Real estate investing may appear to be complex for beginners, but no great things come easy in life.
I officially began my real estate investing journey back in 2002 with a purchase of a three family home. My parents owned a few investment properties, and I witnessed firsthand the success that my parents had with these investments. So I figured it was my turn to try my hand in real estate.
My only problem was that I never stopped and asked myself what brought them the success.
My parents both were immigrants, and their education was limited to high school. What they lacked in schooling, they more than made up with desire, street smarts and a willing to take massive action.
I was fortunate to attend college, but higher education left me unprepared to invest intelligently in real estate.
My parents were the beneficiaries of an emerging real estate market. When they were acquiring their assets, the market in New York was still growing and the price of an asset allowed them to cash flow. Once I began my journey, the market was in a different phase and I was overpaying for my properties, just like most other investors in my market.
Here are the top five things I wish I knew when I began real estate investing.
- Due Diligence
- Everything is negotiable
- Pick a niche
- Learn from a pro
When I first began, I had no idea how to research a market to see if it was a viable market to invest in. I had never heard of job growth, demographics, cost per unit and other metrics to measure a market. I just wanted to own real estate in my town without actually researching the market.
I should have been concerned with job growth and population growth. That would have been a clear indication that my market was not growing, and to look elsewhere. I also had no understanding of how to appropriately analyze one property against the next.
I did not know the typical expenses of running a property in my market, what an cap rate was for investment property, or the tenant laws. I was just thrilled to be buying a property .
If I had understood the market and the market cycle, I would have been able to avoid some costly mistakes. I overpaid for the first few properties because of my lack of understanding the market and not analyzing the properties correctly. How can you avoid this huge mistake?
- Understand market value. What does it cost per unit to purchase a property?
- Research demographics: look at job growth (at least 2% growth for 2 years), population growth, household growth. Google the city you are interested in and the information will be there for you. Learn where the paths of progress are in your city.
- Learn what the costs are in your market. I now know that it costs about 3,600 per unit to run our properties. What are taxes, insurance, maintenance and insurance to run a property?
- Be familiar with the tenant laws in your city. New York is notoriously a tenant friendly state, so evicting a tenant is more costly and a much longer process than the market I am currently investing in.
- Begin to assemble a team to assist you in running your business.
I could write an entire blog about due diligence, but when I first started, I had no idea what the term meant. I learned real quick!
I now abide by the sage words “Trust but Verify”.
An investment has to be dissected and analyzed thoroughly and an investor should only purchase an asset based on “actual” numbers; pro formas should be discarded.
The three types of due diligence every investor should perform in this order are:
- Financial- pore through the financials to make sure the investment fits your criteria. We strive for a 10% Cash on Cash, 8 Cap and 1.3 DSCR and above. I had no idea what these parameters were, but I quickly learned that this was the key to my success.
- Physical: Once the financial side checks out, perform the inspection of the property. Don’t waste your money on an inspection if the numbers don’t work
- Legal: Another big boo-boo on my part. Check to see of there are any violations on the property or if there are any liens. My first investment was a legal three family, but I purchased it as a four family. It took me years and thousands of dollars to fix that mistake, not to mention the grief.
Additional Read: How to Conduct Multifamily Apartment Due Diligence
As you get older in life, you begin to realize that everything is negotiable. The internet has empowered the buyer and allowed him to become educated on the product he is buying. In most instances, the buyer has more knowledge than the salesman.
Real estate is no exception. When I purchased my first investment property, I accepted the bank’s terms without negotiating a better deal. I had little experience dealing with tenants, and that hindered my ability to raise rents accordingly.
Fast forward to the present. My company recently closed on 156 units, and we were able to negotiate great terms with the bank. We were able to put down only 15% as the down payment (banks normally want 20%) and we received interest only payments for one year. This will allow us to use the extra capital to invest in the property and distribute as owner draws. Our plan is to refinance the property within a year.
Be willing to negotiate every aspect of real estate, including vendors, bankers, and tenants.
Pick A Niche:
This may seem obvious to many experienced investors, but when I began, I felt like a chicken running around without a head. Did I want to fix and flip, buy and hold, purchase land? I had no strategy and I was unable to focus my investing goals. My recommendation is to choose a niche, educate yourself on that niche, learn as much as possible and formulate a business plan. You can’t hit a target if you don’t have one. Once I began to concentrate on multifamily properties, my success exploded.
Choose a niche, and begin to write your business plan. I have included our credibility book to show you an effective business plan. You will see how our niche resonates throughout our plan and how we only focus on our niche.
Learn from a Pro
I had never heard of the word mentor or coach when I bought my first property. My career took off once I pursued a coach who was able to help me with my plan. Was it expensive?
Yes, but it cost me more in time and money not to have one.
A coach taught me how to invest correctly, showed me how to set goals, taught me how to analyze a market, and expanded my horizons. It allowed me to shorten my learning curve dramatically, and I was being taught by someone who had massive success in the endeavor I was pursuing.
But most of all, my coach held me accountable and made me realize that all my mistakes were my fault and how to create a plan to avoid these costly mistakes.
Seek out a coach or mentor. Be sure to verify their credentials, and make sure that they are actively investing themselves in the current market. Don’t be afraid to pay a coach. I have found that when I have some skin in the game, I will take the relationship seriously and I will perform much better.
I have countless other follies in my journey, but these top five caused me the most grief. I hope these recommendations have served you well. I would love to hear what your stumbling blocks were when you first began your journey.