Real estate investing (REI) is becoming a popular way for people to diversify their investments. While other types of investments can be more passive (think stocks, bonds, and mutual funds), in order to succeed in REI you have to be committed to active involvement every step of the way. Oftentimes, we see house flips on TV shows and think it’s easy! However, owning and investing in real estate can be a full-time job, so it’s important for beginners to know what they are getting into and think about the level of investment they are willing and able to make. We’ve broken down our top four tips for beginners and hope they help when you are deciding whether to jump into the world of REI!
Reflect on your goals
We always suggest that our clients think through their goals, especially as beginners. Questions like: What is it that attracted you to REI? Why do you think it is the right move for you? How can REI help you reach your goals? And where do you see this taking you in 1 year, 5 years, or 10 years? These are all great questions to understand what the vision is and begin to create the path to get there. While these questions seem basic, they are so important! REI is not for the faint of heart. We’ve had many clients who begin by flipping a house and end up making no profit, or just breaking even, but learning many lessons along the way. We don’t view this as a negative, but rather an inevitability. Not every deal will be good. Sometimes the timing isn’t right, or a contractor is flakey. These are all part of the reality of REI, so it’s good to acknowledge and plan for these things right from the beginning. Thinking about your current assets, your taste for risk, and your commitment to this as a full-time or part-time gig are all vital to your success.
Decide the best exit strategy
After assessing your goals and vision for where REI can take you, it is important to consider what exit strategy will get you there. When we talk about exit strategies, we are basically talking about how you plan to utilize the investment property. Some examples include: fix n’ flip (buying an outdated or run-down property, renovating it quickly, and then selling quickly for a profit), buy and hold (this could look like buying a property in a low market and then holding onto it until the market is high and you can sell the property, without any additional money or work, for a higher price), Traditional or vacation rentals (this looks like buying a property and finding long-term tenants or utilizing it for short-term rentals like Airbnb or VRBO), etc. Even choosing between residential properties and commercial properties will impact your options for exit strategies.
Deciding on an investment strategy is one of the first steps because if you don’t know what you’re doing you can’t know which property is right for you. Finding a property in a populous area with many attractions easily accessible would be ideal for a vacation rental. While finding a property in an old, historic neighborhood that is being revitalized could be a good property for a fix n’ flip. Those are some examples of why knowing your exit strategy (and frankly, having some backups if things go sideways) is so important before purchasing a property.
Build a solid team
REI is not something that is easily done alone. Maybe you are a contractor yourself so you feel like you can handle renovations. Well, it’s still important to find a broker who can find you good property opportunities, an accountant who can help you with taxes, a lender who can supply you with additional capital to complete projects, property managers if you choose to utilize your property as a rental, so on and so forth…
While it might seem like these projects are easy to manage yourself, there are so many aspects that require specialized skills and knowledge, especially if you want to do the job right. For this reason, we recommend building a team very early in the process. Don’t wait until a problem arises to find a professional who can solve that problem. Do some work from the start to interview and build a team around you that you trust. At the end of the day, we’ve seen many good people who try to go it alone and fail. Or even new investors who think they can add individuals onto the project when needed, but don’t do the necessary legwork to make sure they are the right fit for their team and end up having problems and delays. The biggest money sucker in REI is time, so finding a good, efficient, trustworthy team is essential.
Think of it this way, if you have a solid team and you can leverage all the resources you need, you could scale this business tremendously and even replace your full-time gig if that’s what you choose.
Be patient and realistic
Our last tip has to do with your mindset. Our founder always shares this great quote with beginners: “Real Estate is like waiting at a bus stop, there’s always another bus.” This is how we view deals. Oftentimes folks are so excited to get into REI that they will take the first deal they find. This is not the way to be successful in this field. The numbers are all that matter. If the numbers don’t work, then the deal won’t work, no matter how much you love the property or think you can make it happen. Calculating ARV (After Rehab Value) is crucial to the success of your project. If you buy a property thinking a few updates here and there will make you a profit, you are mistaken! Location, Comps, Appraisals, etc. are all factors that will make or break the deal. So we remind our clients just like the quote says that if this deal doesn’t work out, there will always be another deal, there will always be another house. People move and sell properties all the time, so waiting for the right fit is key.
Additionally, with being patient, it’s important to be realistic. Like we’ve mentioned, most new investors don’t make huge profits on their first try (although there are some exceptions who get lucky!). For many, it takes multiple deals to sharpen their skills, understand the market, and build the team they need to succeed. As with anything in life, practice will get you a long way in REI. If you go into your first real estate deal thinking you will make tons of cash, you will likely be disappointed and maybe decide that REI is not for you. But don’t let yourself fall into this trap! Building skills takes time, dedication, and perseverance and it’s the same with real estate investing. Don’t give up and you will reap the rewards of your efforts!
How can CPL Help you reach your goals?
We hope these 4 tips for beginners are helpful as you begin to envision how REI could help you reach your goals! Setting and reflecting on your goals, determining your exit strategies, building a good team, and being patient and realistic are great first steps if you are interested in building out a portfolio of investment properties. Even getting connected with local educational real estate networks can have a huge impact on your ability to network and find good professionals to partner with as well as to have the additional mentorship and guidance from folks already in the field.
At CPL Investments we are always here to help! While we are a private lender, we pride ourselves on our mentoring and coaching that allows new investors to have an edge in this competitive market. Consider reaching out today to learn more about our services and to see how we can help you reach your goals!