Real Estate Investing 101 – The Basics

There is no such thing as get-rich-quick real estate investing. The same criterion that is used in any sound investment strategy or financial plan should be used in the real estate investing business. It is very important to understand that owning and operating rental property is not just an investment, it is a business. Before you purchase any property you should have a plan to minimize your risk, to stay focused on your goals, and to protect yourself along the way. Investing in real estate does not need to be a risky endeavor if you have a plan. Your plan should begin with the following basic steps.

Step 1. Determine your goals or needs

The very first thing you need to decide is what you want to accomplish with your real estate investing, and over what period of time.  What are your priorities?

• Monthly cash flow?  

• Long-term equity building?

• Resale for profit?

• Tax shelter?

Step 2. Establish financing

All real estate investing depends on this.  If you don't have financing, you most likely won't be investing. You'll want to find a program that will allow you to put as little of your own money into the property as possible. In today's competitive mortgage environment, there are now investor programs that allow as little as five percent down on the investor's part.  Since you may have some remodeling or rehab costs, don't forget to look for programs that include money for those activities.

Step 3. Protect yourself legally 

This usually involves setting up a business entity such as a limited liability corporation (LLC). This helps protect your personal assets from many investment property related liabilities. If someone gets hurt on your property, they could sue you -- the LLC can help to protect your personal property. To do this you will need to consult an attorney or a Certified Public Accountant.

Step 4. Decide on your property management strategy

You can do this yourself or hire someone to do it for you.  If you are considering doing it yourself, then you have to ask the following questions:  

• What will I do if I have a tenant that does not pay their rent?

• What will I do if there are repairs needed?  Do I know of contractors that can do the following:

  • Plumbing, electrical, HVAC?

  • Laying carpet?

  • Hanging/repairing drywall?

  • Fixing dry rot and carrying out other carpentry work?

  • Repairing the roof?
    

• How will I handle emergency calls in the middle of the night?

• Who will step in for me if I am out of town or unavailable?

Step 5. Property selection

While I can help you with many of these steps, this is where I shine as the primary advisor/consultant.  I can help you to find, analyze, select and negotiate the right price of the investment property that meets your needs and goals.

Step 6. Income analysis of selected property

Once you have narrowed down the properties to a very select set of potential investments, it is critical to do an investment analysis of the property before you make an offer to see if it meets your goals and to reduce the financial risk.  There are many ways that this can be done - you can do it yourself, hire an appraiser, or I can help you with this.  Regardless of who does this, some of the items that it should cover are:

• Determine the value of the property either through an appraisal or Market Analysis

• Financial analysis of the income vs. expenses.  This should be customized according to your goals.  For example, if your goal is a positive monthly cash flow, the analysis should concentrate on the estimated monthly cash flow for the property.

• Tax ramifications should also be considered.  This may involve a tax attorney or CPA depending on your situation.

Step 7. Negotiating the purchase

This is more than just agreeing on a purchase price.  This involves such things as inspections and repair agreements, analyzing counteroffers, and making sure all the appropriate contracts are used.  I will be your representative through this entire process.

Step 8. Follow through to closing

Just because your offer was accepted does not mean you own the property yet.  There are many other items that need to be accomplished before you can take possession.  There are inspections, surveys, finalizing the financing, insurance, etc.  But this need not be a worry on your part, I will be there with you through this entire process to help make sure it goes as smoothly as possible.

While there are no guarantees to any investing – real estate or otherwise – with the right plan you can help to minimize your risk, stay focused on what you want to accomplish, and make the most of your investment.