How To Get Started in Real Estate Investing

by on March 20, 2012Jason Van Steenwyk

Let’s break down real estate investing into its basic parts: buying, renovating, and either leasing or selling, depending on your investment style and the market. You have to start somewhere – and whether you’re a long-term renter or a short-term house-flipper, you won’t get to collect either a rent check or a sales price until you first buy a property!

So let’s start there.

Find a Property

get started in real estate investingIt’s easy to find houses for sale. You can drive down the street and count the “for sale” signs in most neighborhoods. But finding an investment property that’s suitable for you is a different story. So before you go making offers willy-nilly, be honest with yourself, and develop an investment profile of properties that are within your capabilities. This is particularly vital during your early days as a property flipper. You’re going to make mistakes, and sticking to your profile – your circle of competence – can help contain their size. To borrow a baseball analogy – swing at the pitches you can hit. And bat for average before you swing for the fences.

So what would a possible novice investor’s profile look like?  Here’s a very simple start.

  • I want properties within __ miles of where I live or work.
  • I want properties I can acquire for a down payment of ___ or less.
  • I want properties I can acquire for a monthly cost, including mortgage payments, interest, taxes and fees, of ___ or less.
  • I have special expertise in estimating or executing these kinds of repairs/renovations: 1___, 2___, 3___.
  • I want to specialize in single family homes/condos/duplexes/multi-family units.
  • I can carry the property for ___ months without renting or selling, if I need to.
  • I want properties I can fix up to sell within ___ days.

Write down these criteria, adjusting them to fit your individual situation.  Then interview a few real estate agents. As you get more experienced, you may be able to bypass the agent and approach homeowners directly. But in the early days, it pays to have a real estate expert working with you. (Note: The agent needs to make money, too. Which means if you plan to flip the property, you must also account for the agent’s commission when you sell the property! Your margin on flipping properties will be that much narrower if there is an agent involved.)

Important: Once you develop a profile, stick with it for awhile! This discipline can help you avoid getting in over your head, and making a mistake. Real estate investing is risky enough, even when you are very conservative. You want to be in this game for the long haul. This is a marathon, not a sprint. Get some base hits before you try to swing for the fences. Run for some short, sure yardage before you throw the “Hail Mary” pass.

Find Financing

Financing is still the key to real estate profits. Really, in real estate, financing makes the world go round. Why? Because it’s financing – leverage – that makes it possible to control large properties with relatively small amounts of your own money. Leverage allows you to magnify any gains. But you need to be careful with borrowed money, too, because it also magnifies your risk.

Be Prepared to Put Up Down Payments

The days of easy “no money down” real estate riches are gone, and they won’t be coming back any time soon. We know in hindsight that this plan was a sham all along. In the long run, though, some people did very well if they weren’t still holding the bag when markets collapsed.

“I haven’t seen a ‘piggy’ in years,” says Kimberlie Snyder, a veteran mortgage underwriter who has seen thousands of applications, first at the underwriting desk at the now-defunct Washington Mutual, and now as an underwriter for Bank of America in Washington, D.C. The term “piggy” refers to “piggyback loans,” or the practice, common in the early to mid-2000s real estate boom, of masking the lack of a down payment or any real collateral by taking a second loan in the amount of the expected down payment.

Investors today should be ready to ante up and kick in down payments of 20 to 25 percent for conventional financing. In some specific circumstances, you may be able to find programs that can get your down payment to 10 percent.

So whom do you borrow from? Start building your menu of possible lenders now:

Banks. The obvious source for real estate lending. These are familiar and “scale up” well as you grow and become more successful. They are rarely the “low-cost” loan provider out there, however, and some are more willing than others to finance investment property, as opposed to owner-occupied property. They tend to be better fits for those with good credit – if your credit is weak, you may have more difficulty with larger banks.

Credit Unions. Similar to banks, except they are jointly owned by depositors, rather than stockholders. This frequently means a lower cost structure, and lower fees than banks, since they don’t need to pass profits on to shareholders. This gives credit unions more flexibility to keep fees low and issue dividends to their member-depositors.

Mortgage Brokers. These are essentially “freelancers.” They take your application and “shop it around” to a variety of different lenders. They’ll come back to you (hopefully) with several offers from various lenders, and you can pick the loan with the interest rate and terms that best fit your own unique financing needs. These may be your best bet if you have weak credit, if you’re self-employed, or you have other issues that don’t quite fit the bank underwriter’s cookie-cutter criteria. One important point: Property flippers should avoid llong-term loans with pre-payment penalties. These will just mean an additional cost when you eventually do sell the house and pay the mortgage off early.

Remember, too, that many bankers and credit union lending officers are conditioned to think in terms of 15-to-20 year mortgages. If you are primarily a house-flipper, rather than a buy-and-hold cash-flow property renter, this isn’t you. Some lenders may provide better terms on shorter-term loans of one to five years, or even less.

But … always have a plan B with any property. If things don’t break your way, you may have to fall back on renting until you can make the flip happen. Soldiers call this the go to s**t plan. The plan to execute when everything is breaking against you. Don’t get caught without one.

Owner-Financing Deals. Sometimes a seller really wants a stream-of-income, rather than an immediate cash payment for his house. Indeed, in some circumstances, receiving a big profit on a home could cause a short-term tax problem for the seller. He may prefer taking payments over time. You can make your own deal with the seller to make a series of payments in lieu of a cash payment. You pay the seller, rather than the bank, to finance the property. These properties can be a way to get into real estate investing – especially with weak credit. But owner-financed-properties are sometimes more expensive than they would be otherwise.

A big part of your success as a real estate investor will be in partnering with the right lender or lenders for your specific situation. Some people do great with traditional banks, and have fantastic relationships formed with their lending officer at the local branch – even at the Very Big Bank Amalgamated. Some others are much better served by mortgage brokers who can find them the right “special situation” loan for their needs. It doesn’t matter what other people do. Find the right lender for you.

Get Pre-Approved

This can be tricky for novice investors, since mortgages are typically secured by the underlying property, and lenders want to know what’s securing the loan before they approve. But if you can show sellers that you’re pre-approved, and you can get a deal done in a matter of days, not weeks, you can frequently command a better price than someone who can’t make that guarantee. This is important, because buying at a discount to market value is critical for house-flippers.

The Next Step

This column is just about the entry. It discusses simply creating the conditions that make real estate success possible: an affordable property, purchased at a reasonable price, that is within your circle of competence, and which you can actually buy – generally by obtaining a suitable loan. If you can’t line those criteria up, hold-up … pass on the property! There will be many more to look at.

Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.

{ 7 comments… read them below or add one }

Tamara Martin January 7, 2014 at 9:02 am

Informative and detailed. Thanks alot

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Arnold Kime October 28, 2013 at 10:46 am

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Hobert Lucus July 18, 2013 at 4:13 pm

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Coaleon June 19, 2013 at 8:47 am

the greatest 411 i came across, thanks!

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tom February 2, 2013 at 2:17 pm

good thinking, looking for software to help.

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Braaten April 12, 2012 at 11:02 pm

wow, awesome blog.Much thanks again.

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Mullinax April 9, 2012 at 9:16 pm

I really liked your blog post. Keep writing.

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