The reality is few people make it as real estate investors. Here are the biggest keys to success in the real estate investing business.
#1: Know a deal when you see it
If you want to be a successful real estate investor you need to look at a lot of deals. You have to be prepared to pounce on a bargain in minutes, not days. Excellent values don’t last long. If you can move quickly and confidently, your chances of beating your competition and landing a real estate deal will improve greatly.
The easiest way for a new real estate investor to learn to pounce on a deal quickly is to specialize. Choose an area close to home or work and farm it. Know every street, every corner, all the local businesses, the noisy streets, the busy streets and the quiet ones. The more intimately familiar you are with the neighborhood, the faster you’ll be able to respond and the more likely you’ll be able to make an offer over the phone or via email.
Invest in real estate; don’t speculate. Knowing when you have a deal is also about knowing what’s not a deal. Speculators buy something hoping the value will go up, which has a lot more in common with gambling than investing. True real estate investors buy bargains and secure their profit when they buy the property, they don’t create (or wait for) profit to materialize during the time they own it.
#2: Access to cash and reserves
Conventional and hard money loans are important tools for a real estate investor. Of course cash is also a very powerful asset. Regardless of where it comes from, you need to be able to move quickly and confidently when you find a deal. If you’re not using hard money exclusively, engage an experienced and active mortgage broker. Connect with smaller, local banks because they are the most likely to finance real estate investments quickly and capably.
Unless you have a lot of cash that you’re willing to risk, it’s wise to have a hard money lender lined up. Sometimes a great deal needs to close more quickly than a bank can manage. Other times banks just don’t see the value the same way investors do. Make sure you don’t lose an opportunity to someone who can move faster. If you’re getting a good enough deal, a hard money loan is worth the expense.
Reserves are important because surprises are inevitable. 6 months of holding costs is a good goal, but you can still pursue partnerships, wholesaling and some hard money deals without cash. Repairs and holding time almost never match the original pro-forma on investment property. Vacancies often run longer than expected. Permitting and weather can stretch a project to infinity and beyond. Investors with reserves can weather these issues, but those without can find themselves in trouble quickly.
#3: High tolerance for risk and healthy response to adversity
Real estate investments rarely go as expected. Real estate investors, particularly those dealing with renovations, tolerate a lot of risk and stress. It’s extremely hard to know what you’ll find inside the walls and under the floors of old houses. Renovations and construction almost always take longer and cost more than you think they will. It only takes one bad tenant or prolonged vacancy to kill your numbers on a rental for the year.
If you make a long-term commitment to real estate, these things will average out, but if you can’t deal with painful surprises without breaking down, real estate investing might not be worth it for you.
Don’t risk your health to be a real estate investor. If you don’t have a high tolerance to risk and adversity you will spend many sleepless nights worrying about your projects and countless hours frustrated with contractors, permitting authorities and delivery people, among others. If any hiccup in your project will create financial hardship and unbearable stress in your life, real estate is probably not a good investment of your time or money.
#4: Realistic expectations
The biggest mistake we see new real estate investors make is being too optimistic on the after-repaired value. Just because one comparable house sold for a premium does not mean that you should bank on getting the same price per square foot as that outlier. Be mentally prepared for last minute financing and appraisal issues. Budget for buyer concessions during the contract to closing period. Don’t be deluded by the fuzzy math on HGTV; they often leave out closing costs, holding costs and labor expenses.
Your after-repaired value should reflect a quick sale price, not a hopeful one. If you count on getting the highest per square foot for the area you will likely be deeply disappointed. Holding costs on a vacant house will eat up profit very quickly. Be realistic and avoid being traumatized when your buyer requests concessions during the option period or they get rejected for financing and you have to start marketing the property all over again.
It takes consistent hard work and resilience to be a successful real estate investor. Be certain you’re purchasing your investment properties below market value. Be financially and emotionally prepared for surprises. Be realistic – maybe even slightly pessimistic – about costs and resale value. If you can do all four, you just might be a successful real estate investor.
If you live in Austin and you’re looking for hard money financing or an experienced real estate investment partner, let us know.