As a new investor, is it easy to get pulled in many different directions. You may have friends and co-workers telling you how to invest one way, while another camp may be telling you something completely different. Trying to figure out who to listen to can be very difficult at times. Instead of trying to be a master of every area and becoming an expert of all things, you need to pick and choose your battles. There are a few core concepts that every new investor should be familiar with. Here are what I believe to be some of the most important principles for new investors to understand:
1. Alternative financing: Getting a loan is not an easy process. For starters, the average length of a lender financed transaction is currently somewhere around 45 days. On top of that, the amount of paperwork and documentation has increased greatly in the past few months. Lastly, you need to put anywhere between 20% and 25% down for an investment property. Without a surplus of capital, you may be limited in the number of deals you can purchase. A better option may be to find alternative sources of financing.
There are many more private money lenders than ever before. These types of lenders do not follow traditional bank lending guidelines, and give you the chance to close deals much faster. These can be any family, friend, co-worker or business partner that has capital to invest in real estate. You form a partnership where they supply the funds and you do the real estate work. Alternative financing allows you to build your real estate business without the constraints of lender guidelines. You can also grow at a much quicker pace and close many more deals throughout the year.
2. Mix short and long term: It seems as if every new investor wants to get started with rehabs. There is certainly nothing wrong with going this route, but you shouldn’t put all your eggs in one basket. It is important to remember that you are investing in real estate. By definition, you are looking to buy an asset with a greater future value. Rehabs offer a great, but difficult, way to earn in the short term, but will leave a void in your long term portfolio. Even if you have never explored the rental option, you should at least consider it. A solid performing rental property can show you tremendous upside down the road. While you may not think that far ahead, it will be here much quicker than you realize. Even one rental addition every year can give you increased monthly cash flow with the possibility of appreciation. You don’t need to make this your sole focus, but you should consider both the short and long term.
3. Know your numbers: The real estate business is a numbers game. Everywhere you look and everything you do revolves around numbers. It is not enough to simply estimate and hope for the best; you need to know what every number means. There are many instances, especially when you are just starting out, where you want to make a deal just for sake of making moves. Here is where you need to take a step back and eliminate all emotions and focus on the numbers. If you are disciplined enough to look at them, the numbers will tell you what kind of deal you have. Even if you have spent months looking and evaluating one property, you need to be able to walk away. The same is the case for every other aspect of your business. You need to have an idea of where your money is best spent. A new mailing may be producing results, but is there a better way to do it? Always listen to what the numbers are telling you.
4. Education: There is no better investment than an investment in yourself. It is far better to wait until you truly know what you are doing before getting started. This means studying your business and every nuance involved. Read every article about your local market you can get your hands on, and spend time at local real estate clubs. Talk to people who are actually doing deals in your area. Going in blindly will lead you to bad deals that will, in turn, cause you to sour on the business. You will never know everything about your business, but you need a base level of education to avoid disaster.
The real estate business is full of opportunity. All veteran investors start in the same boat as you. Focus on these five steps and you will start to see results in no time.
