Real estate is one of the best ways for entrepreneurs to ensure a healthy financial future, aside from running a successful business, of course! While poor economic conditions will always be part of the ebb-and-flow of the global condition, it’s rare to find a specific locale where real estate plummets and never rebounds.
Having one, a few, or several investment properties included in your portfolio helps ensure financial protection when business and/or the economy is slow, and allows for a somewhat passive income stream during times when you don’t want to work, such as an extended startup vacation or when retirement finally hits.
Following are 6 tips any entrepreneur can use to safely enter into real estate investing and get the best deal possible:
1. Be wary of all educational materials in the real estate investment industry
Take this advice with a grain of salt, but do take it to heart nonetheless. There are but a few really great resources available to help people enter into the world of real estate investing. Most are just carbon copies of one another and don’t really contain very much unbiased information entrepreneur investors can actually use.
It’s best to take a simple primer course, or attend a local or semi-local weekend seminar near to you. Afterward, start applying that knowledge while mingling to find a mentor with experience. A real estate mentor should be someone whom you trust and who has verified real estate investing experience, in the area of investing you’re considering (ie., residential, commercial, industrial).
Mentors will be an invaluable resource when it comes to assessing properties, making bids, filling out paperwork, and helping to manage your real estate investments. Those mentors should not be fly-by-night online brands that do nothing but regurgitate easy-to-find information, and batter you with upsells and cross-sells for other educational products.
2. Don’t listen to advice from people with no verifiable real estate portfolio
Mentors are much harder to find than the literal millions out there who think they know it all. A seasoned real estate investor is someone who has bought and sold at least a few properties – or someone who has bought properties and owned/leased/rented them for several years and learned the ups, downs, and in- betweens involved in real estate investing.
Everyone else (ie., the majority who’ll freely offer you their advice) should be
carefully screened before you take any action on what they’ve told you. This includes family, friends, coworkers, and random passersby on the street.
Sadly, realtors fall into this category, too. Always remember that there is a very disproportionate ratio of licensed real estate agents compared to available properties that are actually for sale in the world.
Realtors may understand a thing or two about showing and closing on a house, but they aren’t likely to know anything you can’t find on a simple Google search – unless it’s that you’re considering a property in a distressed or otherwise undesirable area (in which case, good luck hearing this from them!)
3. Look for people who want to sell, not hold
This advice should be really simple to digest. If a seller is being dodgy during the showing or dancing around too much after you’ve offered them a fair market deal, run the other way!
A property owner who doesn’t want to sell is either a happy investor, or they’re waiting for the big payoff to drop in their lap, such as a billion-dollar developer buying them out for “X” times their original investment.
Either way, you’re wasting your time and potentially setting yourself up for a big loss if they can convince you to up your bid beyond what the market will hold – now or in the future.
4. Learn why and how to do pre investment analysis’ on prospective properties
There’s so much a prospective property investor needs to know in order to make a sound investment that will pay a good return including, but not limited to:
- Property details (seller/property manager): How the property is laid out, number of units, square footage, utility metering, etc.
- Purchase info (seller/property manager): The purchase price of the property, weighted against potential needed repairs or suggested improvements.
- Property income versus expenses (seller/property manager): How much the property generates in rental or other income, versus how much it costs to maintain (ie., repairs, taxes, insurance, etc.)
- Financing details (bank or other lender): The bank or lender can provide you with these details that include loan amount, downpayment required, interest rate information, and closing costs for the mortgage.
You’ll also want to verify that all data coming from the seller or current property manager is actual data and not “pro-forma.” Pro-forma data is basically just a guess. Whether it’s a truly educated one or something that took an hour to complete isn’t something you want to bank your financial future on.
If the initial discussion revolves around pro-forma information, make it clear that you and your accountant/trusted advisor will require verified property records before proceeding with the purchase.
5. Invest for the long term, but never bank on appreciation
No real estate investor worth their salt will tell you to buy a property because it’s in an area that’s set to explode in value down the road. For instance, someone has told you a certain property is the site of a new international airport or series of freeways, like what happened to Arnold Schwarzenegger and Franco Colombo in their early real estate investing days.
Banking on appreciation is gambling, not investing. Do this kind of investing when you have a lot of money to lose, yet aren’t big on heading off to Vegas for the weekend to blow it all in one shot.
6. Have a firm game plan for making money with the property
Pure and simple: Are you flipping, renting, or doing a buy and hold while the economy recovers from a massive downturn? Knowing the answer to this question will tell you if a property is truly worth the financial risk it presents to you.
For instance, you don’t want to buy a property to flip in a low income area, only to get stuck renting it out to people of little means for the next five or ten years. Nor would you want to buy that same property when the economy is poor with no clue as to what the values are when the market is optimal.
Always develop a firm game plan for how you intend to make your money back, and how long your investment will be tied up for.
Real estate investing is a great way for all entrepreneurs to diversify their portfolio and keep their money working for them, instead of sitting still in the bank.
If you have any questions or comments about real estate investing, feel free to leave them down below.
Let’s get a discussion going.