Introduction
This article has been written to provide a novice person considering real estate investing some fundamental concepts to consider as you commit yourself to this area of interest. Like all new endeavors explored, it will be to your advantage to have some basic knowledge on the particular topic before you can truly appreciate if this is right for you.
What Are The Financial Benefits Of Investing In Real Estate?
There are various opportunities that will financially benefit you by investing in real estate. Based upon your current financial condition and future investment goals, there are many factors that must be considered when selecting both a business model as well as a specific project. The following section will provide an overview on the significant financial benefits that are achievable when you invest in real estate.
Property Appreciation
Although predicting future appreciation with great certainty is not feasible, by looking at specific economic indicators can assist the Real Estate Investor in understanding future trends with regards to property value and possible appreciation. Some of these key indicators are as follows:
Job growth
Job growth is a key contributor in establishing possible future appreciation. As Primary jobs (those jobs that export products outside of the local area like the car makers of Detroit) increase, the need for Secondary jobs will also increase by 2-3 times the number of Primary jobs. Secondary jobs provide services to the people performing the Primary jobs. Examples of secondary jobs include the following:
� Restaurant workers
� Retail store workers
� Local trades (plumbers, electricians, builders, etc.)
� School employees
Demographic Trends
Demographic trends are another factor to consider when trying to determine if an area has the potential for future appreciation. Demographic research will provide data on the general population of an area which includes the following:
� Population Changes
� Age distribution
� Income
� Family Size
� Race
� Owners verses renters
� Marital status
Revitalization Initiatives
Another factor that can affect the appreciation of an area is any revitalization initiatives the local government is undertaking. Revitalization can include the following:
� Improvements of roads and transportation
� Condemning and removing abandoned houses and buildings
� Crime reduction
� Tax credit, grants, and loans to developers and Investors to come into the area as well as programs to help keep the current employers from moving away.
Economic development offices from the local government are typically responsible for implementing and managing the revitalization efforts.
Cash flow
Another aspect of how to financially benefit from real estate investing is through the creation of cash flow. Although there are many factors that are taken into consideration that derives your cash flow, simply put, it is the amount of money left over for you after all of the expenses have been paid.
The term cash flow is usually associated with properties that you are holding and generating income from rental units or homes. The great thing about creating a cash flow stream is that it will typically continue whether you stay in bed all day or off on a vacation. However, sustaining this cash flow will take some effort on your part and may include the following:
� Maintaining the property
� Managing the existing tenants
� Keeping the property occupied
� Managing property management companies
Equity
Property equity is the difference between the fair market value of the property and the sum of all of the loans against the property. For example, if a property is worth $250,000 and there is a first and second mortgage totaling $200,000, the property has $50,000 in equity. Having equity in your property is essential in order to have a cushion in the event the market exhibits declining value during the time you are holding the property. By utilizing strategies like a loans.blogspot.com/" title="refinance loans">refinance or Line of Credit, it will allow you to pull this equity out of the property and use it as you see fit including a return of your initial investment or to leverage this capital to purchase another property. Although having strong cash flow with your properties is vital during your hold times, this income stream will disappear if you ever need to sell the property. Ultimately, it is the equity in your properties that will help set the stage for your long-term wealth creation and financial security.
Tax Incentives
In addition to the benefits mentioned above, there are outstanding tax incentives that the real estate investor can benefit from, they include the following:
� Depreciation of the actual property and any capital equipment that may be utilized in your business.
� Deductions resulting from expenses from owning and managing the property the property as well as business expenses you may incur.
� IRC 1031 exchanges, this is a powerful tax strategy that will allow you to leverage Capital Gains taxes that you would normally pay on the sale of an investment property and defer paying those taxes by purchasing a "Like-kind" replacement property with the full proceeds you received from the sale.
Why Do You Want To Invest In Real Estate?
It will be important for you to understand what reason(s) have motivated you to be interested and involved with real estate investing. Over the years, I have spoken to many new Investors on this subject and I have boiled it down to the following reasons:
Supplement Your Current Income
There are some people who are looking at just supplementing their current income without the intention of leaving their current profession and look at real estate investing as their second job. The Investor's that fall into this group are fortunate because they are not relying solely on real estate investing as their primary source of income, this will be very beneficial during the time you are developing you real estate skill set and investment portfolio.
Take Control of Your Financial Future
Based upon the many years of speaking with Real Estate Investors, perhaps the most compelling reasons people consider real estate investing is the ability for you to have a significant influence of your financial security and for you to control the level of income you would like to receive.
Create a Retirement Plan for Yourself
Using real estate investing as a vehicle to establish or augment a retirement plan is another common motivator I hear frequently from new investors. It is understandable that when economic conditions include downsizing, cost of living increases, and the fear of Social Security meltdown, people are concerned about having an adequate financial foundation to sustain them during their retirement phase of life.
Critical Things to Consider Before Considering Real Estate Investing
Investing in real estate is certainly not for everyone and it will be important for you to honestly assess if this is the right path for you. The following section will provide some basic questions you should ask yourself as you evaluate the feasibility of becoming involved as a Real Estate Investor.
How Much Time Will You Have To Dedicate Towards Real Estate Investing?
As we all know, you can't create anymore time; there can only be 24 hours in a day. As you consider real estate investing, you will need to be realistic with regards to how much time you will have to devote to this endeavor. With today's fast paced society that requires multiple income sources combined with the commitments you may already have with your family, many people can be left with little or no time to devote towards their real estate investing goals.
Are You Able To Motivate Yourself And Have The Discipline Required To Succeed?
Having the desire to be a successful Real Estate Investor is only part of the equation for ultimate success. Along with the desire to succeed comes the need for you to be able to motivate and discipline yourself. Real estate investing is certainly not for everyone despite the late night infomercials that try to convince you otherwise by implying "If I could do it, anybody can"; this is just not the case. Successful Real Estate Investors have the ability to both self motivate and provide the discipline which allows them to remain focused on their plan; this personal characteristic is what helps them to establish and sustain their success.
Can I Do Real Estate Investing Part Time?
A topic I address frequently with novice Investor's is if it is possible to become a successful Real Estate Investor if you can only commit to it part-time. If I reflect on the many Investors I know and people I have spoken with over the years who are employed in real estate full time, the vast majority of them have started out on a part time basis. By initially starting out in real estate investing on a part-time basis allowed them to develop their business model and skill set and to achieve "financial wins" along the way to a full-time status. Having small financial wins during the early stages is critical in building confidence and to create a solid financial foundation to bring it to the next level of full-time status.
Do The People Around You Support Your Desire To Become A Real Estate Investor?
One of the key recipes for success in real estate investing as well as any new initiative you are taking on is for you to have the complete support from the people around you. Nothing can undermine your excitement and motivation more than to have a family member say to you "Are you crazy investing in real estate, remember the last get rich quick scheme you tried!" Not having complete buy-in is a real issue that I frequently address with new Investors. Although the specific reasons for the lack of support from family members vary, what are common are the effects of this negative energy. Typically, it can cause significant conflicts or in some cases may cause the excited Investor to "throw in the towel" on their investing dreams
Are You Prepared To Take On Some Financial Risks?
As with all business and investment ventures you may consider, there needs to be a realization of any potential financial risks as well as an understanding of how these risks may affect the people you are financially responsible for. It is one thing to take some bonus money you have earned throughout the year and apply it to an investment plan; it is a completely different story to pull funds you have accumulated for your child's education. With regards to investing money in any type of financial opportunity, if the possibility of losing your capital will have devastating effects on you and your family, than perhaps you may need to reconsider your investment strategy.
Performing a Financial Assessment
Another consideration you will have to factor in to your decision of investing in real estate is to take an assessment of your current financial situation, this assessment is critical to determine if you will be able to provide the required capital personally or will need to utilize creative financing opportunities like Sellers Financing and OPM (Other People's Money) techniques.
Keep in mind, even if you can provide the required financing for your first project, where do you go after that. Eventually, you may be faced with the challenges of running out of the necessary capital that is required in order for you to achieve your desired goals.
Address Your Personal and Business Credit
Another consideration you should address is your personal and business credit. As you embark on real estate investing, having good credit will be critical to participate in many of the investment business models that are available to you like flipping or Hold to Rent. Since you may not have all of the capital resources required to purchase an investment or to provide working capital for your company, it may be necessary to seek out loans from traditional or private lenders. Remember, even if you can completely finance your initial deals, at some point, you will run out of capital and will need to rely on others to provide it. Having a good credit history will not only make a statement with regards to your current financial situation, it will paint a picture of your past financial responsibilities and how you handled them. Even if you are planning on bringing on a business partner or participate in a Joint Venture project, your credit history will help set the stage for people to feel comfortable entering into any business venture with you.
Will You Be Bringing On A Partner?
Another option for you to consider as you begin your real estate investing plans is weather you should bring in a business partner or to do this on your own. This decision should not be taken lightly because it could have a direct impact on your ultimate success. Some of the benefits of bringing in a partner are summarized below:
Allows you to share in the financial risk
Benefit from someone who has other critical skill sets or experience that you do not have
Availability of more capital
Share in the day-to-day operation and required decisions of the business
It will help to motivate you and to be accountable to each other.
Just remember, having a business partner will not necessarily ensure that your business will achieve greater success; if you have selected the wrong partner, they could in fact jeopardize the success of the business and perhaps your relationship.
Another option you may want to consider instead of bring on a full blown business partner is to team up with another Investor and just do single deal together and if it works out, you can consider doing other investments together, this arrangement is called a Joint Venture Partnership. This is a great way to "Test" the viability of bringing your relationship to the next level.
Do You Have A Game Plan To Help Achieve Your Success?
One of the most fundamental mistakes I see novice Investors do time and time again is to set out with great intentions of investing in Real Estate but they fall short of putting together a comprehensive plan that will assist them in their journey to success. Without a plan, there is no way to effectively identify and manage all of the things you need to do to achieve your high level goals. Without a comprehensive plan, you may not even know what your high level goals are! The tool that will help you understand how to build your foundation and set the stage for your long-term success is called the Business Plan. Many people I talk to about generating a Business Plan understandably push back at first but once they really understand the benefits, they become a believer. Here are some of the typical initial responses I get when requesting that my coaching clients create a Business Plan:
� "Aren't they just for large companies?"
� "I'm not sure I know what I want to do"
� "I don't see how having a Business Plan will help me get started"
� "I will create a Business Plan after I get my first deal"
The development your Business Plan will not only assist the novice Investor get off the ground, it will also be extremely valuable to the established and seasoned Investor looking to further develop their business model or to expand to a new one.
What Is A Business Plan?
A Business Plan is a document that you create that will identify the intentions of your business model. Some of the common areas a Business Plan will cover are as follows:
� Your short-term and long-term financial and business goals
� Identify the specific business model you will be involved with
� How you will operate the business model
� Who will be part of your business
� Identify the financial needs of the business
� Identify the specific activities that will be required for you to achieve your business goals.
� Identify Risk and Risk Management strategies
Your Business Plan is a living document and should be referenced frequently. In addition, as you are developing your business model, your Business Plan should be adjusted as required. There are many variations of a Business Plan based upon the specific purpose of the document. Some of these purposes are listed below:
� Trying to secure financing
� Looking for a business partner
� Using it to help you in the development of your business model
Do You Want To Participate In A Passive Or Active Business Model?
As an Investor, you will have the option of investing in Active and Passive business models, let's discuss the differences.
Passive Investing
Passive Investing are investment opportunities where the Investor does not participate in any active role in the operation of the business model or investment instrument. Typically, Investors would just provide capital and would rely on another person or organization to actively work the business model. The Passive Investor usually does not have any control on the financial outcome of the investment. Some examples of a passive investment are as follows:
� Purchasing a CD
� Investing in Stocks and Bonds
� Holding a loan or mortgage for someone
� Providing capital for someone else to actively use
� Joint Ventures
Active Investing
Conversely to passive investing is active investing; this is when the Investor is directly involved in the operation of the business model and typically has full or part responsibility for the financial outcome and successes of the business model. Some examples of active investing are as follows:
� Purchasing a property and Flipping it
� Purchasing properties and holding them to rent
� Bird-dog services (locating investments for other Investors)
� Wholesaling properties
Is Passive or Active Investing Right For You?
When considering either active or passive investing, many factors need to be taken into account like lifestyle, short verses long term goals, cash flow verses long-term wealth development, etc. It is strongly recommended that you consult with your Financial Advisor and Accountant to fully understand how these decisions will affect you both today as well as in the future.
Will You Invest Locally Or Out Of the Area?
Another consideration that you will need to address as part of your decision to invest in real estate is if you should invest locally in your own back yard or to consider out of area and possibly out of state investing. Overwhelmingly, most of the novice Investors I have spoke with over the years seems to be much more comfortable with the thought of investing based upon the convenience of the property being easily accessible. Understandably, the thought of driving or flying a few hours to check on a property just doesn't sit well with most people.
My response to inquiries from curious new Investors about "where do you think I should I start my investing" usually includes a question back to them like "do you think you can achieve your investing goals locally" and the responses are typically "I don't know"; it just feels better to them. Most people are reluctant to move outside of their normal comfort zone, and for the average new Investor, out of area and out of state investing can be really be a frightful thought. Understandingly so, investing outside of your backyard may in fact add to the challenges of managing your investments. However, if you are willing to open up the window of opportunity and consider investments based upon financial performance not just convenience, than you can truly take advantage of the many exciting markets that are available to you.
Getting Help to Be Successful
Weather your are a novice looking for your first real estate investment or a seasoned Investor, you will need to rely on your professional support team to help you achieve your investment goals successfully; this team should be considered as an extension of your organization and may include the following:
� Attorney
� Accountant
� Realtors
� Coach
� Contractors
� Traditional and private Lenders
� Engineers or Home Inspectors
� Property Manager
� Financial Advisor
� Title Company
My experience as a Coach has validated that many new Investors are not implementing their support team at the appropriate time. A common misconception is that Investors should bring in the appropriate people after they have a deal they pulled the trigger on. This type of thinking is completely backwards, your support team should be advising you to make sure you are selecting the correct projects and to ensure your business structure is sound before you start looking for a deal.
Asset Protection
One area many new Investors seem to overlook or ignore is to develop a comprehensive asset protection plan; ideally, this plan should be in place before you start to acquire any of your investment properties. In addition to setting the stage for outstanding tax benefits, having a robust asset protection plan will help to eliminate or minimize your personal liability in the event there is a lawsuit connected to one of the properties you own; the last thing you need is to have someone take away everything you have worked hard for because you were not properly protected.
Marketing and Networking
Regardless of what type of real estate business model you are interested in, having a comprehensive marketing and networking campaign will be an essential tool in establishing and maintaining your investment success. By having a strong network in place will help to set the foundation for many opportunities to develop which could include the following:
� Locating a business partner or Joint Venture Partner
� Receive investment opportunities
� Present investment opportunities
� Connect to services and products you may need
� Locate investment capital
Training and Education
As you embark on any new endeavor, when it comes to training and education, you can never have too much. However, you will need to exercise caution to ensure that you will not be overwhelmed in both the volume and scope of information you are trying to absorb and process, this is commonly referred to as information overload. On one hand, it is very beneficial for you to see the numerous investments options available to you so you can select the best one that fits your goals and interest.
Types of Education
Education comes in many forms that can benefit both the new and experienced Investor. Each person comprehends information differently and therefore one method is not best suited for everyone; some prefer reading books while others need a more structured and formal educational process. The following is an overview of the various educational opportunities that are available to you that you may want to consider:
� Real Estate Shows
� Boot Camps
� Joining Investment Groups
� Participating In a Coaching Program
� Teleconferences and Webinars
� On-line Courses
� Adult and Continuing Education Programs
Be Careful Not To Dilute Your Focus
There is one challenge that you may face as a new Real Estate Investor that you need to keep in mind. Be careful not to dilute your efforts by trying to learn and implement every real estate business model available. On one hand, getting an overview understanding of the various business models will allow you to better select a strategy that is best suited to meet your investment goals and personal interest. However, when it comes to developing a business model implementation strategy, you may be setting yourself up for failure if you try rolling out various models simultaneously.
Should You Start With Single- Family or Multi-Family Properties?
Still another consideration you will have to think about is if you want to initially invest in single family or multifamily properties; this has historically been a frequent topic of discussion with many people I meet. Many of the textbooks and educators out there today promote starting with single family properties and then at some point in your development transition to the multi-family model. There can be some inherent flaws in this thinking because in general, single family investing can come with more financial risks. An example would be if you are just starting out investing in single family properties and let's say your only property is vacant, you may have to pull money out of your pocket to cover expenses. Using the same example, if this is a multifamily property, when one unit is vacant, you will still have the other units that can help cover the expenses.
The following section will provide some highlights in understanding some of the areas that could represent risks and challenges in determining what a good deal looks like. If you are not preparing yourself to consider these issues, it could set the stage for the end results to be nothing short of disastrous.
Where Is The Local Market Heading?
It will be vital for you to understand how the dynamics and trend of the local market can affect the short and long term value of the property.
Have an accurate assessment of the rehabilitation and holding costs. Here is an area where many inexperienced Investors can get themselves in deep trouble. Unexpected repairs and delays will eat away at your bottom, line or worst can push the final "Basis Price" into a zone where it is no longer attractive as an investment.
What Profit and Cash Flow Margins Are You Comfortable With?
Having strong cash flow and profit margins in the investment opportunities you are considering will be your buffer in the event something goes wrong in the execution of your plan and can include the following:
� The rent rate you were expecting is not achievable
� Rehabilitation and holding cost growth
� Can't locate a buyer for the property
Strong margins will give you the buffer that will allow you to make adjustments in your return expectations without getting hurt too much.
The following section will provide an overview of the common business models available to the Real Estate Investor.
Bird-dogging
In today's market that is overflowing with many motivated sellers, it becomes very important to the Real Estate Investor to have a comprehensive network of people "on the lookout" for them; this is where a Bird-Dog comes in. The role of a Bird-Dog is to locate good investment opportunities and present them to their pool of Investors for consideration. If an Investor proceeds with the purchase, the Investor will pay a finder's fee to the Bird-dog. A Bird-bog typically is not part of the actual transaction and with the possible exception of a Fee Agreement they may have with their Investors, their name will not appear on any of the legal documents. In addition, the Bird-dog has no right or control to affect the outcome of a purchase presented to the Investor once there is a meeting of the minds between the seller and the Investor.
Wholesale (Assignment)
The Wholesaling business model has continued to hold its ground as a very popular business strategy with both new and experienced Investors. The current buyers market that is overflowing with Short Sales, Foreclosures, large inventory, and motivated sellers has set the stage for outstanding below market value acquisitions. The basic structure of a wholesale transaction is fairly straight forward and the major steps are listed below:
� Locate a property that has significant equity or equity potential after renovation, commonly referred to as after repaired value (ARV)
� Tie the property up by entering into a Sales Contract
� Locate another Investor or end user who would be interested in the property.
� Assign the contract to the new buyer
� The new buyer will proceed to close on the property
� Upon a successful closing, you will receive an assignment fee.
What makes the Wholesale business model attractive for Investors is once you have located your replacement buyer and assigned the contract, your work is done. Now it's just a waiting game until closing (and your assignment fee). In addition, since you will not be getting involved in any renovations and remarketing, it will allow you to focus on getting the next project in the pipeline.
Hold to Rent
The hold to rent business model is extremely popular among successful investors. In this model you will hold property with the intention of utilizing them as rental units. This is the business model that will ultimately lead towards explosive wealth building opportunities for the investor. Due to the nature of this business model, it is possible to take advantage of any market location local or otherwise. There are a number of business models within this business model that include the following:
� Student rentals
� Seasonal rentals
� Safe housing rentals
� Single Room Occupancy (SRO's)
� Luxury rentals
� Subsidized housing rentals
One of the significant benefits of this business model is the ability to add value to the property. For the investor who purchases a nonperforming hold property and turns the property around, they can benefit from outstanding organic equity growth. Some of the things that may be required to transform the property may include the following:
� Raising rents to the current market value
� Removing deadbeat tenants
� Add new amenities
� Reduce tenant turnover
� Improve the curb appeal
� Change the property management company
Other significant benefits of this business model are the outstanding tax deductions and incentives available to you. It is strongly suggested that you consult with your tax advisor in order for you to implement an effective tax strategy.
Flipping
With the Flipping investment model, the Investor will purchase and close on the property and then will sell it to either another Investor or an end user. In many cases the property may go through a rehabilitation phase prior to the re-sale. The following will highlight some key factors to consider when pursuing this business model:
Capital Requirements
The Flip business model can require significant capital resources and is broken down into the following categories:
Acquisition Costs
Down payment and closing costs: Due Diligence costs which can include hiring a Property Inspector.
Repair costs
Materials and labor required for the rehabilitation
Holding costs
Mortgage payments
Insurance and taxes
Utility bills
Security
Selling costs
Marketing
Brokers commissions
Closing costs
One of the benefits of this business model is that your initial capital investment that you had to utilize for the complete flip cycle which includes acquisition, rehabilitation, and resale can be re-used again on your next deal while pocketing some profits along the way.
