The Ultimate Guide to Starting a Real Estate Investment Business
As my parents got older, they asked me to help manage the rental property that occupied half of their two-family home in Northeastern Pennsylvania. The extent of their real estate experience involved finding tenants through word-of-mouth, charging an absurdly low rent, collecting a check each month, and hoping no major repairs were needed as the year progressed. Admittedly, I knew little more about real estate investing than what I’d observed from the actions of my Mom and Dad. It seemed pretty simple so I was more than willing to help out. Besides, I’d had some business exposure of my own through the ownership of a small insurance agency.
That little venture sparked my own separate journey into the real estate investing business. As with most major endeavors in my life, I liked to wade ankle-deep in the water before I dove in head first. From that small rental concern, I gradually branched out into multi-family units for income and flipping properties for quicker cash flow. Obviously, my pursuits became more involved and I needed to apply a lot of the knowledge from my own business to buying and selling homes. One major advantage I’d had was the fact that the property and casualty insurance business dovetailed nicely with the real estate business.
Starting a Real Estate Investment Business
As an insurance broker, I often inspected properties and understood a good deal about valuation and risk. I did business frequently with landlords and got a feel for their obstacles to a decent return on investment, specifically, finding good tenants and permanently saying goodbye to the difficult ones. The buyers I knew who were interested in future capital gains often got upended by market forces and house flippers I encountered sometimes bypassed inspections—ending up with unexpected costs from mold or compromised foundations. To prevent you from making similar mistakes, I want to pass on the knowledge you shouldn’t be without before starting your own real estate business.
Finding Good Deals
Scouring the internet, I find many local properties for sale. The majority of those listings are cast in the best possible light. High-dynamic-range photography makes rooms look big and bright but nobody posts photos of aging heating systems or deteriorating roof shingles. I’ve found that square footage is often exaggerated and the advertised property taxes might have been pulled from rolls that were old enough to vote. I’m alright with a lot of property faults. Those problems can be remedied but the real issue lies in the asking prices on MLS sites. Buyers and their agents have this strategy to maximize their profits, and rightfully so. Those folks are in business, too.
If I’m about to spend a large sum of money on a home, I need to acquire it as cheaply as possible. I need to maximize my cap rate (net income divided by acquisition price) on rentals and, if I’m flipping, buying low and selling high helps garner the best return on investment. You can look at it this way. Regardless of whether you plan to sell an antique that you buy, do you relish paying full retail for it? I didn’t think so. Now imagine that you will sell it at some point and I believe you see the importance of a good price. The quest to find undervalued properties becomes even more important in a business where you may spend upwards of $100,000 on your first investment.
Finding Solid Leads
Now the emphasis shifts to finding properties at less-than-market prices. I was fortunate that my insurance business put me in contact with other business professionals who constantly had their ear to the ground. With the volume of customers I had, many conversations arose involving my bringing buyers together with sellers, whether it be office furniture or an automobile. On the other side of the coin, numerous clients knew I had an interest in real estate acquisition and if I had helped them find deals, they willingly brought motivated home sellers to my door.
I like slick marketing campaigns but I can’t state strongly enough that the best advertising is free. To really have a marketing impact, you’ll need to develop a brand that engages your audience, starting with picking a name for your real estate investing business. From there, you need to get the word out. Using social media for real estate lead generation is cheap, but the rate of return is pretty low. Other advertising strategies, often based on outdated information from lead lists, like sending mailers and cold-calling can be effective but you’ll spend a lot of time making it work. It’s best to find motivated sellers without these lead lists. The best way, in my opinion, is to become an independently owned and operated HomeVestors® franchisee so you can leverage the nationally-known and trusted “We Buy Ugly Houses®” marketing campaign.
Finding Great Locations
Let the first rule of real estate investing always be in the front of your mind. Set criteria for the locales that you wish to purchase in, and stick to those standards. You can command higher asking prices and rents for homes that sit squarely on the beaten path. It’s truly a world of convenience and families cherish locations close to parks, grocery stores, restaurants, and work destinations. In any city, quick access to public transportation stands out as another great selling point for renters or buyers. Not every base can be covered, but if you bullet point the positives, make sure your purchase locations satisfy most of the items on that list.
I’ve discovered many of my better buys in unsung neighborhoods—places surrounded by a buzz but still devoid of ballooning list prices. Practicing some foresight, I tracked rising property values in certain spots and chose to invest one town over. My hope was that buyers and tenants squeezed out of pricey markets would settle for life in a less-hyped and more affordable community. Most of the time, my ROI benefitted from that strategy. In this industry, I needed to leverage any situation that would enhance potential profits.
Finding Reliable Contractors
My family is pretty large and so is my wife’s clan. Even if I didn’t have the edge of owning a small business, I would have been able to pick a lot of brains on hiring the best plumbers, electricians, and carpenters to repair my flips. If buying, renovating, and selling houses is on the agenda, turnaround time is essential. I couldn’t afford to experiment with randomly picked contractors who accepted deposits and either disappeared for weeks or performed shoddy work. Thus, I once again leaned on my family and friends to refer service professionals who backed up their word with their work.
I never subscribed to the low bidder process. In most cases, you get what you pay for. I’ve always been willing to shell out a few more bucks for contractors who show up on time and complete a project by a set deadline. When flipping houses, inexcusable delays cut into my ROI and my patience. On the rental side, inconveniencing my good tenants might mean that I’d have to replace them with less savory renters when it came time to renew the lease. With respect to my repair budget, I always pad rehab estimates to assure I can retain quality tradesmen with a conscience. If the project finishes below that budget, I have extra funds to allocate toward upgrades in landscaping or design.
Finding Your Strengths
I didn’t have the proverbial light bulb turn on in my head before I started a real estate business. It was a carefully weighed decision that hinged on my past business experience. Most confident in my personability, I felt I could initially rely on my strong people skills to get me started, and the rest I could either delegate or learn on the fly. I knew nothing about construction so the relationships I built with those contractors became even more important. It’s true that if you treat people with patience, consideration, and respect, those virtues will eventually come back to greet you.
Sales and negotiation were really my strong suits but as time progressed, I realized that I enjoyed crunching numbers as well. In addition to understanding financing options, which I’ll touch on later, I had to get a handle on taxes, depreciation, forecasting, and profit and loss statements. These concepts got more involved as I built my real estate portfolio, but I leveraged the help of various software programs for investors that aided me in keeping track of the financial end of the business. It was either tackle these tasks myself or pay an accountant and, with one business objective defined by holding the line on expenses, I chose the DIY option with all but the most complex financial renderings.
I was a homeowner so I understood the conventional means of buying a home. Maintain good credit, find a mortgage broker, hand over pay stubs and tax returns, fill out reams of paperwork, and hope for the best. Buying properties for the long term basically follows along the same lines, except interest rates will likely be higher for investment properties than would be for your primary home. Nonetheless, I always kept an eye on the Fed funds rate and the effect that the central bank’s policy would have on my bottom line. Lower interest rates meant lower monthly payments with more money left over to pocket or deposit on another property.
Buying houses to rehab and sell took me to an entirely different realm. Being that my goal was to offload a property as quickly as possible, traditional lenders didn’t have a product to fulfill my short-term needs. My research provided me with an overview of hard money 101 and yielded a network of private lenders who understood this niche. Hard money lenders don’t necessarily emphasize credit scores and income, but rather focus on the value of the property at hand. One major plus over conventional mortgages is that closings can occur in a matter of days—shortening your time to project completion and the eventual sale.
Finding Quality Tenants
If you find a landlord who’s never had any unpleasant tenant experiences, please let me know. I’m guessing these people have had only one tenant or are the luckiest folks in the world. No matter which rental property owners I talk to, all have been saddled with one or more of the following problems: property damage, nonpayment, liability issues or painful eviction proceedings. These nuisances go with the territory but preventive measures are the key to avoiding troubling issues in the first place.
Local tenants are easier to vet in my small community because I usually know the applicants or have a connection with somebody who does. My referral network is useful not only for property leads but also for gaining some insight into who might occupy my rental homes. I steadfastly run criminal background checks, obtain credit profiles, and follow up on every previous landlord reference provided by all interested parties. My faith in human nature waned as I had to make interior repairs that extended way beyond what a month’s security deposit would cover. In addition, I scheduled quarterly walkthroughs to keep small nits from turning into bombshells. A few ounces of prevention are definitely better than a huge hit to my bottom line.
When I started my property investment career, I thought I could handle all the ins and outs myself. After all, I’d run a successful insurance business for about a decade so how much more difficult could buying and selling homes be? Once reality knocked my ego back a few pegs, I became an independently owned and operated HomeVestors® franchisee. The training and expert guidance that I got from my seasoned Development Agent and the local HomeVestors® franchisees helped me achieve a winning strategy. In addition, the nationally-known “We Buy Ugly Houses®” marketing campaign steered promising leads in my direction. Like my very first real estate investment cohorts, the HomeVestors team felt a lot like family.
Contact HomeVestors when you’re ready to piece together all the aspects of a proven real estate investment system.