5 Tips To Keep In Mind Before Closing Your First Deal
By Paul Esajian on August 31, 2018
Investing in real estate can completely change your financial situation. Instead of earning a minuscule percentage in a traditional savings account you can let your money work for you. Whether you focus on flips or rentals there is significant money to be made in real estate, but only if you know what you are doing. What many new investors overlook is that not every property will be a home run. Getting involved in the wrong property, in the wrong area at the wrong price starts a cycle that is difficult to get out of. Instead of focusing on profit you are forced to scramble just to break even. If you have been thinking about making your first offer there are a few important things you need to know. Here are five tips every new investor needs to hear before getting too far.
- Focus on education. How much do you really know about investing in real estate? It is not enough to watch a couple house flipping shows on TV and think you know the business. Sure, they can be helpful but there is more to the business than what you see on TV. You need to understand the process every step of the way. If you drop the ball on just one item, it can completely alter the bottom line. It should go without saying but you need to know how you want to invest and what your expected timeframe is. You should know who you will need on your team and what their specific roles will be. You should study the numbers, potential problems and ways of generating business. You will never know everything but the more you understand the business less likely you will find yourself in a bad situation you want to get out of.
- Get the price you want. As you look for your first deal there is a natural feeling of anxiousness. You want to get started as soon as possible. While your excitement is admirable, you must also exhibit some patience. The goal is not to simply obtain a property, but to make a profit. It can be argued whether you make your money when you buy or when you sell but what can’t be argued is the importance of never overpaying. This doesn’t mean submitting lowball offers on every property, but you do need to get your price. By overpaying you start the process immediately behind the eight ball. You will cut corners to save money which could impact quality. This leads to the home sitting on the market for weeks longer than anticipated and eventually reducing the price just to get it sold. On the flip side, when you get your price you have a bit of a cushion which allows you to do the things you know you need to. Finding that sweet spot may take dozens of offers but it is better to wait on your price than push the envelope.
- Know your exit strategy. The longer you are in real estate the more you will realize that things don’t always go the way you plan. It is not just a good idea, but a necessity, to have a backup plan to your backup plan. Prior to making an offer you should consider what you want to do with the property. Run the scenarios through you mind and come up with a defined strategy. From there you should have some contingency plans for almost every negative potential scenario. If your goal is to make some renovations and put the home on the market you should have a backup plan if the property doesn’t sell. Are you willing to rent for a year and hope the market changes or would you lower the price? How low does the price need to go for you to accept an offer? There are a handful of variables and scenarios you should play out in your mind. Always know your end goal and how you will get there prior to getting too far.
- Don’t forget the bottom line. Investing in real estate must be treated like any other investment you are part of. In the simplest form the goal is to generate income from your initial investment. In real estate you are not judged on the number of properties you obtain, but rather what you do with them. If the numbers don’t make sense you need to walk away. This doesn’t mean you can’t be satisfied with a small profit, but you need to know what you are giving up. Putting your money in a property with minimal upside may limit your potential for buying something else. You don’t need to swing for the fences on every deal, but you have to be aware of your bottom line and what you are giving up to get it.
- Pick the right market. All markets are not created equally. It is always better buying a quality property in a strong market than a perceived bargain in a declining market. The market you buy has a direct impact on your profits. As you are just starting out it is a good idea to narrow your focus to only a handful of markets. That way you will know specific pockets that are better to buy than others. Either way, you should take the time and study as many market demographics as possible. Crime rates, foreclosures, unemployment, taxes and strength of schools often determine demand which has a direct impact on value.
There is certainly a lot to know as you are just getting going. Study these five tips prior to closing your first deal.