For Newbies

11 Tips to Excel as a Real Estate Investor

11 Tips to Excel as a Real Estate Investor

There is no such thing as a foolproof roadmap for success in real estate investing. Every single investor brings their unique qualities to the table (innate entrepreneurial instinct, people skills, systems thinking, or something else) which are then put to the test in the harsh conditions of real estate markets.

And while some investors manage to successfully grow their business over the years, many shut down their real estate investing companies within the first year. What sets these two groups of investors apart? Well, it’s hard to tell, as each investor has their own story. 

That being said, you can benefit a lot from these stories; you can learn lessons on becoming a real estate investor without going through bad experiences and eventually excel as a real estate investor. To help you out, we’ve put together this list of tips (some of which come from investors who were guests on our REI Marketing Nerds podcast), so let’s get right into it.

1. Don’t Go All Out When Rehabbing

This is advice for those who prefer house flips. Realtors and real estate brokers can do wholetail and wholesale deals without making big changes to the actual property. On the other hand, investors often handle distressed houses, so a bit of remodeling work is required before they can get the property into a buyer’s listing.

The rehab projects are ok as long as they prepare the house for selling. However, rehabbing is also one of the pitfalls of “fix and flip” as investing strategy, because it can lead you to max out on repairs. And the line between necessary remodeling and excessive remodeling is very thin.

So, before you expand the scope of a rehab project, pause for a moment to determine whether such remodeling is essential for the sale. Will the rehab increase the after repair value (ARV)? Or is it a nice-to-have type of feature?

Obviously, the answers to these questions are complex and call for careful consideration (and calculations), but your safest bet is to stick to the basics. These include solving issues with electricity, plumbing, and structural integrity (roof or foundations), as well as sorting out code violation issues. Once these are covered, you can consider projects like knocking down walls to create an open house floor plan, upgrades to the flooring, or remodeling the kitchen (it does serve to increase the house’s overall value). Amenities, curb appeal, and home luxuries come after this unless these features are essential for turning a profit when house flipping in your market.

2. Value Your Time: Don’t Go DIY To Save Money

We’ve discussed this in the past; investors who have money don’t have time, while those who have time don’t have money. So, naturally, a novice investor with extra time on their hands might be tempted to try and save money by taking on additional responsibilities. This goes along the following lines:

  • doing remodeling work on your own instead of hiring a contractor;
  • cleaning and fixing a rental unit on your own instead of hiring a property manager;
  • collecting payments from tenants on your own instead of hiring a rental account manager;
  • creating and managing ad campaigns on your own instead of hiring a marketing agent, etc.

The bad news is that going DIY doesn’t save time and money – this is counter-intuitive, but it’s true. If you focus on saving money by cutting specific costs, you lose track of the real costs that come with wasting your own time.

Joe Cordes explained this at length when he was our guest, especially when it comes to house flips. Suppose a contractor asked more than you are willing to pay for the job and you postpone a rehab project in the hopes of finding another contractor who will present a cheaper offer. The property accumulates costs each day by sitting idle (utility bills, maintenance costs, mortgage payments) and you must take this daily burn rate into account. Even if you end up finding a cheaper contractor, the daily burn rate will eat up the money you saved on.

It’s a mindset shift, critical for entrepreneurs, where you value your own time over saving by cutting corners. First, you need to know how much you make in an hour doing what you do best. And if going DIY will save you less than what you make in an hour, then that task is simply not worth your time. Delegate to team members or hire the services of others.

3. Hire Services That Specialize in Real Estate Investing

Speaking of hiring services to relieve your workload, go for services, products, and resources that are specifically developed for real estate investors. This will prove helpful in many aspects of your work, because someone who specializes in working with investors will have a better understanding about your sore points and how to address them.

In specific terms, this translates into using Carrot to build your website, products like InvestorFuse to manage leads in a client relationship system, and AdWords Nerds for pay-per-click marketing and search engine optimization.

There is nothing wrong with hiring a service that has clients across different industries or using a resource that’s not created exclusively for investors. However, in our case, we’ve spent a decade helping real estate investors get motivated seller leads, and the experience (and the data set) that comes with all that is hard to match. This probably applies to all other real estate-related service providers out there.

4. Hire Team Members Based on Values, Not on Skill Set

Building a team becomes a necessity as you scale up your real estate investing business. Even if you intend to remain a solopreneur, there will be instances when you’ll need to rely on someone else to complete a task (maybe your spouse or another family member).

Some investors use predictive index tests in their recruitment process. These are aptitude tests done through completing different types of tasks. They allow users to identify the most suitable team members for a job, and many successful companies use them to assign roles for employees in which their skill set will be put to best use.

However, we’ve also pointed out that personal values should also play a role in selecting team members. The logic behind this approach is simple, yet profound; you can teach people new skills, but you can’t ingrain values in them (not in the employer-employee relationship). Training employees to adopt a new skill or to follow an in-house procedure is easy if they have the right mindset to begin with.

If your employees put their personal interest first, sooner or later this will disrupt the balance in your team. Also, by hiring an inconsiderate employee, you put yourself at risk of losing your good reputation with motivated sellers, private lenders, and other professionals.

5. Vet Courses and Networking Opportunities

This is important during networking interactions within your local REI club. These clubs are the perfect place to jump start your real estate investing business. If you make an effort to participate in REI club events and meet ups on a regular basis, you will hear both success stories and horror stories from fellow investors – the benefits from mingling in this environment are invaluable.

However, when you join a REI club, you are also guaranteed to receive offers on courses and events that are available at an extra fee, like courses to learn a new skill (or improve an existing one) or mastermind networking events. Investing in personal development and meeting industry leaders is great, but there is no lack of stories from investors who realize they’ve been up-sold a course (or an event) once they grasp the actual value of the opportunity they’ve been offered.

It’s ok, we’ve all made that mistake along the way, just don’t make it too often. You have been warned, so vet the people who arrange these opportunities before you reach for your wallet to get behind the paywall. Sometimes comparable learning or networking experiences are available for free elsewhere.

6. Use the 2%, the 50%, and the 70% Rule of Thumb

Investors need a method that will enable them to qualify leads fast, so they’ve introduced shortcuts to help determine whether a deal is worth pursuing. Of course, these are “rules of thumb” and not “rules of real estate investing law” and they are to be used for making initial assessment, but not for arriving at a final decision. Not without doing proper due diligence (including calculations).

These rules of thumb include:

  • The 2% Rule of Thumb – used to gauge whether a rental property investment can provide consistent cash flow. It is calculated with the following formula: monthly rent divided by the value of the property expressed as a percentage. For example, if the rent is $1,500 a month, and the house’s total value is $300,000, this deal meets the 2% threshold.
  • The 50% Rule of Thumb – or to expect that only half of the income from a rental property can be used for loan payments, saving, or reinvesting. The other half is spent on operating expenses (property management, taxes, rental vacancies, utility bills, etc.). So, if you get $1,500 rent each month, the operating costs will eat at least $750 of that rent. Fixing major issues is covered by operating costs too – for instance, repairing a critical leak in the plumbing needed once every 5 years, but it costs you $50 each month.
  • The 70% Rule of Thumb – finally a rule for wholesalers and house-flippers. It states that the highest price you can afford to pay for a flip is 70% of the ARV minus the repair costs. A lot depends on the actual estimate regarding ARV and the exact costs once the rehab project is completed. Nevertheless, this rule serves to create a fast sketch of the deal.

Again, you shouldn’t base a purchasing decision on these three “rules,” but they can help you with the initial screening of deals. Local laws and regulations (taxes, insurance, closing costs) and characteristics of local real estate markets can significantly throw off the calculation when using these formulas.

7. Use Triangulation to Verify Data You Know Nothing About

Managers (and entrepreneurs in general) are forced to face their own limitations in the course of daily decision-making. You simply can’t be an expert in every aspect of your business; maybe you know finances, but you don’t know construction, or maybe you don’t know IT, but you master people skills, etc. So, how do you bridge the knowledge gap, particularly for decisions you can’t possibly delegate to anyone else in your company?

Enter: triangulation method. You use as many valid data sources (at least three, hence the name) to develop an understanding of the stakes. We all do this, every day. Suppose you need to decide which gym to join – you get quotes from many fitness clubs and you compare the membership plans they offer.

The same applies to selecting a rehab project contractor for a house flip if you know nothing about construction: you ask for quotes from several contractors and you compare their terms and offers. Say you have five offers and one contractor submits an offer that’s way too cheap relative to the other four. Chances are, the cheap contractor is either:

1) not aware of the actual costs for this rehab; or

2) they know the real costs, but they submit a cheap offer to secure the contract.

In both instances, they are likely to ask for more money once the project is underway (i.e. walls are demolished and there’s no turning back).

The triangulation method can be used in every area of real estate investing. Let’s say you are a novice investor and you need advice about entering a specific real estate market. You can consult many professionals (for example, your mentor, a realtor, and an attorney) and they will check each other’s work. If one of them contradicts the others, this person is either deliberately trying to mislead you, or they have a different perspective on real estate markets. In either case, you learn about the market, and about the people you consulted on the matter. Of course, first, you need to master networking to be able to consult different people at will and to get their honest opinion.

8. Have More Than One Exit Strategy

Although you might prefer one investing strategy and ideally close only one type of deal, you can’t run a real estate investing business having only one exit strategy for all properties. Sometimes, and especially in a seller’s market, your preferred deal is not an option, so you better be capable of choosing between multiple exit strategies.

We call this the multiple close model and it’s the best way to make the most of the leads that landed in your funnel. Dan explained this in one of the first episodes on our podcast:

I think the most common variation of this is an investor who can flip houses when they want, they can wholesale deals when they want, and they can work with a realtor, or they have some way of making money off of leads that just want retail price. So they have the ability to flip when there’s a lot of profit to be made, they have the ability to wholesale when maybe there’s profit to be made, but they don’t necessarily want to do the work, and they have the ability to work with leads that want retail price on their home.

9. Set up a Revocable Living Trust

Trusts are known as alternatives to wills in estate planning. You know, having a transition plan in place in case you are incapacitated or suffer sudden death. A document that eliminates the need for lengthy and unpredictable probate proceedings. However, trusts are much more than that.

If you are both the grantor and the trustee of a revocable living trust (i.e. one that can be changed while you are still alive), you can enjoy many benefits, including tax breaks and the ability to actively manage assets even though they are meant to be eventually given to a beneficiary.

It’s a somewhat complex legal matter, but it’s worth considering, and many investors deem them important.

10. Diversify Your Investment Portfolio

When you start out in real estate investing, usually the concern is how to get loans to close deals. As your business grows, the issue becomes how to distribute your assets in a way that will allow you to mitigate the risks of losing them to a downturn in the economy. It’s a cliché, but it’s true – don’t keep all of your eggs in one basket.

In practical terms, this means investing your wealth in different asset classes. You can use the extra cash to become a microlender yourself (and collect interest from debtors). You can hold a rental property for cash flow and wholesale or flip those you don’t want to keep.

And, finally, you can venture into a new type of real estate deals, like commercial or industrial property, and even land. It’s a great way to diversify your investing portfolio, but keep in mind that each of these markets has its own unwritten rules, and you’ll need to learn them before splurging your hard-earned cash.

11. Master Marketing and the Rest Will Fall Into Place

I get it, you are probably thinking: “These guys do online marketing for motivated seller leads, so they tout their own horn by pushing marketing as an essential part of real estate investing.” However, we are not the only ones out there who recognize the importance of marketing for making it as a real estate investor. Others see this too, and the popular podcaster Greg Helbeck is one of them.

This is what he had to say when he was a guest on our show:

…the real estate business is the marketing business, especially in a direct to seller environment, if you’re going to get deals off market…. If you could put a dollar in and get two or three out, how many times do you do that?

…Then I started looking back at mailings I did unsuccessfully, just anything that I did unsuccessfully, and it was not marketing-wise and I wasn’t following the principles of always having an offer, following up, tracking measurement accountability, making it look like mail order, just all the typical direct response stuff….I had all of these aha moments…I’ve got to start learning more about this. Then I basically said I’m in the real estate business, and I understand how to buy and sell properties and raise money and all that. I’m going to get good at the marketing business.

Takeaway

We’ve covered a lot of ground, so here is the shortest possible version of these 11 tips:

Don’t max out on rehab projects – make a distinction between necessary and excessive repairs when you do fix and flip. Repair costs are dents in your profit, so stick to remodeling work that is essential for improving ARV

Don’t go DIY to save money – you are an entrepreneur and you have to start thinking like one. If the task can be completed at a rate that is lower than your average per hour pay, value your time and give the task to someone else.

Hire services that deal exclusively with real estate investors – go for companies like AdWords Nerds, Carrot, or InvestorFuse. They have years of experience in the field and their products, services, and resources are tailor-made for investors.

Recruit employees based on values – new skills can be passed on to any employee who is willing to learn, but you can’t change people’s values. Hire team members whose values match yours to avoid HR issues.

Do a proper vetting on course and event organizers – some of the people who try to sell you a course or networking event at your local REI club might be in it only for the money, so always double-check these offers.

Use the 2%, the 50%, and the 70% rule of thumb – as a shortcut for estimating whether to commit to a deal. Don’t make a final decision based solely on these rules, but keep them in mind when qualifying leads.

Triangulate to decide when you lack understanding – select at least three offers (for anything) and compare them relative to one another. Even if you don’t have a clue, triangulation can help you make a better decision.

Employ the multiple close model – don’t expect to always close your favorite type of deal. Make your real estate investing company flexible and able to close wholesale, flips, or retail deals if needed.

Create a revocable living trust – because it’s better to have one than to skip. If you manage them properly, trusts can help you get a tax break and distribute assets more freely.

Diversify your investment portfolio – as a risk mitigation strategy. Property is one of the safest investment assets, but you can try new markets and type of deals to keep your wealth during a crisis.

Master marketing to get more deals – there are always deals in the market, and marketing is the way to get them. It’s an essential part of real estate investing and your future depends on it.

Good luck!

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