Purchasing an investment property can be a scary endeavor for many first-time buyers, fraught with many “what ifs.”
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What if I overpay? What if I buy at the peak of the market? What if the property is a money pit? What if I can’t find a good renter? The list goes on.
While it is human nature to be cautious, being overly cautious is perhaps as detrimental to financial security as being reckless. I will offer an analogy that may help guide you to get yourself past the what ifs and into the realm of investment property owner.
I am a law enforcement officer, and within our agency, we are fortunate to have leadership that firmly believes in training. As a result, we train monthly on high liability, low probability scenarios.
One scenario is an ambush situation. In an ambush situation, where the officer is on the receiving end, one of the only options available and one for which we practice is to get into action as quickly as possible, trusting our equipment and training. It is as simple as that.
Trust your training! Training, or in other words, education, allows one to act appropriately when presented with a given set of circumstances. See the connection?
Real Life Education
Warren Buffet said, “The best investment you can make is an investment in yourself. The more you learn, the more you’ll earn.”
Education is the key to being successful. I am not strictly talking about a college education either but instead self-education about real estate.
BiggerPockets is an excellent venue to learn multiple aspects about the real estate world and to glean a plethora of information from many different beliefs and strategies or techniques involving real estate investing and real estate financing.
I stated in an earlier article that real estate is flexible, and I still adhere to that belief. Educate yourself about the many steps and different paths that can lead to real estate ownership. Remember, doing something gives you experience, but it does not necessarily make you an expert.
Buying a property will provide a specific experience for you, but it does not, in and of itself, make you an expert. However, you do not need to purchase property to educate yourself about the process, about what to look for, about how to obtain financing and how to talk to people, about finding deals, or about everything else associated with real estate.
For those of you who feel you are not in the league of the guy down the street who owns 100 doors, don’t sweat it. That is where the “training” or “education” part comes into play. An elite athlete does not necessarily become elite from playing in the game, but from the countless hours of practice. Real estate investing is the same way.
Reading, researching, networking, asking questions, and seeking out answers can eventually make one an expert in real estate investing—without ever purchasing a property. So do not allow yourself to be intimidated by the 100-door investor, who in reality may know next to nothing about real estate.
Failing to Plan Is Planning to Fail
I am not going to propose that anyone follow my path to real estate ownership, but I will detail it in hopes that it will help someone find the way to their first purchase. Once that first purchase is on the books, it does not magically get easier; it just seems that way because it builds your confidence!
Education, education, education! Learn everything (figuratively, not literally) you can about the different types of real estate options. Explore each and figure out which one interests you and will work for your given set of circumstances.
Time, finances, risk tolerance, desire, and present employment—among other things—are all factors that come into play relative to which type of real estate investing one wants to pursue (at least initially). Do you want to use real estate to supplement your lifestyle or to fund it? That, for example, can be a major factor in deciding which path you want to take.
Create a workable and realistic business plan. Putting it down on paper, being detailed, and figuring it all out prior to any action was a huge asset in making our first purchase.
I compiled a 14-page business plan that detailed each owner’s duties (I am partners with my brother), what type of property we would purchase, who makes the financial decisions, and who makes the property suitability decisions. We even planned an exit strategy, should one of us want out of the business. We included the positives to purchasing property, as well as the negatives, and we update it annually.
Take a good look around you—literally. My wife and I drive the area on weekends looking for properties we would be interested in owning. We take an hour or two and just cruise up and down the streets in the areas we deem acceptable.
This is often our “date night” and is a fun way to get some quiet time away from kids and our busy lives. She writes down the addresses for me to evaluate later.
Research the properties from the list of addresses you’ve compiled. Once I have this, I begin researching the properties on our local tax website and county public information property website.
These websites give me the square footage of the property, tax valuation, owner information, last purchase price, and date of the last time it sold. I then rank the properties from one to three, with one being the most desirable and three the least. We specifically look for properties that were built as a multifamily and not converted.
I rank properties with out-of-state owners in the most desirable areas and with the building structure we desire as number ones.
The number twos are the same as above but with local owners. I further separate the “local owners” as owners who live in the county or who live outside the county but in the state.
A number three is a property that I would not purchase, but I still like to keep track of where it is and who owns it just in case it comes up for sale later.
Write a letter. Next I complete a letter stating who I am (a local resident) and that I am trying to build up a property portfolio to supplement my retirement.
I try to keep the letter to one page and make it personal. I explain that they own a property I would be interested in owning and inquire if they would be willing to sell.
I list at least three options for purchasing the property. Two of the three options involve owner financing; the third is an outright purchase.
I list all of my contact information and end with a request that if they do not wish to sell but know of someone who does, I would appreciate if they would send me that information.
I sign each letter and address the envelope by hand.
Evaluate the potential purchase. If I receive a response—I have sent out a total of five letters, purchased three properties, and am dealing on a fourth from those five letters—I do an individual, modified, written evaluation for each property we consider. It’s based on our business plan.
This allows us to take the emotional decisions out of the potential purchase, which in turn gives us greater confidence that the purchase is a good one for us.
Make an offer. Once my written evaluation is completed, if it fits our criteria, I write up an offer on the property that is based upon the current or potential rents. I take into consideration the property payment, insurance, taxes, maintenance, capital expenditures, and vacancies, which are all standard expenses.
Our primary offer is 5 percent interest and a 10-year owner carry note with a 20-year amortized payment. We plan to pay the property off in 15 years or less but like this approach, as it lowers our payment initially. As part of the process, I explain to the owner that we can often get them a payment that is equivalent to what they were getting when renting it, minus expenses and without the potential issues associated with being a landlord.
If the offer is accepted, we write up a purchase agreement that allows us to back out if we find issues with the property upon inspection. Remember, up to this point, we have based our offer on the exterior of the property, as well as the information we were able to find through the research I mentioned earlier.
Pulling the Trigger
This is not the only way—nor perhaps the best way—but it is the way we overcame the “what ifs” and purchased our first property.
I educated myself, thanks in large part to BiggerPockets. Based upon that education I developed a process.
Utilizing that process, we located, evaluated, and purchased four duplex properties to date and built a fifth.
I still have moments of apprehension, buyer’s remorse, or whatever you want to call it. It is easy to second guess yourself. But ultimately, just like in that ambush situation, you have to get into action and trust your education (training) and your process (equipment).
I am a small-time property owner by many standards, and I am okay with that. It does not mean that I am less educated, nor more educated for that matter, than the investor with 500 doors. He has more experiences than I do, but it is also likely we have the same type of experiences.
What sets us apart—or makes us equal—is our knowledge and education about the investing process, not the number of properties in our portfolio. That process is refined by our real estate education, which thanks to BiggerPockets, should be never-ending.
There are a multitude of real estate opportunities out there. Investing in anything has its risks, and real estate is no different. You are best served by remembering that the idea is not to eliminate all the risk (although that would be wonderful). Rather, you should minimize those risks by educating yourself about the world of real estate investing and then using that education to establish a process that leads to a purchase of one property—or 100.
Author Rebekah Crane said it best in The Upside of Falling Down:“You can’t be overwhelmed by the what ifs, or you’ll miss out on the best part.”