Getting into real estate investment is not just about throwing money at a property. To invest in real estate profitably, you must treat it like a full-time job and address all the main issues you will run across. Only then will you be successful in the commercial real estate market.
1. Know what kind of real estate you want to do
There are a number of different real estate options, and if you are serious about real estate, you should start off focusing on one type. There are so many nuances to investing in real estate for each type. It would be detrimental to search for any opportunity and go for it without a concerted plan. Experienced investors can expand into other loan types because they’ve already built a team around them to make it easier.
The most common real estate type many beginners get into is multi-family unit real estate. This can be from duplexes to fourplexes and then into higher number units in apartments. These are good, stable, residual income sources that are relatively low in risk compared to other types of real estate.
There are plenty of other types as well. Whether you want to focus on hospitality, office, industrial, or empty land for future development, master one first before trying other real estate types.
2. Educate yourself on real estate
Master the real estate type that you have chosen. Understand all the nuances. Research everything there is on it and find others who are willing to help. Find out who needs to be on your team to be successful. It is important not to go into an investment blind to pitfalls that might show up. Know them from the beginning and work them into your plan.
3. Educate yourself on brokers
There are plenty of loan brokers in the world. Your risk is mitigated because most brokers are competent enough. Do not avoid a broker just because of the points he gets to save a buck. Brokers find the financing and orchestrate the deal. It saves a lot of time, headaches, and money in the end. As the deals get bigger and your portfolio expands, having the buffer between a lender and an investor is highly recommended.
4. Lawyer up
Do the homework required to find a good real estate lawyer because they will help you avoid many of the pitfalls that you will face. There are so many laws and regulations on properties that could cost thousands if a new investor is unaware. Hopefully, through research this won’t happen but with so much complexity, having a good lawyer on the team will save a lot of pain and even bankruptcy.
5. Build your stable of lenders
As more and more deals are completed, you will find that some lenders are better to work with than others. Building a contact list for banks and alternative lenders is important. Brokers have their own list (another benefit for them) but try to never rely on others for things that can be controlled in-house.
6. Strength of credit
Hopes and dreams do not make an investor successful. In the beginning, when there are few assets other than your home, it is important to have a strong personal credit. It is recommended that you maintain a credit score higher than 720. If it is lower, lenders will want to know why. There is a rough correlation between credit score and how it is managed.
7. Be a homeowner
Is your credit not as strong as it could be? Owning a home can be used as leverage to improve credit worthiness because a home is an asset like any other real estate. It is a great way to get your first property financed more easily.
Cash on hand always helps. Having six months of reserves for an income property is a quick way to push a deal through. Maintaining an account filled with a certain amount of cash (dependent on total assets and purpose) will greatly improve credit worthiness and show levels of experience and real estate maturity. This may be hard to do starting out but as soon as money can be funneled into an account for this purpose, the easier future deals will be.
9. Find your property
Do not dive into something just because it is available. Real estate inventory fluctuates regularly. Patience in finding the first property (and all future ones) is key to finding the right one. In the beginning, there is less room for mistakes. Picking the wrong property can sink a new real estate investor right from the beginning.
10. Due diligence
Do not skip on the due diligence. Do all the appraisals, inspections, environmentals on the property. It might seem like a great property until that first layer is lifted and a whole host of problems are found. By having brokers and lawyers doing your due diligence will vastly minimize pitfalls but skipping this will most likely cost a great deal of money.
Starting out in real estate and doing it right is not as easy as strolling down the street and buying a house. But, while there is a learning curve to the whole experience, there is a great deal of stability in real estate and a lot of money to be made. The most successful real estate investors know that the prep work is one of the important keys in purchasing good properties.