Investing in real estate is appealing to almost everyone wanting to get ahead financially. What holds many back is a fear of the potential pitfalls. Investing pitfalls exist in every investment market. That’s why the risk-reward equation exists. It’s no different in real estate. However, in real estate there is a vast array of different investment opportunities. These vary from stable middle class neighborhoods with a near zero vacancy rate to inner city ghetto zones where it’s not only difficult to collect the rent but delinquents also regularly trash properties for no reason at all. That variation doesn’t include the huge dissimilarity encompassing commercial real estate investing.
For real estate investing rookies, there are fundamentals that you want to learn before taking the investment plunge.
- Your first investments will be through realtors. You need to find the best. Most realtors specialize. Some prefer listing properties, others are best at selling. Few want to work with investors. The reason being is that investors are looking for below market value deals. Investors will look at 20 to 30 properties before making a single offer and then low ball the offer. As a newbie investor, you need to find a high quality realtor that understands this but is still in the business of working with investors.
- You need to become a master negotiator. Successfully negotiating an investment isn’t always about the selling price. When working with a motivated seller, you’ll do much better understanding why they are motivated to sell and directly addressing the issue that is motivating him or her. If it’s a fast closing, you can offer less money but close the deal in a week. If they are tired of managing the property, you can offer a lease option to buy in the future but manage the property today. There are many reasons that motivate sellers to sell for less than market value. You need to understand the motive of your seller.
- As an investor, you need to be capable of quickly analyzing a potential deal. If you have two realtors each sending you five potential deals every day, you can’t take four days or even four hours to analyze each deal. You need to be able to turn down the clear losers in as little as ten minutes. Then you create a short list of qualified potential deals. Still, you need to be able to come up with an initial offer within a couple of hours. The best deals go to the faster movers. You need a simple checklist to qualify the best deals.
- You need to be proficient in the many financing options for real estate. Just a few of the most popular for investors include: all cash sales, lease options, wrap mortgages, short sales, owner financing, foreclosures, and mortgage sales. Don’t invest until you’ve fully researched this important aspect of real estate investing.
- Last but certainly not least is the importance of comprehending the reason(s) for investing in a particular piece of real estate. You don’t make your profit when you sell. You make it when you buy. A proper due diligence of a property isn’t based on the purchase price. It’s based on the purchase price and the sales or investment profit. When buying a rental, you need to thoroughly understand the cash flow and all of the expenses. When flipping a property, you need to understand the repair and improvement costs, holding costs, and the low end of selling prices for the neighborhood. If you’re going into the commercial real estate market, you need to know that the business model is completely different from residential real estate.
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