When dealing with real estate investments there are many steps to go through before investing. Here are my top 10 keys to a successful real estate investment.
(1) Education – If you are not experienced in real estate investments the very first thing you should do is to get educated. Take the time to find out what all of the risks are in the investment type you are interested in. Find others that can help educate you on the investment type, which are not involved in the transaction you are doing specifically so there is no conflict of interest. Buy books, tapes, and go to multiple seminars in order to continue your education, and don’t buy the $5,000+ books and tapes sets from the gurus. Buy your educational material from the bookstore and save yourself thousands of dollars.
(2) Goal Settings – If you do not have a goal lined out for your real estate investments how do you plan on getting there? Most investors buy one property, or invest based on emotion rather than having a set goal in mind. For example, you could have a goal of obtaining $30,000 per month in passive rental income from your investments through buying single family rental homes and apartment buildings. Your goals should be clearly defined and should include protections and risk mitigation techniques to make sure it is a stable viable plan that can be obtained.
(3) Building Your Resources- You WILL NOT become a successful real estate investor without resources. In real estate resources include, capital investors, property leads, team members and much more. For this you must go to networking events if you do not already have your resources built. It’s imperative that you go to networking events and expand your relationship base. Real estate is a team sport so if you do not go network you cannot build your team.
(4) Building Your Team -In order to make your investments work you must build your team. Some of the team members you need are Real Estate Agents, Brokers and Bankers, Private Lenders, Appraisers, CPA’s, Attorney’s, Affiliates, Inspectors, Property Managers and Contractors. There are much more but it’s pretty impossible to name them all. It takes quite a bit of time to develop your team and make sure they can be relied upon. I have found that building a team is the most important aspect of investing other than your due diligence on the investment itself.
(5) Due Diligence – Before investing in any real estate asset your due diligence is crucial. You need to analyze the market your investing in, the market timing relative to that market, the specific neighborhood, the market value of the investment, the cash flow it produces, the rental income it should bring in, all of the expenses related to the investment and much more. Inspections should be done as well as review of all of the backup documentation such as leases and contracts. Think like an auditor, review all of the backup information provided by the seller and verify it with an outside source as much as possible. I hear horror stories all the time about how people lost money in real estate. After inquiring as to what happened I can say that 99% of the time the investor did not do or know how to do the right due diligence on the investment in the first place.
(6) Property Management- Property management can make or break your investment. If you do not have a competent property manager that actually cares about your investment and your success you will have a losing investment. We went through about 5 different property management companies before finally starting our own company and bringing the management in house. Most managers are bad at some of the basic management functions such as accounting, rent collection, tenanting, leasing and background checks, repair calls and taking care of the tenant. By far the most important and biggest problem is communication with the owner of the property. Communication is crucial because without communication the investor cannot make decisions regarding the investment and lack control. Property management also needs to be structured based on performance, meaning, they get paid if it’s occupied only, not when it’s vacant and there are incentives in place to optimize performance.
(7) Marketing – If you do not know how to market for property, capital, property sales, and resources you will not be successful in real estate. Marketing and sales is one of the most important parts of any business. During economic problems and recessions most companies cut back on marketing when it’s most important to increase your marketing efforts. If there are less investors, buyers, and resources available because of the economy, there is more of your competition going after your resources. So in order to attract those resources before your competition you have to market more. Marketing and sales is a business all in itself so getting educated on marketing strategies is imperative to your success. When most people think marketing they think of posting classified ads, sending out mailers, coupons, billboards and more but the most important and underutilized marketing strategy is internet marketing. Internet marketing is revolutionizing the way most companies market and if you do not understand it or start to learn about internet marketing you will not gain the market share you deserve and will not be as successful. 85% of buyers go online first for investments. It is an online world weather you know about it or not.
(8) Treat Your Investments As a Business – Most investors buy one real estate investment and do not fully utilize all of its capabilities from a business perspective. If you own one property or 50+ properties you should be treating it as a business. Be sure to keep track of ALL of your expenses related to the investment, the due diligence you did, travel costs you incurred, etc so that you can get a deduction for those items against income from other sources. These types of expenses can happen annually and a percentage of your personal expenses can be used as a tax loophole in order to deduct more against your active income from your job. Your biggest expense in life is your taxes. It is the government’s job to find more creative ways to tax us. It is our job to find creative ways to legally not pay taxes. If you are not winning against the government, start to educate yourself on key tax saving strategies.
(9) Legal Protection And Tax Structuring – It is crucial that you protect yourself from financial predators. There are people out there that will sue anyone they possibly can. It’s really important to obtain additional umbrella insurance or put your assets into a proper entity so that you are not liable in frivolous lawsuits. Generally for tax purposes you want to keep passive investments (investments like rental real estate that produce income you do not work for) in an LLC and active investments (investments you actively work for) in an S-Corporation or similar entity. Please consult your individual tax advisor to go over your specific situation as it is impossible for this advice to relate to every situation. Also be sure to keep yourself separate financially from the investment or entity you hold the investment in so that you do not pierce the corporate veil. If you co-mingle your funds there is a very real possibility that in court your legal entity protection that you worked so hard to setup is worthless.
(10) Investing In Sustainable Investment Types – Invest in asset types and real estate investments that are sustainable in the long run. Look closely at the cash flow included in the investment. If it’s negative, unless you are flipping, do not invest. Flipping can be much more dangerous than investing for cash flow because you typically have a payment on a flip investment that is not covered fully by the rental income and if you get stuck with the property you find yourself in a negative cash flow situation and can only sustain as long as you have money in the bank that can make that payment. Many people lose a lot of money trying to flip property, not knowing fully what they are doing and the risk they are taking only to lose a significant amount of money. On the other side when you are investing for cash flow only invest in quality assets. Typically if you invest in low end assets in your market you get low end tenants also. What I consider a low end tenant is someone that does not pay the rent on time if at all, causes damage to your property and is a nightmare to deal with. This happens quite frequently in low end property for a particular market. You want to invest in quality long term assets that are going to produce positive monthly cash flow and make you a great return on investment after you have been conservative with the numbers.
I truly believe if you do these things along with increasing your financial IQ you will be successful if you work hard for it. Most of the wealthy individuals in the world work hard for their money and are constantly evaluating their financial situation and investment goals. Putting a personal budget together and reviewing it monthly, creating additional income sources, implementing tax savings strategies, protecting your money from financial predators and constantly educating yourself are the keys to becoming wealthy.