Investing in Real Estate is an incredible opportunity to develop your financial wealth, strength, and well being. Yet… If your first investment goes poorly, it could sink your investment ship before you really get sailing.
Avoid the seven areas in this article, and you’ll be on your way toward a successful first real estate investment.
Rental real estate investing is a simple business model. You already understand it; either you lived in a home your family owned, or you lived in one you rented. Knowing what it takes to provide safe, clean, affordable housing is more than half this business. Living in a particular area, you alreadyknow what areas are good and which ones are less safe. You can do this!
1. They take bad financing. One of the reasons REI (Real Estate Investing) is so great, is the leverage that banks will give you. With your $10,000 down payment and a 3% conventional program, you can borrow the rest to purchase a $300,000+ duplex, or fourplex (quad). Nowhere else are new investors getting that much leverage against an asset, and Alaska real estate has consistently appreciated in value for the last 30 years. But, if you borrow cash from a hard money lender at 12% and get yourself into a tight position – you can spoil the whole deal!
That all said – you need to work with a knowledgeable and investor friendly lender. There are a few great options in Alaska – and you’ll want to have a conversation with them sooner than later. Some common sense pieces to know – when you’re in the financing time-frame – don’t go out and buy a new car – or take on some debt for a vacation. Now is the time to sit tight and get that investment property! As soon as your loan closes – sure – go to Kona, Hawai’i. But if you spend your cash or borrow for that car first – even after getting pre-approval, you may not qualify any longer for that loan. Remember – lenders have rules they have to play by, now more than ever, and you want to borrow their money for as cheaply as possible!
2. They shoot for the moon as a rookie. If you see a beat up old house on the market for 350 days – there is probably a reason the professional house flippers haven’t scooped it up already. Thanks to HGTV – every major and minor city now has multiple people flipping houses for a living. You can score a deal – don’t get me wrong – but it takes some hustle – and someone who has done it before looking at this with you is a big help.
If you’re like how I was when I started – you want cash flow. That way you can repeat your investments early and often. I still want cash flow – but what I have learned over the years is that 25% cash flow from a failing neighborhood on paper is most likely to be 10% cashflow in the real world. (And a lot of headaches.)
3. They overpay. Simple enough. You need to start out in a good position. I almost bought a home for more than it is worth because we wanted to move. If we had – we would have surely lost money when we went to sell it. You’ll always pay more for great locations and great condition – but you can often get a 5-10% discount on value by doing some analysis (I’ve got spreadsheets!) – or bringing value to the property through renovations or management, etc.
4. They go solo. By now you should understand the value of other people in your life. Every great investor has many people that work with them and for them. You will want to read (self-educate) and find a mentor for investing! I love sharing what I’ve learned through investing – and so will many others – buddy up! As a real estate agent, I am in a very small percentage who actually own and manage real estate investments of my own – consider working with someone like me who can see through the selling sides sales talk and soft numbers.
5. They don’t budget for repairs. To be an investor you need to be optimistic, but realistic at the same time. Not exactly, “Hoping for the best but expecting the worst,” but some expectation makes sense. If you’ve budgeted for repairs, and don’t have them come up – extra cash flow! Budget for some CapEx – some repairs – some lost rent – etc., and don’t let an agent, an advisor, or anyone else tell you that those things don’t come. Your roof will need to be repaired and replaced at some point!
6. They buy in a bad location. Now can you buy in any part of Anchorage and make it work? Yes. But as a first time investor – you may be wise to avoid the roughest parts of town. There is a property and a strategy to fit every investor – but no investor fits every property or strategy. But for your first time out – you want to buy a property that will move you forward without exposing you to more risk than you can handle.
7. They wait too long. Now I am all for waiting on the right investment. It may take six or sixteen months. Yet – some will be stopped by fear, or “analysis paralysis” and see ten years roll by while sitting on the sidelines. I’d rather have an average investment for the last ten years than none at all. Especially in real estate – where I am paying down the mortgage – receiving tax benefits – and earning cash flow. Any action or investment includes risk – but if you find good team members and continue to learn you are on the path towards a great first investment!
The takeaway: Don’t let fear stop you from getting in the game – or greed get you bite off more than you can chew. Hustle and find a mentor, and pursue an investment.
Don’t swing for the fences with your first at bat – hit a single and focus getting on base. Then double down – you’ll be armed with an education and insights that will make your second investment better than your first. Rinse and repeat. Soon you’ll be on your way to passive income, a financial foundation worth building on, and the ability to be a blessing to your family and community.
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