price-to-rent ratio, or potential net income.
When I search for a real estate investment, I do it in a neighborhood or area I feel most confident has a bright future. This is the most important step for me when buying an investment. A great location can save you from a lot of other potential mistakes.
5. Remove the 'Rich Quick' Mindset
When you try to get 'rich quick,' bad things happen.
Many manipulative salespeople are trying to 'sell' you on their training programs that will make you rich fast. These are a bunch of self-proclaimed real estate investors who, if they had any success with real estate investing, wouldn't have time to sell you on something that isn't real.
Whether looking at a fix-and-flip or a buy-and-hold strategy, you want to educate yourself as much as possible. Seek out mentors, these people will guide you to success and help you stay away from any big mistakes.
Real estate investing takes time, and you are going to make mistakes. You have to be willing to put in the hard work necessary. Otherwise, you are better off investing in a mutual fund with low fees. Real estate investing has a great return if you put in the work and the time.
6. Know Your Numbers (Key Performance Metrics)
What are your key performance metrics?
Once you set your goals, you need to determine how to reach them, and your numbers need to add up.
You will need to know different metrics to make a smart decision when buying a real estate investment. These metrics are unique to each transaction and situational to your local real estate market and situation.
- Cash Flow
- Vacancy rates
- Price-to-Rent ratios
- Capitalization Rate
When searching homes for sale in Raleigh, I knew I wanted something inexpensive to provide at least a 1% price-to-rent ratio. So, if I bought a house for $120,000, I would need to be able to rent for $1,200/month.
Your numbers are going to need to line up with your investing goals. You should be able to disqualify a lot of properties before you even see them in person based on the numbers. You'll also notice that some areas will offer greater potential than others.
For instance, a buy-and-hold investor purchasing a property near a college campus will likely have a favorable vacancy rate. There will be a significant need for rental properties in college cities. We have NC State in Raleigh, which gives investors a great opportunity.
7. Time
Whether you are a fix-and-flip or a buy-and-hold investor, the last thing you want to do is trade your time for money.
What I mean by this is you don't want to spend 10,000 hours working for a $100,000 gain because that is only $10 an hour. You will want to set up a team or have things that allow you to spend your time elsewhere.
Most of your time should be spent BEFORE investing in real estate in your education and learning from mentors. You should also find ways to leverage your time to use that time you are saving to make more money (if that makes sense).
If you buy a real estate investment, you do not want to spend your time managing renters, fixing the house, chasing them down for money, or on a team of contractors.
One of the best solutions for this can be to hire a property manager to handle many of the time requirements that come with owning a rental property.
While looking for real estate investments, there are certain criteria one must make sure to stick with. The criteria completely depend on your investment goals and will differ for every investor. Since I am looking for properties to "Flip" in the Wake County area, I will be looking for single-family homes in good, family-friendly neighborhoods where houses sell in less than 30 days. I like to look for homes in areas that first-time home buyers seek out because it keeps me in a price range that more people can get into, allowing me to sell faster.
Regarding the actual specs of the house, I will be looking for homes close to the median price for homes sold in the area, specifically searching for homes with three or more bedrooms and at least one and a half baths to accommodate the average family. I like to stick with homes built between 1970 and the early 2000s; homes older than the 1970s will most likely require more work and will likely have hidden problems once you start tearing down walls (Termite damage, plumbing problems, mold, foundation issues). I also don't target newer homes because they will be fairly updated, lowering the value add I can do on a property by making upgrades myself.
Sticking to very specific criteria when investing in real estate properties, no matter your goal, is important because it allows you to laser-focus your marketing efforts on finding homes that fit your business model. It will also allow you to become an expert in a certain type of home you choose, allowing you not to become an authority in the area and complete projects more efficiently.
FAQs
What are the five keys of real estate investing?
The key pillars of real estate investing are cash flow, market appreciation, tax benefits, principal reduction, and leverage.
What is the 2% rule in real estate investing?
The 2% rule states that the monthly rent for a property should be at least 2% of the purchase price to produce a positive cash flow.
Is $20,000 enough to invest in real estate?
While you can't buy many houses for $20,000, you can still get a head start and invest in real estate with that money through a real estate ETF or a real estate investment trust.
Final Thoughts on Real Estate Investing
Whether you are a buy-and-hold or fix-and-flip real estate investor, a lot of the same tips apply.
You will likely want to focus on different areas depending on your strategy. Some great buy-and-hold neighborhoods may not offer the best rate of return on a fix and flip and vice versa. A buy-and-hold strategy in a college neighborhood makes much sense but likely not so much for a fix-and-flip investor.
Real estate investing is nothing like what the self-proclaimed gurus talk about in their commercials, YouTube ads, or anywhere else. It takes time, effort, and, most importantly, patience.
If you want to get rich quickly, you should probably play the lottery because real estate investing is how you get rich slowly.
