When I purchased my first rental property in 2012, I didn’t know how to read a pro forma statement. I had never even heard of terms like Cash-On-Cash Return, or Net Operating Income. When I really stop to think about it, I didn’t even know how to really analyze cash flow numbers at all! How was I to know what a good return was? I had never even considered things like the 1% rule, or 50% rule. You can pretty much say that I started off blind…
But, I didn’t let that stop me… I went ahead with it anyway.
When I got into contract for my second rental property, it was a short-sale. I didn’t know what a short-sale was, but whatever it was, I wasn’t going to let it stop me from trying to win again! 🙂
And so on and so forth… I’m sure in another year or two, I’ll look back on today and be amazed yet again by how very little I know about real estate investing.
The truth is, you really don’t need to be an expert before jumping into the game. Granted, you need to be more careful in today’s environment, because finding a good deal is much more difficult. But still, real estate investing isn’t rocket science… not by a long shot! If REI was really that difficult, there’s no way so many ordinary people could be so successful at it.
REI: It’s NOT That Complicated
When it comes down to it, REI is nothing more complicated than the following:
- You invest money to purchase a piece of property. You either buy the property outright, or you borrow from someone and take on a loan where you make regular principal and interest payments.
- You find a qualified tenant to pay more in rent each month than it costs you to own and operate the building. The positive difference is your net cash flow. If you’re smart about it, your cash flow will still be positive even after setting aside a good portion (say 20% of gross rents) towards vacancy and maintenance reserves. Your extra cash flow buffer is a safety net in case the market corrects and things hit the fan…
- If something breaks, you fix it. If your tenant doesn’t pay, you kick them out and find a better one. If you don’t want to oversee the day-to-day operations, hire a property manager.
- Over time, your tenant will keep paying down your mortgage, and you’ll get to keep collecting those rent checks each month to help continually build up your semi-passive income stream. If the property appreciates significantly, you can sell it to capture the capital gains, or pull equity out to fund more investments.
- Lather, rinse, and repeat over and over again until you hit your desired cash flow target. If you used financing and want to mitigate risk, start paying down the debt once you’ve hit your magic number (cash flow or units).
We All Start At the Beginning
Like most things in life, you learn as you go. If you really don’t want to screw up the first time around, surround yourself (network) with other more successful investors who have “been there and done that”. Learn the ropes, and ask lots of questions if you don’t understand something. Take your time, and go at your own pace. There should never be any rush to get into REI because there will ALWAYS be more opportunities. Housing prices go up and down. Over and over, time and time again. People just tend to get overzealous when times are good… To protect yourself, be fearful when others are greedy. Then, load up on deals when others are fearful.
And know this — Once you own a property, you’re the boss and you get to call ALL the shots. You don’t ever need to be the brightest or smartest person in the room to be successful… you just need to make sure that you DO hire the ones who are!
Most important of all, never stop learning. Even after your first deal, and then second, third, fourth, fifth, etc., there’s always something more for you to learn.
If you are highly successful right out of the gates, keep your ego in check and continue to be open to new ideas. You can’t improve or grow as an investor (or person) if you think you know everything!
I didn’t know any of these things when I won my first property in 2012:
- How to read a pro forma statement.
- How to perform cash flow, ROI analysis. This can be subjective, but I do what works for me to help determine whether I should buy or pass on a deal.
- How to close a deal (from winning the offer to securing financing).
- How to negotiate through low appraisals.
- What a short-sale was and all the steps involved in closing one.
- How to market a property, screen for tenants, work with and manage tenants.
- How to deal with pesky HOA. 😉
- How to perform due diligence for out-of-state properties (fly out there and meet the teams in person!).
- How to close an out-of-state deal.
- How to manage a PM from afar.
- Umbrella insurance and liability protection.
- How to talk to attorneys, agents, loan officers, etc.
- How an eviction process works (in one particular location, but I’m learning this as we speak).
Here are more things for me to learn in the future:
- 1031 exchanges. Apply theory to practice.
- Commercial real estate. I know absolutely ZERO about it.
- Attempt to get a commercial loan. Talk to different lenders.
- Work with a portfolio lender.
- Refinance a deal, or pull equity out.
- Notes, seller financing, hard money loans, etc.
- Hiring and negotiating with contractors, repairmen. Rental Property #2 was a pretty bad experience…
- DIY hands on repairs. I could learn a thing or ten from The Stoic Investor.
You Can Do It!
Real estate investing may seem daunting at first, but it really isn’t. The best thing you can do is to get educated and to take your time in finding your first deal. Nobody knows everything, and we all started at the beginning at one point in time. The highly successful investors you come across might not want to admit it, but there was a time when they were novices too!
I’m going on Year 3 of real estate investing, and I still know next to nothing about it. This hasn’t stopped me from making progress and continuing along on my own journey. I love to learn, and as you can see from the list above, there are still a million things I don’t know anything about… 🙂
So, cut yourself some slack and take a deep breath. You too can do this! Put together that winning gameplan and start taking steps towards making your dreams a reality. Just remember to write things down in pencil, because you’ll probably be revising and fine-tuning your plans as you move along and build up your knowledge base. And there ain’t nothing wrong with that!
Do you remember when you first started investing? How much (or little) did you know when you closed your first deal? Was it worth it?