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Getting your foot in the real estate investing door can seem daunting for new investors. People look at successful investors and think they have a “secret” as to why they’re so successful.. As such, people have asked me countless times over my years as an investor: Ryan, is it hard to get into real estate investing?
No, it’s not hard to get into real estate investing. But, it’s hard to be successful. New investors must dedicate time and effort to learning investing basics. Then, they need to follow a proven system, build a strategy to reverse engineer their next deal, and consistently execute that strategy.
In the following article, I’ll dive into how you can get into real estate investing. Specifically, I’ll cover these topics:
- An Overview of Successful Real Estate Investing
- Following a Proven Investing System
- Reverse Engineer Success with the Next Deal Blueprint
- Execute Your Real Estate Investing Strategy
- Final Thoughts
Is It Hard to Get Into Real Estate Investing?
No, it’s absolutely not hard getting into real estate investing. Here’s the better question: is it hard to be a successful real estate investor? The answer depends on you. Ultimately, success in real estate (and most of life!) comes down to the effort you’re willing to put into learning and gaining experience.
Unfortunately, most people simply won’t put in the work that’s necessary to succeed as an investor. As a new investor, you likely won’t succeed if you’re not willing to work at least 15 to 20 hours a week. If you do that for six months or so, you’ll get your foot in the door. If you don’t, you’ll find it extremely difficult to become a successful investor.
Broadly speaking, here are the key elements to finding success as a real estate investor:
- Desire and commitment: With the amount of time real estate investing takes to learn and execute, you won’t have the staying power to succeed without these character traits.
- Knowledge: This ties directly into the above traits. To successfully invest in real estate, you need to learn about real estate. And, no one’s born with an inherent understanding of this field. Instead, you need to dedicate yourself to the “academics” – reading books and articles, listening to podcasts, finding mentors, and anything else you can do to learn about real estate.
- Follow a proven system: There are a million paths to real estate investing success. But, what you’ll find with most successful investors is that they follow a proven investing system. This has two advantages: 1) you know the system works, and 2) you can become an absolute subject-matter expert in your system.
- Design a strategy to “reverse engineer” success: Identify your next deal, and then work backwards to confirm the key steps necessary to go from goal to successful deal.
- Execute: Once you’ve built the above strategy, you need to go out and have the discipline to work through those key steps to success every week.
In the rest of the article, I’ll build on the last three of these items.
Following a Proven Investing System
A countless number of real estate investing systems – and variations of those systems – exist. Some of these prove far more complex than others. For this reason, I like to outline an experience progression. Each of the following investing systems builds on the prior ones, and many successful investors become experts in each system before moving on to the next one.
While you don’t need to follow these steps exactly, the below investing systems help you walk through the “investor lifecycle.” Learning them in a step-by-step approach allows you to gradually build your experience.
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.
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.
Execute Your Real Estate Investing Strategy
But, a good plan does not equal a good deal. It’s certainly a key part, but you eventually need to go and execute that plan! Every week, you need to do certain activities that will lead to success.
For example, I absolutely love a technique 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!
However, the key with these action steps is consistency. Every week, you have to hit your milestones. For example, if you say you need to make 50 calls to potential sellers, make 50 calls. If you need to find 20 homes while driving for dollars, go find 20 homes. And, this will absolutely wear you down. Most people will reject your offers – some quite rudely. It takes a ton of stamina and determination to stick with your plan in the face of this adversity. But, if you stay at it, good things will happen!
Even after outlining the above, I understand how overwhelming starting out as a new real estate investor can seem. That’s why the Do Hard Money team is here to help! We have tons of resources to help new investors. From finding deals to securing financing to successfully rehabbing homes, our tools and mentors will provide the support you need. Drop us a note, and we look forward to helping you launch your real estate investing journey!