There are many different strategies and techniques on how to get started in the real estate business. Regardless of your market or how you plan on investing there are a handful of core questions that must be answered prior to getting too far. How you answer these questions will dictate how, when and even where you end up investing. It will impact the people you surround yourself with and your timeframe in taking action.
Without answering these core questions you can certainly get started but you won’t have the roadmap necessary for success. You will bounce around from deal to deal and property to property without a clear goal. Eventually you will get caught up in a property you don’t really want and can’t get out of and your business will come to a screeching halt. Before you get too far you need to answer these five essential questions.
- Do you want short or long-term returns? The first question you should ask yourself is when do you want to see a return on your investment. Most new investors that enter the business are focused on quick flips and rehabs. However, this is far from the only strategy. There are many investors who only look for buy and hold rental properties. Whether you want a short or long term return you should decide that before you make your first offer. Your strategy will change over time but for your first twelve months you should put a timeframe on your returns. Even if you want to start flipping houses you should know that it will take some time. An offer that is accepted today can be at least four months before you close on the end transaction. There is no right or wrong approach to investing, only what is preferred for you.
- How will you finance your offers? Almost everything you do in your business is predicated on the type of available financing. You may want to start flipping homes today but without financing in place you won’t get very far. In a perfect world you would have excess capital available to use on every offer. If you are in this situation you are ahead of the game. If you are like most investors, you will be forced to either use traditional lender financing or find a hard money lender. On the surface these may appear similar but for investing purposes these are quite different. Some sellers, like big banks, give preference to offers made with cash that a hard money lender would provide. Not only can you close quicker but you can close more deals over the course of the year. Traditional financing requires anywhere from 20-25% down payment but gives you the ability to walk away with a higher net profit amount. Without financing in place no good real estate agent will show you properties. Figure out how much personal capital you have, how much you need and where you can find it and go from there.
- How much time can you commit? Investing in real estate should be treated like running a business. With any business you need to spend ample time growing it. As we stated there are many ways to get started in real estate. It is not essential that you leave your day job and commit forty hours to the business. However, the amount of time you have available will determine, in part, how you operate. If you can’t talk during the day you may have trouble making offers and communicating with your team. In this scenario you may want to take on a partner that has more day time flexibility. If you have free time or want to transition full time you may be able to do more work on your properties which would impact your offer. You don’t need to commit 60 hours to the business, but you do need to know how much time you can be available.
- Who do you need on your team? Every real estate investor needs a team. Even if you don’t have a dedicated business partner there are several people that will be influential in your success. Your real estate agent, attorney, hard money lender, mortgage broker, contractor and property manager will all play a role at some point or another. Many investors are hesitant reaching out to these people prior to getting a few deals under their belt. However, now is the time to start building these relationships and getting an idea if you are a good fit. The right team will make the transition into the business as easy as possible but the wrong personal can set you back. Recognize that you need a good team to succeed and look for people that are the right fit for you and your goals.
- Is this a one-off thing? There is absolutely nothing wrong with closing one deal a year. There are many investors who have specific buying criteria and only pursue a small number of deals per year. On the flip side there are also investors who close a number of deals per week. Before you get going you should have an idea of whether you want to make investing a business or simply a part time hobby. The volume of deals you do can help choose properties within certain margins or even the types of properties and markets. It will help with the structure of your business and who you need around you. You always have the ability to shift gears but you should know how many deals you plan on pursuing.
Use these five questions to help form a business plan, goals and strategy. The more detailed your answers are the easier it is to start investing today.