Without a doubt, investing in real estate is one of the greatest paths for building long-term wealth and passive income. But, it’s also not an easy path. Success takes a ton of work and discipline. As such, people often ask me how to be a successful real estate investor.
Success in real estate begins with certain characteristics: willingness to learn, work ethic, and resilience. With those as a foundation, most successful real estate investors follow a standard experience progression. And, mastering each of these investing building blocks brings real estate success.
In the rest of the article, I’ll dive into the details of becoming a successful real estate investor. Specifically, I’ll cover the following topics:
- Characteristics of a Successful Real Estate Investor
- The Real Estate Investor Experience Progression
- UOPM (Use Other People’s Money)
- The Value of Investing Mentors
- Find the Best Real Estate Deals
- Final Thoughts
Characteristics of a Successful Real Estate Investor
Prior to even discussing real estate, all successful investors share three common characteristics:
Willingness to Learn
Real estate, like most industries, has its own language and skills. For a new investor, it can be an extremely steep learning curve trying to grasp all of this industry-specific knowledge. If you don’t have a willingness to dive into the learning process, you will undoubtedly fail as a real estate investor.
This trait relates directly to willingness to learn. Unfortunately, many novice investors confuse passive with easy when they hear about making money in real estate. Yes, in the right situations, you can develop incredible passive income sources with sound real estate investments. But, this takes a ton of work – both in terms of A) learning, and B) finding and executing quality deals. Without a serious work ethic, new investors will not succeed.
In addition to taking a lot of work and study, real estate investing also comes with unexpected bumps in the road. Even the most experienced investors hit obstacles (e.g. an HVAC unit unexpectedly breaks, the post-rehab value of a home falls below expectations, your contractor flakes out on you and you need to find a new one, etc.). If you let these setbacks destroy your confidence and motivation, you won’t thrive as a real estate investor.
The Real Estate Investor Experience Progression
When you possess the above characteristics, you’ll be armed with a solid investing foundation. But, at some point in time, you have to translate these characteristics into execution. In other words, yes, part of initial real estate education certainly involves “academic” work. That is, you need to do some reading, listen to some podcasts, talk to experienced investors. Bottom line, you need to build a general understanding of investing prior to diving headfirst into your first deal.
But, this “bookwork” can only take you so far. Eventually, to grow as an investor, you need to start getting actual experience. As the saying goes, good judgment comes from experience, and experience comes from bad judgment. You have to get your hands dirty, make some mistakes, and learn from those mistakes to gain experience.
However, this doesn’t mean you should try to start your real estate journey by developing a 250-unit apartment building. Instead, a common – and logical – investment experience path exists. While you don’t need to follow these steps exactly, the following investment strategies help you walk through the “investor lifecycle.” Each strategy is more complicated than the prior one, so learning them in a step-by-step approach allows you to gradually build your experience, becoming a successful real estate investor in the process.
Bird dogging offers an awesome, low-risk way to get your foot in the real estate world. And, it doesn’t require any capital. To make money, you’ll absolutely need to work hard and learn a lot. But, if you make a mistake on a deal, you won’t lose tons of invested money in the process.
Here’s how it works. A lot of real estate investors make money through wholesaling, which I’ll discuss next. But, in a nutshell, wholesaling requires investors to find deals to bring to other investors. While the wholesalers themselves can certainly do this searching legwork, they often pay other people – bird doggers – to do it for them.
Bird doggers spend their time looking for a certain sort of deal. They want to find distressed properties that won’t qualify for traditional financing. In other words, traditional mortgage lenders want to make sure a house is actually habitable. Bird doggers look for properties that don’t meet this standard. Next, the owners of these properties need to have A) some equity in the property, and B) some reason for wanting to sell – often to turn that equity into cash.
As bird doggers find leads on situations like this, they pass them along to wholesalers for a fee. They may receive a fee for every lead, or it could be a contingent payment based on the lead actually converting. It ultimately depends on the relationship you have with a particular wholesaler. But, regardless of payment structure, bird dogging provides you an outstanding opportunity to gain some real estate investing experience with little to no barrier to entry.
Once you’ve bird dogged for a while, you can make the jump into wholesaling properties yourself. This investment strategy lets you make money without needing to actually purchase properties. As a result, it represents a great approach for new real estate investors working on gaining experience.
As stated, with wholesaling, you don’t purchase an investment property. Instead, wholesalers find off-market properties, and they enter contracts to purchase these properties. Rather than close on the purchases, they assign the contracts to a third party, typically a fix & flip investor. And, they assign these contracts for a fee. As such, wholesalers find deals, connect the sellers with investors, and collect a fee in the process – all without dealing with the headaches of doing any rehab work themselves.
When you wholesale, you learn very quickly how to spot good deals for fix & flip investors. If you don’t find good deals, you won’t be able to assign contracts to these people. Simply put, you learn what to look for in a property. Additionally, you have to work closely with house flippers. This gives you the added benefit of learning from them. Pick these people’s brains. They have tons of experience, and you can learn from it. Lastly, wholesaling puts money in your pocket. If disciplined, you can allocate a portion of these funds for a down payment to purchase your own fix & flip property.
All of these advantages to wholesaling put you in a position to make the jump into the next strategy.
Fix & Flip
As a fix & flip investor, you need to understand everything wholesalers do about finding good deals. But, you also need to understand how to rehab and sell these properties. Broadly speaking, the fix & flip strategy works like this:
- Step 1, Find a distressed property: Investors need to find properties that need rehab work to qualify for traditional financing. And, these properties need to make financial sense. That is, the purchase price and all rehab-related costs need to be less than the projected final sale price to make a profit.
- Step 2, Rehab the property: After purchasing a distressed property, house flippers need to renovate it to a standard that A) qualifies for a traditional mortgage, and B) appeals to potential buyers in that particular market. This requires an in-depth understanding of renovations, working with contractors, and creating accurate rehab budgets.
- Step 3, Sell the property: Finally, house flippers need to sell the property. Typically, these investors sell to primary homebuyers. That is, they sell to people looking to buy their home – not an investment property. This requires an understanding of sales and pricing strategies, and a solid analysis of the local market.
The above provides a simplified overview of the house flipping system. However, it should be clear – this strategy takes far more knowledge and experience than bird dogging or wholesaling. But, it also provides investors far greater returns. And, during the house flipping process, you’ll inevitably make mistakes. As you work through a few deals, you’ll quickly gain a tremendous amount of experience.
After gaining experience in the fix & flip world, many investors make the jump into the BRRR strategy. This requires all of the experience and knowledge of flippers, but now you also need to understand property management and permanent financing. Here are the steps that make up the BRRR strategy:
- Buy: Investors buy distressed properties – ideally at a deep discount – in need of major repairs. As such, BRRR investors largely look for the same properties as fix & flip investors.
- Rehab: Investors then rehab the property. However, they don’t rehab it to sell it. Rather, they do their renovations with an aim to appeal to renters. Rehabbing a rental property usually means picking far more durable materials than if rehabbing for sale. You’ll need materials that can handle the wear and tear of multiple tenants. And, you don’t want to have to complete repairs every year. This rehab leads directly into the next step of the strategy.
- Rent: Once you’ve completed the renovation, you need to market the property for rent and secure quality tenants. You can certainly hire a property manager to do this. This saves you a ton of headaches, but it also costs money. And, from an experience perspective, I recommend investors manage at least one of their own properties. This provides you a solid understanding of the leasing and property management process, and you’ll be better positioned to hire and supervise property management companies down the line.
- Refinance: Once you’ve rehabbed the property and signed a tenant lease, you can refinance the property. Typically, BRRR investors (and flippers) use hard money loans to finance a property purchase and rehab. However, these loans have high interest rates, as they’re designed for short-term investment use. Once a property meets traditional mortgage quality standards and is rented out, you’ll want to refinance into a traditional mortgage. This new loan will pay off the outstanding hard money loan.
As these steps illustrate, BRRR investing requires all the experience and knowledge of flipping homes, with two additional wrinkles. These investors need to understand property management, and they need to have a better grasp of real estate financing. The success of the strategy hinges on refinancing, so that’s crucial knowledge.
However, while requiring more experience, this strategy also provides more profit. With a house flip, you have one-and-done profit. That is, once you sell a property, that’s how much you make – for better or worse. BRRR investing creates long-term wealth. In addition to profiting up-front by pocketing a portion of your refinance proceeds, you continue to make money in three ways.
First, you pocket any rent payments in excess of operating expenses and debt service. Second, you gradually build equity in the property as your tenants’ payments pay down the amortizing mortgage. And, third, houses appreciate over time. While they may fluctuate in the short-term, over time (especially a 30-year mortgage horizon), home appreciation historically has outpaced inflation.
Become a Lender
The final step in the real estate investing progression requires expertise in all of the previous strategies. Once investors understand these systems, they often decide to become hard money or private lenders. Of note, both of these lenders function similarly, but hard money lenders act as formal businesses, whereas private lenders act as individuals.
At face value, lenders appear to do far less work. And, in some ways, they do. Lend money, sit back, and profit. But, to do that successfully, you need to have an in-depth understanding of how to analyze deals. Lenders only make money on successful deals. If you lend to anyone for any deal, you’ll fail. As such, before issuing loans, these lenders need to fully analyze a deal – the same way they would as a fix & flip or BRRR investor. However, now the loan interest is their income not expense.
But, lenders need to know more than just analyzing deals. They also need to understand the legal, administrative, and financial requirements of originating and administering loans. And, unfortunately, part of this means understanding the foreclosure process, as well. Proper up-front due diligence mitigates the likelihood of a borrower foreclosure. But, sometimes a series of unfortunate incidents leads to borrower default. As a lender in this situation, you need to be prepared to execute foreclosure procedures to recoup as much loan principal as possible.
UOPM (Use Other People’s Money)
As a real estate investor, two factors will limit the amount of deals you can complete: time and money. You can multiply your available time by working with and delegating tasks to a solid team – something that comes with success.
When it comes to money, unless you have a massive trust fund, you’re eventually going to run out of your own to commit to deals. Solution? Use other people’s money! The most successful real estate investors understand the value of smart leverage, that is, wisely using debt to finance deals that you couldn’t make happen with just your own money. When done correctly, using debt (i.e. loans) to finance deals significantly increases A) the size and number of deals you can complete, and B) the return on your investment in those deals.
As a real estate investor, understanding the ins and outs of two types of financing will allow you to “use other people’s money” to boost your returns: 1) hard money lending, and B) gap financing.
Hard Money Lending
Hard money lenders provide hard money loans primarily against the hard asset – the property. With a traditional mortgage, lenders base their lending criteria largely on the borrower’s “soft assets.” That is, lenders assess a borrower’s income, credit score, debt-to-income ratio, and other personal financial information to make a loan decision. Basically, lenders want to confirm you can make your monthly debt service payments. If you’ve applied for a home mortgage before, you understand the cumbersome nature of this soft asset review process for borrowers.
On the other hand, hard money lenders base their decision on the quality of the deal itself – not the borrower’s personal financial profile. Generally speaking, these lenders provide loans for distressed properties that would not qualify for traditional financing. Real estate investors – often using fix & flip strategies – use these loans to purchase and rehab properties to bring them to traditional mortgage lending standards. As a result, hard money lenders look at the future value of these distressed properties, known as the after-rehab value (ARV). Lenders assess a deal’s ARV, and they base the amount they’ll lend off of that future value. As long as borrowers don’t have bankruptcies or judgments, their credit doesn’t impact hard money lending decisions.
With an extremely good deal, a hard money loan will allow you to 100% finance that deal. But, plenty of quality deals exist that may not meet this level. As a result, investors need to come up with extra cash to meet the difference between A) budget, and B) the hard money loan. Enter gap financing.
With gap financing, investors look for a way to get from what they have to what they need to make a deal happen. For example, assume you can get a $100,000 hard money loan for a property, but you need $120,000 to make the deal happen. If you have $10,000 of your own cash, that still leaves you $10,000 short on the deal. Enter gap financing. In this example, these short-term financing solutions provide investors a way to cover that last $10,000 (or whatever that funding gap totals).
While not an all-inclusive list, here are some of the more common gap financing strategies:
- Primary residence home equity line of credit (HELOC)
- Credit card financing
- Business partners
- Business lines of credit
- Signature loans
The Value of Investing Mentors
When it comes to investing in real estate, most new investors make two mistakes. First, they underestimate the amount of work it takes for success. Second, they overestimate how easy investing will be. A little experience gets rid of both of these notions. Investors quickly learn how much work goes into real estate success.
While new investors certainly need to make some mistakes on their own – just part of the learning process – other mistakes can and should be avoided. And, successful investors understand that a means of avoiding some of these bad judgement mistakes exists: real estate investing mentors!
A solid mentor will provide critical support as you gain personal experience as a new real estate investor. More precisely, quality investing mentors will impart some of their hard-learned wisdom, helping you avoid unnecessary mistakes in the process. Yes, you certainly can begin your investing journey without a mentor. But, as I like to say, work smarter, not harder. If you can have someone help you avoid making silly – and costly – mistakes, why wouldn’t you jump at that opportunity?
Find the Best Real Estate Deals
New investors often believe quality deals just fall into your lap. In reality, you’ll spend most of your time as a real estate investor looking for deals. Accordingly, if you want to become a successful real estate investor, you should understand the below realities of finding quality deals.
Why the Multiple Listing Service (MLS) Doesn’t Work for Investors
Most new real estate investors understand the MLS. That is, if you’re looking to buy an investment property, you’ve probably already purchased a primary home. And, when you bought your home, there’s a good chance you worked with a real estate agent. This agent probably took your general search parameters (e.g. price, area, size, etc.) and gave you tailored access to the MLS where you could scroll through every listed property meeting your search criteria.
While this system works great for finding a primary home, finding investment properties on the MLS rarely works. More precisely, due to the following three reasons, investors will struggle to find good deals on the MLS:
- Competition: In theory, if you work with a real estate agent (or are a real estate agent), you can access MLS data from anywhere in the world. Accordingly, when investors try to find potential deals on the MLS, they’re really competing against three different parties: 1) primary home buyers, 2) other local investors, and 3) out-of-market investors. This situation significantly drives up the competition for MLS properties.
- Property Condition: While you can buy investment properties on the MLS, you’re unlikely to find a distressed property that will qualify for a fix & fix deal. People primarily list properties on the MLS for primary home buyers, meaning that these homes need to qualify for traditional financing. In other words, they are not distressed properties in need of repair. Instead, most MLS properties are in good enough condition to meet standards required by traditional lenders.
- Price: Related directly to property condition, MLS properties generally have prices that don’t support a fix & flip budget. Rather, these homes list at retail price. This means that, even if an investor does find a property to rehab, there’s a good chance that its price will not support a deal budget.
The Benefits of Off-Market Deals
Instead of dealing with the challenges associated with MLS properties, successful investors understand the value in finding off-market deals. In other words, they look for properties that A) fit their investment criteria, but B) haven’t been listed for sale.
Searching for deals in off-market properties presents two primary advantages. First, as these properties aren’t listed on the MLS, they inherently have less competition. In most situations, when you approach a potential seller, you’ll be the only investor making an offer. This lack of competition leads directly to the second major advantage: price. Off-market properties fitting an investor’s criteria will typically have major repair needs. Between these needed repairs and the lack of competition, sellers do not have the leverage to command retail prices.
Bottom line, successful investors understand the importance of crafting a strategy to find off-market homes. But, as I’ll explain in the next section, finding these homes is only one part of the problem.
The “Driving for Dollars” Strategy for Finding Off-Market Deals
I absolutely love a strategy I call “driving for dollars.” Simply put, you hop in your car, drive around some neighborhoods, and identify homes that look like potential deals. You may find a distressed property or one that looks abandoned. Regardless what type of property you’re seeking, driving around for a couple hours every week will help you find plenty of opportunities. And, we’re so confident in the potential of this technique that we’ve built a Driving for Dollars app to help!
This app helps achieve two major objectives: 1) find potential deals, and 2) connect with motivated sellers. With respect to the first, the app tracks your progress through a geographic area, helping make sure you don’t miss any streets – or potential deals! Second, the app seamlessly integrates with our Investor’s Edge database of over 160 million potential deals, which gives you the ability to connect with the owners of homes you identify while driving for dollars.
More precisely, with Investor’s Edge and the Driving for Dollars app, you can market instantly to homeowners via printed postcards with pre-filled addresses or automated voicemails. This system lets you efficiently bridge the gap between a potential deal and putting a property under contract.
To become a successful real estate investor, you first need to embrace certain personal characteristics: willingness to learn, work ethic, and resilience. With those traits as a foundation, you can begin your journey through the real estate investing progression, building your expertise in the process.