I Want to Invest in Real Estate

So, you’ve been binge watching real estate shows on HGTV (Good Bones, Flip or Flop, Property Brothers, etc) and decide, ‘I need to buy some rentals, how hard could it be’? That’s great! It’s really not hard, but first a reality check, it’s not easy to find real deals, rehabs are expensive, building a network takes time, tenants have drama. But you gotta deal with all that to invest in real estate.

But here’s what I think is the biggest issue, are you mentally, financially, and emotionally prepared to invest in real estate?

Hey, you’ve read this far, but who am I? I’m just a guy that wants to share some of my experiences and the knowledge I’ve gained along the way. I’ve owned real estate for over 40 years and seen a few market cycles.  Actively investing in real estate for the past 15 years.  I’ve done a few single family home flips here in Utah, I really like the market here and think there’s going to be continued appreciation growth, especially in Northern Utah (Weber & Davis counties).  I’m now focusing on multifamily properties and have been investing in Indiana. 

3 BIGGEST ISSUES 

As you get ready to start to invest in real estate, here are the 3 things I think you should consider: Financial preparation, Mental preparation, and Emotional preparation.

FINANCIAL PREPARATION

If you’ve got a ton of credit card or consumer debt, stop reading this now and deal with that first.  I believe that everyone needs a financial education and they’re probably not getting that in schools. 

To Invest in real estate takes money, if you don’t have any it’s not for you…right now.  I’ve seen a ton of ‘gurus’ that talk about ‘investing with no money down’, ‘start wholesaling properties’, ‘find a money partner’.  I’m also not going to talk about ‘Hard Money Loans’, this can be an option but I feel like it’s for more experienced investors that understand the risks. More on this in another blog post (put link here)

My opinion is that a first time investor should be in a pretty good place financially, they need to have a budget in place, should be contributing to a retirement plan (401K, IRA, etc), and have short term savings of 3-6 months of living expenses.  If you’ve got all that covered, then you’re probably ready to consider investing in real estate.

Most investment property will require a 20% down payment just to buy the property.  Additionally you’ll need cash in reserve to handle repairs, property taxes, insurance, and the mortgage payment (if you have vacancies or tenants stop paying).   

MENTAL PREPARATION 

The key to this is education.  You need to learn enough about real estate investing and your target market to be able to recognize a deal.  Hint, you won’t find many real deals.  Let me repeat that, you won’t find many real deals! Build a network to help you with your education / knowledge.  Use online forums (BiggerPockets is one I like), attend your local REIA (Real Estate Investment Association), talk to agents, and even look at deals provided by wholesalers (be really careful here).  Here’s a link to another article about deal evaluation and terminology, investment criteria.

I’m really conservative, and I know it’s caused me to miss some opportunities.  But, in real estate you need to verify every bit of information.  There’s too much money at stake, and too many unethical people that will take advantage of new investors.  So, be careful and do your research.

Build a network of people you trust by taking the time to ask questions and verify what you’re being told, and get referrals / references.  Here’s a link to another article about an unethical turnkey operator that burned quite a few investors.

EMOTIONAL PREPARATION 

Ok you’ve got your financial prep checked off, you’re educated and have a few trusted resources to help you, now what?  

This one was hard for me personally, I just kept second guessing myself.  Running through ‘what if’ scenarios, until I’d convinced myself that I was guaranteed to lose money (not true).  One thing that helped me was talking it over with my spouse.  If you’re in a relationship, you both need to be on the same page when making decisions (36 years of marriage has taught me this).  

Things will go wrong in real estate.  You need to make your best effort when analyzing a deal, but trust me on this, once you start operating the property it likely won’t follow your model.  If you bought a property in December 2019, would you have predicted the impact of COVID? Not likely.  I’ve been fortunate with my tenants, most have continued to pay on time or worked out a payment plan.  But I’ve also had one tenant that hasn’t paid since April when he lost his job. I’m sympathetic, but I’ve got a mortgage to pay.

So, how do you prepare yourself?  Don’t expect it to be perfect.  Unforeseen things will happen, but you need to make sure that you have a plan to deal with it.  Most problems in real estate can be solved by writing a check.  If you have financial reserves, you can ride out the short term problems and take advantage of the long term gains.  Remember, real estate is a get wealthy slow investment.  Here’s a link to another article about a how RE builds wealth

CONCLUSION

I’ve covered a lot in the article, and provided links to additional articles about specific topics.  I believe that if you invest in real estate it will be a great way to build wealth over time.

As a new investor, don’t spend your last dollar on a real estate investment, it only takes a few repairs or vacancies before you’ll find yourself in trouble.  Hopefully any properties you buy will perform well right from the start, but you’ve got to plan for the worst and make sure you have the reserves to cover it.  

Get educated and learn the neighborhoods. Buying properties in sketchy areas will always look good on paper, but the risk is huge.  Establish what your investing criteria is, what kind of returns you’ll be satisfied with, and how much you want to risk on your first property.

Being a landlord isn’t for everyone, but as an investor you have the option of hiring a property manager to deal with tenants.  Just make sure the property still cash flows and meets your investment objectives with the additional property manager expense.  But, this is a good way to insulate yourself from a lot of the daily operational responsibilities.