The Guide to Real Estate Investing
You know that real estate investing is how you’re going to create generational security for your family….
You know this because you see so many others doing it! You see that most wealthy people have a large percentage of their net worth tied up in real estate. You might even have a friend or two who’s gone from poor to well-off because they started fix & flipping. You probably know someone who started acquiring rental properties when they were in their early 20’s, and now they seem to have a dozen or two.
So it’s your turn right?
That’s why I created this post—to help someone like you figure out where to start, based on your goals, what you like to do, how much money you have available and more!
The Guide to Real Estate Investing – Pick Your Strategy
First, I’m going to advise dabbling in several different strategies at once. “Jack of all trades, master of none” is a common phrase for a reason. When you try to jump into anything as popular as real estate, it’s going to be hard to succeed in a meaningful way without mastering a skill or two, and only then expanding from there.
So I’m going to talk about a few of the more common strategies to help you pick.
No-Property Involved Strategies
Perhaps you’re a little nervous at first about getting into a deal where a property is going to be listed under your name. I get it, that can be scary!
So here are two of the ways you can get involved with no property:
Crowdfunded Real Estate
I’m starting with the caveats already:
Most crowdfunded real estate platforms actually do have you purchase property, but you’re so far removed from the sale that you might as well not even own it!
Essentially, these platforms allow you to buy a small piece of a property. If you own 1/100 of the rental house, 1/100 of the rent goes to you!
Companies will do this for single family rentals, land, and even entire apartment buildings. Often in these platforms, you’ll have the opportunity to choose your deals. They give you the details, and then you do your homework to figure out if you’d like to invest in that one!
Some will allow you to have your “portfolio” be managed by an expert, but that comes with management fees. The costs to join these can be as low as $5, all the way up to a $25k minimum investment.
REITs are one of the simplest and most common ways that Americans invest in real estate! In fact, there’s an excellent chance that you’re already investing in one….
REIT stands for Real estate Investing Trusts which are companies that own income-producing real estate. Most REITs trade on the stock exchange, and they’re actually required to pay out a minimum of 90% of their taxable income to shareholders.
They are a very common part of most portfolios in the United States. If you’re invested in a 401(k), IRA, or other portfolio, it’s likely that you’re involved in a REIT.
The strategy here is you could purposefully invest more heavily in a REIT and enjoy the dividends that they pay out.
This doesn’t require a ton of skill, although researching the best performing REITs is important. This isn’t a strategy that’s likely to make you rich, but more of a steady growth plan.
Now, let’s talk about more passive ways to invest! Meaning that you’re not doing boots-on-the-ground work on these properties, but you’re still earning a nice return.
In fact, lending is my #1 preferred way to invest in real estate because the returns are incredible. Let’s talk about some of them
Private/Hard Money Lender
First of all…yes I own Do Hard Money, a hard money lender. So it’s safe to say that I love it.
Because of the nature of fix & flips, hard money loans are typically around 6 months, with extension payments and then interest due on the principal if the investor takes longer to finish their deal.
Because they’re short term, hard money loans typically carry double digit interest rates, and sometimes up over 20%! Fix & flippers are willing to pay that interest because they’re only in the loan for 6 months, so the interest actually isn’t overwhelming for them. Also, they’re looking at making $30k+ even after paying the interest!
Another benefit of lending in this environment is that your money isn’t tied up long term like it could be in other types of deals. Ideally, you’re getting it back in 6 months.
So what’s the difference between a private money lender and a hard money lender? Private money typically comes from an individual who sets terms on a case-by-case basis. A hard money lender is typically an established bank that has fixed rates and terms, as well as a rigorous underwriting/evaluation/appraisal process.
But all in all, you just can’t beat the interest you get on your money, especially for doing nothing more than evaluating deals and wiring money.
The biggest drawback of private or hard money lending is that you’re typically looking to fund entire deals. That could be hundreds of thousands of dollars!
Enter gap financing…
When a fix & flipper is working to get a loan, they’ll often be required to bring cash-to-close to make the deal happen. But what if they don’t have enough cash on hand?
They can essentially borrow that money as well! I’ll talk more later about the borrower side of this exchange, but you can lend the $10k or whatever is needed. You can come to an agreement for how they’ll pay you back—be it interest on the principal or a percent of the profit.
No Financing Required
Now, let’s start talking the more boots-on-the-ground, active real estate investing! The next two sections are more likely what you had in mind when you clicked on this post, so let’s jump in.
First, let’s talk about how you can be an active real estate investor without having to worry about even getting a loan.
This is certainly the most well-known way to do this!
Wholesaling is a strategy that allows you put a property under contract, but then before you have to close on the deal, you find someone else to sell—also called assign—the contract to! They pay you a finder’s fee, and they go ahead and fix it up and resell it.
Pretty cool, right? You don’t need to figure out financing, there’s no rehab, no dealing with contractors, no deadlines to meet, no extension payments, no surprise market changes….
And on the other hand, they’re quicker and still fairly profitable!
Depending on the deal, you should look for a minimum of $2,500 with over $10,000 not being uncommon! Not bad for a process that usually takes less than two weeks.
A lot of new investors like to wholesale in order to get their feet wet. It’s also common for an investor doing an active flip to wholesale the next good deal they find if they’re worried about financing/managing the rehab for two simultaneous deals.
In my opinion, this is the ultimate beginner strategy. If you’re just getting started and want some quick wins, this is the way to go…especially if you have little experience and funds.
Bird-dog simply means that you find leads for a fix & flipper. There are plenty of ways to find deals, but you can check out my post about my 26 favorite ways to find off-market properties!
Then if the fix & flipper closes the deal that you sent over, they’ll pay you a finder’s fee. It’s often in the $500 range.
So that’s the downside, right? You don’t make a whole lot per deal, but because you don’t do anything but pass a lead, you can in theory pass a lot of them on!
You also don’t have much control over whether the deal will actually close or not, as opposed to wholesaling where you’re actively involved up until you’ve earned your check.
Now, let’s talk about some of the traditional strategies of active real estate investing! With these ones, you will be getting financing (or paying lots of cash) and taking on ownership of a property. But this is also where those big fat checks happen!
Fix & Flip
You’ve heard of this, I’m sure. If you’ve ever turned on HGTV, this is almost all of what you see! There’s something big and sexy about taking a broken down property, putting in the work to make it nice, taking pride in that final product, and then selling it for a massive payday.
It’s appealing to be able to earn what you make in a year in one single project.
So what’s a fix & flip? I talked before about it, but let’s give a quick run-down:
- You find a motivated seller willing to sell his property at a discount
- You pull your comps, evaluate the profit potential, and then make an offer on the house
- Once your offer is accepted, you secure financing, likely from a hard money lender
- You then fix up the property by hiring a contractor
- You sell the property at a much higher price and you walk away happy!
While fix & flips are certainly more complicated, they come with a larger payday. In fact, our average paid-off loan results in average profit of $33,578! And it’s not uncommon to see $50k – $100k, either. That’s why fix & flips are so popular.
If a lot of moving pieces don’t scare you, and you can handle unforeseen problems in stride, then fix & flips might be the right strategy for you.
Stands for buy, rehab, rent, refinance!
- Find a property that would fit the bill for a fix & flip opportunity
- Get funding and rehab the property as if a fix & flip
- Find a renter
- Refinance your hard money loan with a traditional loan!
That’s (obviously) oversimplifying it a bit, especially that you’re looking for slightly different parameters with a rental. For example, your profit numbers don’t need to be quite as amazing, and you’d like to have a smaller rehab scope.
But overall, investors love BRRR because of the potential for good monthly cash flow right from the start! With a regular buy & hold (I’ll talk about that next), you’ll likely not make more than a few hundred a month, and sometimes break even at first.
However, since you rehabbed the property, you could easily start out with $500+ per month in net cash flow on the deal—which of course increases over time as you can raise rent.
This isn’t a beginner strategy, but after you get your feet wet with real estate investing, or you partner with someone experienced, then you can try this out.
Buy & Hold
This is the more traditional rental strategy!
- You research desirable neighborhoods where a family would want to live. After all, high turnover among your tenants is not only annoying, it’s extremely costly.
- Find a property
- Get financing!
- Get renters
It’s pretty straightforward!
There is a variation on this that’s incredibly common, and might be the most popular way that people start out in buy & holds…and that is to buy a house, live in it for a few years, then find another house while you rent out the original one you bought!
It’s one of the simpler strategies on this list, and one that can eventually produce great results. At first, it probably won’t be a cash cow—maybe a few hundred bucks per month. But, you get great tax benefits, you can raise rent over time, and someone else is paying off your mortgage. It’s still a great play.
Where to Get Financing?
Now let’s take this a step further in continuing our discussion of real estate investing for beginners!
Getting hundreds of thousands in funding can be complicated—and clearly not a step to be taken lightly.
For the rest of this post, I’m going to assume that you’re looking at a BRRR or fix & flip deal! I know you need financing for a buy & hold as well, but that’s typically going to be a conventional mortgage and straightforward.
Sure, if you’re loaded, you can absolutely pay cash for a deal! It makes things a great deal less complicated of course…but even if you have the money, I still don’t recommend using cash.
The reason being that if you pay for the whole thing up front, ALL of the risk on you. It’s not shared with a lender or business partner.
It also ties up a lot of money. Let’s say that you have $400,000 in cash to invest with. If you go and do a single deal with that $400,000, then you’re stuck in that one deal. The proverbial “eggs in one basket” comes to mind.
On the other hand, what if you were in four different deals that each required $10k-$20k, and the rest of the money was financed….
Then you still have a chunk of your money left over—meaning that if another deal comes along, you’ve got money sitting there that you can use. Now you’ve got profit potential for five different investments instead of one.
So how are you going to get the rest of the money?
Hard Money Lender
I’ve already touched on this above, but let me say this—hard money lending should be your primary source of money for all your deals, unless you’ve got a good private lender.
I say this because hard money lenders have better evaluation processes and standard rates. You might get a better deal from a private lender, but a hard money lender will do much more to ensure that you’ve got a good deal.
They also have resources to help that a private lender won’t.
Just as an example…
With Do Hard Money, all our borrowers get:
- Access to customer service
- Deal evaluation software
- Access to a loan servicer
- A project manager (all of ours are former general contractors) assigned specifically to them
- Contract templates
- Video training
- And more….
(Yes, that was a “subtle” pitch for Do Hard Money, but know that most hard money lenders will give you more support than if your Uncle Joe was funding your deal)
In order to get a hard money loan, most lenders require a minimum credit score (though usually not as strict as a conventional bank), at least one prior flip, and usually a minimum down payment. They’ll have a policy, for example, where they’ll pay 90% of the purchase price of the property and 100% of the rehab. Then you pay other loan costs associated with the deal.
Although rare, some hard money lenders will lend up to 100% of ALL the costs associated with the deal. We often do deals where the borrower brings $0 to the closing table, although these are for only really good deals.
Those deals require that you find a property where you can fit all your costs under 70% of the after repair value. For example, if your research of comparable properties reveals that your property will likely be worth $300k after rehab, then you would need to find a deal where the purchase price, rehab, and loan/closing costs fit under $210k. Like I said, it’s tough to find, but the reward is literally bringing $0 to the closing table.
Hard money loan rates vary tremendously based on the risk involved in the deal, as well as the borrower’s credit score, experience, and the profit potential. Because they’re short term loans, you’re looking at higher rates than conventional loans, and into double figures in most cases.
Like I mentioned before though, the interest isn’t overwhelming because it only accrues over several months.
Your next best bet is to find someone who’ll lend you the money in a private transaction! This could be someone you don’t know, perhaps that you found in an online community, or it could be a family member or friend.
Like I mentioned before, I would only go this route if 1) you’re sure it won’t ruin an important relationship, even if the deal goes south and 2) you don’t need the support and evaluations that a hard money lender would provide.
If you’re good with that, there are a few ways to set up a partnership:
- Debt partnership – They’re lending you the money, and you owe them a debt, just like you would with a bank. You determine an interest rate and when you’ll pay it off. This could be in the form of monthly payments or all at the end when the loan is paid off.
- Equity partnership – They’re not really loaning you the money, they’re giving the money to the bank and entering into a more equal partnership with you. They give the money, you do the work, and it’s seen as a more even split. Instead of paying an interest rate, your equity partner gets a percent of the profits. This can cost you more money, but it’s also less risky. If there’s no or little profit, it stinks to have to pay a big interest bill at the end. Not so with an equity partnership.
When you’ve secured your hard money lending, and your deal didn’t quite qualify for 100% financing, you either need to come up with the difference or find another way to find the cash! There are many ways to do this, and I cover them all in my post called 16 Ways to Get 100% Financing
Find Deals With Driving for Dollars
If you’re just starting out… want something cheap. Even if you can afford it, you’re too new to throw money away. You need an education. you need to be out getting to know you’re area. Learning neighborhoods, good & bad, knowing price points, etc. will pay dividends long term.
So… Driving For Dollars! (In fact, I recently made it the one single strategy that I teach to my inner circle members…that’s how much I believe in it).
Later…branch out. But don’t water down your learning right now. There’s no reason to dabble in 10 strategies…there are always others out there who are experts in the strategies you’re trying to compete in.
My suggestion: become an absolute expert at Driving For Dollars. You can easily do 2 deals per year if you focus on this one strategy… only then do you branch out to new strategies.
Even if you can afford to have someone drive around and find properties…DON’T. You need the education and experience to make this work long term. Just…trust me on this.
When you’re out driving and you come across a property, you’ll want to make a note of it. Then at the end of your day, you’ll want to find a way to get their info so that you can contact them! The best way to do this is with a skip trace. There are free ways to do this, but skip tracing is so cheap and so fast that I wouldn’t recommend any other strategy.
You can read my post about skip tracing here!
Now you’ve got their information— hopefully a name, email, and phone number—it’s time to hit them up with some information!
Call – I’m actually a big fan of cold-calling. You can get a response right away, and there’s nothing like some actual contact to work those sales skills! However, a lot of people don’t answer, so I usually do both of these next two things as well.
Voice Broadcast – Sometimes called ringless voicemail, this is an automated message that you record that gets sent straight to their voicemail. It doesn’t bug them with an actual phone call because getting an automated message live on the phone isn’t conducive to creating a good relationship. But this way, it just looks like they missed the call and it sounds like you’re leaving an in-the-moment voicemail. Then you’ll get calls back and you’re good to go!
Postcards – These have been one of my go-to strategies since the very beginning! There’s nothing like getting a piece of mail that looks different from the rest to grab some attention! With our postcard provider, we pay $.53 apiece, which includes shipping. For a good piece of marketing, that’s so worth it.
If Driving for Dollars sounds like a finding strategy you’d like to use, my inner circle members get our Driving for Dollars app that hooks up to 160 million property records and also gives you phone scripts and video training. You can apply to our Find-Fund-Flip System here.
Well, there’s certainly more to cover…but hopefully that’s a good starting point! Many of the links I’ve put throughout this post will send you to more detailed information.
If you have any questions, be sure to reach out! Good luck, and make it a profitable day!