Wednesday, January 27, 2021

How To Get Rich In Real Estate: The Proven Method

Photo by Anete Lusina from Pexels
Welcome the first post of the New Year! A number of years ago I wanted to start a business purchasing residential mortgages in the secondary market. This was a significant time after the Great Recession of 2009 and although the smoked had cleared from that downturn, enthusiasm in the mortgage secondary market had not yet fully recovered. I knew that if I were to market my business idea, which I was positive was sound, I would have to not only formally document it in a presentation and a business plan, but would also have to show actual positive implementation results. I realized that I would have to raise a small amount of capital to implement this strategy on a small scale, so that I could present it to larger investors upon its successful completion.

In service to this idea, I spent a few weeks attending business classes and drafting a business plan in order to present the idea to potential investors. Once the business plan was complete, I brought it to the Small Business Administration to have another set of eyes on it. The plan was essentially complete and required some quick format changes to meet the SBA’s format. The changes were made quickly and the submission process was promptly completed. A few days later, the SBA gave me a final opinion on the business plan. The review wasn’t groundbreaking—it merely confirmed that the plan was complete, but the necessary next steps were Earth-shattering in their simplicity.

The SBA suggested that I seek out angel investors and pitch my idea to my sphere of influence, however, it also offered an alternative:

  •    Save up enough money to put 10% - 20% down on a house in a local    market;
  •    Purchase an undervalued or affordable property;
  •    Prepare the property for rental;
  •   Find tenants to rent the property;
  •   Use the rent to pay the mortgage and build up equity;
  •   Refinance or sell the property at the first available opportunity, using   the cash to fund your next venture.

It really is that simple…at least in theory. Believe or not, it is also very possible for most. This strategy is an expanded version of the popular BRRRR-Buy, Repair, Rent, Refinance, Repeat, strategy that is frequently discussed on the Internet and in real estate investor circles around the country. I didn’t receive it from a local investor or from a get-rich-quick website or even from a seasoned member of the real estate community trying to market a coaching program, however, but instead from the federal government. There can be no greater confirmation of the reliability of this strategy.

There it is. I’m definitely not the first to reveal this to the world and I won’t be the last, but let’s explore each step of the process more in depth:

Save Enough Money

The cost of entry is and lack of credit are the most popularly used reasons cited for not investing in real estate. According to the NAR, the National Association of Realtors, the median home price in the United States is $310,880. Admittedly, saving $63,000 can be outside of the means of most, but there are many local markets which have properties for sale for less than $200,000.  If saving $20,000 to $40,000 seems to be an untenable amount, the average cost of a new car in November of 2020 was $39,259, according to Kelley Blue Book. Assuming a poor/fair credit, causing a higher interest rate of 6%, a new car financed at 100% for the typical 5 year term, would cost $682 a month. A used car costing $20,000 with the same interest rate and no down payment would cost $387 a month. If those payments sound to high, a $17,000 car under the same circumstances would cost $329 a month. Due to the interest built into those monthly payments those hypothetical cars would be purchased at a near 16% mark-up. Interestingly, placing $333.34 a month in a savings account with 0% interest would allow a person to save over $20,000 in 5 years. If five years seems like a long time to save, please keep in mind that five years will pass whether or not you save at all. Furthermore, most people have bills that they have paid consistently for more than five years for services, cars, cell phones, etc. If necessary, a down payment can simply be thought of as another bill—your Independence bill. There are certainly quicker ways to amass a down payment—credit, borrowing from friends and family, birddogging, whole-selling, but one things is clear, the barrier to entry is not an impossible hurdle.

Purchase An Undervalued/Affordable Property

This is probably the second easiest step of this the method. I don’t want to be misleading, it certainly takes a great deal of effort to locate a property that works best for your personal situation, but this is the step during which the most support is usually offered. Finding a real estate agent with whom you can work is essential to this process. Although it is both possible and likely that the property that is chosen for investment is not found through an agent, the access to market information that  good agent has, as well as the benefit of their transaction experience can be invaluable. That said, it is important to look for a property that is at least in your price range and at best is undervalued. It is also essential to stick with an area of familiarity, if you have any. If you are a businessperson or are familiar with a certain type of industry, then commercial real estate may be your forte. In most instances, however, residential rental real estate is the easiest way to enter into the market as most people are familiar with either living as a tenant or living in residential real estate.

Although I highly recommend using a real estate agent, it is important to seek off-market properties sales, as well. Estate sales, for-sale-by-owner, speaking with local investors, tax lien sales and even memberships to local real estate investment clubs are all viable ways to find deals. REO sales are also a great way to find value, but those sales are very much on market and are always listed with an REO broker. I generally recommend not approaching a large REO broker directly as a new investor, as they typically have a long list of investors with whom they already deal and usually to whom they steer business. Anything that a new investor receives from such a broker has usually been passed by numerous times by other investors and for good reason. Establishing a relationship with small or “up-and-coming” REO broker, however, could prove to be very valuable, provided that their REO vendors are truly servicing that agent and not merely using him or her to test the market for their properties. Tax liens are also a great opportunity for investment, so long as you have time to investigate the property and a good title company and a good ESA company to ensure that there are no serious restrictions or environmental issues with the property.

  • In your search, please make sure to avoid properties with the following issues:
  • Located in an area that is unfavorable to rentals;
  • Cannot be rented;
  • Cannot be easily financed;
  • Has really high taxes;
  • Has serious repair issues;
  • Has title issues;
  • Has environmental issue. 

A good lawyer, mortgage professional and home inspector will ensure that you avoid any and all of those pitfalls. If you don’t know where to find reputable real estate professionals, an experienced realtor or real estate investor can provide you with contacts to professionals willing to assist you. Above all, it is important to maintain a balance of not rushing into a purchase, while not indefinitely sitting on the fence and never closing a deal. Although the old real estate adage—“The money is made on the buy,” is true, it is very important not to develop analysis paralysis.

Prepare The Property For Rental

Although I do not want to gloss over this step, as is it is a key step to this process, to ensure that this post doesn’t turn into a book, I will keep it short. Careful purchasing will ensure that the necessary repairs are not substantial. In order to ensure that you can handle minimal repairs, it is advisable to save an additional $5,000 to $10,000 for repairs. If this additional amount to save seems to be prohibitive, then please reduce the intended purchase price by $5,000 to $10,000.

Further, a reputable contractor is key to this step, however, there is no substitute for attentiveness. An owner’s presence during this phase of investment is key, both to show engagement and also because this is an important time for an early investor to learn more about the process of rehabilitating property.

Find Tenants To Rent The Property

If money is made on the buy, then finding tenants is where the money is secured. Tenants can be found through effective advertising and real estate agents. It may take some time to find the strategy that works best for you and the property’s market, but it is possible to create a pipeline of tenants for your rental or future rentals. It is also equally as important to vet your tenants to increase the likelihood that they will pay on time. Credit and reference checks are important to this process. You can either learn to how to perform these checks, which are not difficult to learn, or hire a vendor to do so. There are a few tricks of the trade, like never calling the current landlord of a potential tenant, as they are never honest about a bad tenant, but this can all be learned with time and research

Use The Rent To Pay The Mortgage And Build Up Equity

The beauty of owning a cash-flowing asset is that it pays for itself. Even if you were to break even with the rent after the mortgage payments is factored in, equity would still accumulate. In some instances, it may even be worth taking a loss merely to build equity, because appreciation works in tandem with equity accumulation. I would be very careful, however, not to take losses on a property in a depreciating market. That said, if you have acquired and rented correctly, this step is very passive.

Refinance Or Sell The Property At The First Available Opportunity

This is the payout. Just like the purchase, this is also a step where you will find a great deal of support. Every real estate professional loves working for a motivated seller and profit will be your motivation. Although any number of things can happen to delay a sale and marketing times may be longer than expected, depending on the market conditions, the finish line is in sight at this point. It is important to remember that all pricing should be well-informed and aggressive, if possible. It is always greater to take a hit of a few thousand on the asking or purchase price than bare the risk and cost of additional carrying charges, especially when a deal is imminent. Flexibility and creativity in closing terms and financing may also be helpful in avoiding unnecessary standoffs and allow both parties to walk away feeling like their needs were met through the transaction.

If the opportunity presents itself sooner, it might even be best to skip steps 4 and 5 and merely flip the property. That decision is entirely up to you. The most important part is that profits gained are used wisely and hopefully to buy more real estate.

Well, that’s my take on how to get rich in real estate. As I said earlier, the concept is simple, but the execution takes effort. Feel free to leave your comments below and please stay tuned for my next article—“Why Most People Don’t Get Rich In Real Estate."

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