5 Lessons I Wish I’d Known When I Started Investing in Real Estate

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"I just want to make money, this should be easy. They move in and I collect rent...done", that's how I thought it was going to work in the beginning. Boy was I wrong!

 

The day I had to sign my first mortgage, I remember the feeling that came across me the night before. I was scared out of my mind. I was taking on a mortgage for my first rental unit (4 bedroom condo). I remember thinking man $61,000 is a lot of money. Keep in mind that I was a sophomore in college still living at home with my parents. Not to mention I closed on the property 2 days before my 21st birthday... Old enough to own a property, but not yet old enough to drink a beer... legally at least.

 

I was working at a local community bank in commercial lending and saw all of these "deals" being made and thought to myself  I can do this. I was barely not a teenager anymore, but I convinced the bank that I could handle this and they agreed.

 

So I embarked on real estate journey at the ripe old age of 20 and haven't looked back since, however everything was not daisy's and roses along the way, but I wouldn't trade it for anything.

 

Here is a list of the 5 most important things I wish I had known about before starting down the real estate path:

 

5 Lessons I Wish I'd Known When I started

Investing in Real Estate

1. Learn how to property look at cash flow

Cash flow is often the reason most first time investors get into real estate, they want the cash flow! Learning how to property forecast a cash flow is the most important thing you will ever do, you simply need to know how to account for all the expected expenses and unexpected expenses. If you fail at forecasting you could end up $100,000 in debt with the wrong property. If this is your first property it needs to be a winner, or it could slow your dreams of buying more property for years and years...

 

You simply need to budget for unexpected repairs. 11 months into ownership and your sitting good with $4,000 in NOI (net operating income) and then all of a sudden you get hit with a water heater replacement and then to top it off the furnace goes out. Bam you get hit with a $4,500 repair bill and your in the hole -$500. "Oh this is just plain old bad luck", you say yo yourself. "It won't happen again". That's exactly what first time new investors will often say to themselves, and that's why they are first time investors.

 

A experienced investor will think good thing I planned and budgeted for this to happen, I bought this property knowing unexpected things could happen and I factored that into my cash flow when I decided to buy this property. So how do could you find a good cash flowing deal while still factoring in thousands of dollars in expense? It's not easy, but that's the name of the game.

 

If you can start into this real estate journey by accurately forecasting cash flow, you are almost guaranteed to make money, and isn't that the reason your getting into this, to make money?

2. The perfect deal isn't achievable, look for a good deal instead

 

 

I often get asked, how do you find these good deals? The answer often expected by most is that I somehow have a secret inside source to foreclosures or properties before they hit the market, or that I have a special website that I go to when looking for the "next deal". In truth yes those things can help, but I depend on the same sources as most of you do. I am online with Zillow, LoopNet....etc.  I am simply looking around and running the numbers on deals I think have a chance to cash flow at first glance.



"Perfection is not a destination; it is a continuous journey that never ends"

- Unknown

The issue we have when looking for the perfect deal is that if you wait around for the perfect deal to come along, you will never act. The perfect deal isn't there for the taking, so stop looking for it. Instead look for a good deal. So what if the house has some odd ball things to it, so what if it's not in the absolute perfect neighborhood. The single most important thing is if it works or can work with a little help then that's the deal you need to take.

At the end of the day just remember no matter how things look, just keep working toward your goal. Days will come when it seems like your idea may never get started, but don't lose hope! You will make it happen...

3.) You need a cash reserve, but you don't need a million dollars

You save up the 20% down the bank wants and the minute you get there your ready to pull the trigger on your first property. This is the mindset most people have, don't be like most people...

You need to be a smart investor, we are talking about thousands of dollars being tied up in real estate. This is your hard earned money and you cannot afford to lose it! 20% down is typical from most banks and this is fine, but you need to have a reserve set aside for the property incase something bad happens. You do not want to be in a position where you end up going back to the bank requesting a loan for a new furnace, because you don't have any money left in your savings account.

How much money do you need in a cash reserve? Great questions, the answer is I have no idea. You simply need to look at the property type and envision what could go wrong. Ask yourself the following questions: How much would a new furnace cost? How much does a water heater this size cost? Whats the ballpark cost for a new roof? What happens if my tenant doesn't pay me for 3 months, do I have enough cash saved up to cover the payment? The bank doesn't care if your tenant doesn't pay, they 100% expect you to pay them on time every time.

4. Don't become a slumlord, just don't

Chasing the first deal or maybe even the second or third deal you will come across the properties that are so cheap you will think to yourself, "I could buy two or three of these, man that would be a lot of cash flow". Yes we all know that part of town that is a "little rough" and generally has lower income levels. The houses are generally prices low and look appealing at first glance.

I know several people personally who make a lot of money investing in this low-end real estate. They are simply killing it! This is great and all but the complexities of this type of market or niche is something I do not recommend for the first time investor or even a seasoned investor. You truly need to have a set of skills that are outside the norm that most people think a real estate investor needs.

Don't look back and regret your investments of rentals in bad areas. The amount of head ache you will deal with is not worth it. Simply ask yourself the following question. If you made $35,000/year would you want to live in this neighborhood? If the answer is no, then do not invest your money into it.

5.) Learn how to be a strong property manager

If you ever want a return on your investment you need to be a strong property manager. Strong management is what separates the investor who doesn't make money from the investor who will make money. Again you got into this real estate game to make money, right?

Cash flow forecasting is so important (see number 1 above), but if you don't manage the property well the cash flow means nothing. Cash flow is simply a piece of paper or a spreadsheet that says what you should make. The whole point or goal of accurately forecasting the cash flow of a property is to be wrong with the smallest margin of error as possible. "99% of the time you will be wrong 100% of the time". The less wrong you are the more money you will make.

Do you also have a plan to weed out the bad applicants? What type of reports will you run? Credit score report? Background check report? Where will you go to run these reports? What type of standards will you look for in the reports? If you standards are to high you might not get enough qualifies applicants, if your standards are too low then you may end up with a nightmare tenant. You need to figure this out.

Will your preventive maintenance plans help extend the mechanical systems in the property? Will the upgrades and improvements you plan to do really increase the value or amount you can charge for rent? Success in the real estate games depends on finding the good deal, then managing the good deal well. If you fail at either one of those you will not make money nor will you have a good experience with real estate.

The best property in the world will lose money if you have piss poor management skills and a tenant who never pays rent. It doesn't matter how good or bad the property looked on paper if you can't manage it then you shouldn't buy it.

Why you need to invest

You just read the above points and now you may be telling yourself there is no way you can do this. You may not have all the skills listed or knowledge listed above, and you don't want to make any of those mistakes. The good news is now you know those mistakes are out there and you have knowledge on what you need to do. this doesn't mean you can do it, but you know what needs to be done and that's half the battle.

 

Continue to read and study, find a mentor who has done this in your area and take them to lunch. Talk with a bank about your plans and ask them how you can get there. Go out and do what you can when you can and whatever you do keep on going. If you want this don't lose hope, take the chance to learn and take the chance to invest. You may look back 10 years from now and ask yourself why you didn't start sooner.

 

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America's Favorite,

The Small Time Investor