The Investment Purchase Process
Ready to pull the trigger on an investment and don’t know where to start? As with most investments, businesses, and other projects, a sound investment plan and strategy is key. In this post, and others yet to come, we walk you through the process of planning for your investment purchase all the way to taking the keys of ownership. This article is a “how to” for the new investor or someone looking to get into real estate investing.
1) Get Educated in Real Estate Investing
Before you start hunting for properties, the first step of the investment purchase process is to get educated on the fundamentals of real estate investing. You will want to learn how you can “run the numbers” to get a great deal financially. As with any new venture, education is key. Don’t walk into the bank and close on a property just yet! Most potential investors fail from the start because they follow a “hot tip” or “once in a lifetime investment” without learning the ropes first. If you’ve been reading the blogs here on AssetRover, you know it takes preparation and running the numbers to analyze your deals. As mentioned in Birds on a Wire, there are three books that we feel provide a great starting point for real estate education. These books are Robert Kiyosaki – You Can Choose to Be Rich (Audiobook), Ken McElroy – The ABCs of Real Estate Investing, and Gary Keller – The Millionaire Real Estate Investor. Other great books to check out are HOLD and FLIP which are part of Gary Keller’s real estate investor series as well.
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“If I have seen further, it is by standing on the shoulders of giants.” – Sir Isaac Newton
There are many books out there, and these are simply suggestions. Feel free to grab whatever books catch your eye. The important part is learning from the experts. Make sure to look for authors and experts who have real world experience and have invested successfully in the past. There are too many authors out there who are good at writing and selling books but don’t have the real world experience. Steer clear of those authors.
2) Form Your Team: Property Manager, Real Estate Agent, Attorney
The second step of the investment purchase process is to form your team. As you learn more about real estate investing, your educational books, mentors, and seminars will likely tout the benefits of forming such a team. They are certainly right since real estate investing is not a solo endeavor. Once you learn about real estate finance, the business models, calculations, and potential risks/pitfalls, it’s time to put this knowledge to the test in the real world. If you are just getting started and don’t know how to begin, meet with a property manager who will really help you get a feel for what’s out there in the market. A property manager is an individual or firm who manages real estate for the owners. As discussed in 5 Reasons You Need a Property Manager, the property manager will have intimate knowledge of the market you are trying to invest in. They know what places typically rent for, how easy it is to find tenants, and which neighborhoods are the most appropriate targets. If you aren’t sure what to ask the property manager, start with these 10 questions!
Another key member of your team, especially when you are starting out, is a real estate agent. More experienced or seasoned investors may not use a real estate agent in some transactions, but even experienced investors use real estate agents to make their lives easier and to streamline the search process. Your agent can write offers, negotiate with the seller or seller’s agent, and be an extra pair of eyes and ears to search for great deals. If you are a new investor, an agent will help you become familiar with the neighborhood, will run comps, and help you find properties within your search criteria. Make sure you find a real estate agent who is familiar with investment properties. In some cases, your property manager may also offer to represent you as a real estate agent since most states require a property manager to be a broker anyway.
A third member of your team to work with early on is a real estate attorney. This step of the process is often missed because most people don’t look at real estate investing as a business. In order to Protect Your Assets, you will want to consider forming an LLC or corporation to limit your liability and protect yourself from lawsuits. If you are part of a real estate investment club, the members should be able to recommend attorneys who your area who specialize in real estate. Chances are, one might have even spoken at your club. You can also ask your property manager or real estate agent for recommendations since they should also be able to refer you to someone.
There are many more valuable people in the real estate industry who should be part of your team as you search for your investment property, but they will get involved later in the process. Just as your real estate agent and/or property manager can refer you to a real estate attorney, they can help connect you to other important people, such as a banker and home inspector.
3) Start Looking at Properties!
The third step of the investment purchase process is getting out there and looking at properties! You certainly can “window shop” when you are searching for investment properties. It’s free to look, especially with online tools out there now. Nothing will educate you quicker than getting out there and learning about your neighborhood and market conditions. In fact, nothing we’ve suggested so far really costs any money. Most of it is free–even the attorney might do a free consultation if it’s brief and leads to potential business down the road.
You can take your real estate agent (or property manager in some cases) and check out the physical properties you checked out online or in local ads around town. Find out what your criteria is. For example, you will want to know how many bedrooms and bathrooms you need, if you are looking for a 1 or 2 car garage (attached or not attached), and what style of house you want. Having a criteria and learning about your specific property will make it easier to spot trends. You may be surprised to find that the same house you previously saw for $120K is sitting across town with an $80K asking price. Take a close look at these properties, snap some photos, and ask your real estate agent for a property disclosure statement. Just because a comparable property is cheaper doesn’t mean it’s a better deal and you will begin to learn your market and what is valuable. Property conditions and deferred maintenance can bring a property’s value down quickly and make that below market discount an “above market liability.”
Head on over to our next post called “find and lock down cash flowing real estate” where we get into the nitty gritty of the real estate search process. It’s time to wrap up the window shopping and start getting serious about your next purchase!