How to Start Investing in Real Estate

Very often I meet people who are overwhelmed with the options, strategies, courses, and various directions that real estate investing can go.  This article attempts to simplify the very complex world of real estate investing for new investors.

What is Real Estate Investing? 

Before we dive in, let's address this basic, but not obvious question. When I talk about real estate investing, I'm talking about Buy and Hold Investing; In other words, purchasing property with the intention of keeping it for the long term to generate regular cash flow.real estate Deal analysis calculator bb french real estate

This is different from wholesaling, fix and flip investing, land development and the like.

Many people consider these activities investing, but for the purposes of this article, I will assume you are looking to create long term, passive income rather than another full time job. 

I also assume you have another source of income, either from your job, self-employment, or business.  There are certainly people who dedicate themselves to professional real estate investing and create firms for this purpose; This article is not for them. 

This article is for individuals and families who want to round out other investment vehicles with the tried and true investment vehicle, Real Estate Assets. What portion of your investment portfolio should be real estate versus other asset classes is up to you, your Financial Advisors, CPA, and other professionals.

How to Start Real Estate Investing

Now that we've established your real estate investing goals are simply monthly, passive cash flow + long term appreciation, the answer is easy:

Understand How to Analyze Potential Acquisitions

You must have a strong grasp on what variables influence Cash Flow, Cash on Cash Return and Cap Rate, which are largely:

  • Purchase Price
  • Down Payment Amount
  • Interest Rate / Mortgage Term
  • Current vs Performa Income
  • Current vs Performa Expenses
  • Repair Costs

I recommend analyzing deals with the Conventional Buy and Hold approach to solidify your understanding. Once you have the hang of this analysis, you can explore different real estate investing strategies.

See YouTube Play list of live deal analysis HERE

 

Analyze at least 20 potential real estate deals, so you can begin to understand which deals you would offer on and which you would pass. real estate investing bb french

Questions to ask yourself while analyzing deals:

  1. Would I make an offer on this property?  If so, why?  If not, why not?
  2. What price would I offer? Why?
  3. What is the business plan for this deal? How will you create the income you desire? 
  4. What is the long term plan with the property?
Common Real Estate Investing Vocabulary

Vacancy Rate

  • The vacancy rate is the percentage of all available units in a rental property that are vacant or unoccupied at a particular time.  
  • In Greater Seattle, we tend to use 3-5% vacancy rates.
Net Operating Income (NOI)
  • Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. 

Pro Forma Income674795_VariousCharacterGraphics02_Paperwork_040220

  • A property’s pro forma are essentially its cash flow projections.
  • After establishing potential market rent, depending on your business plan, you can make a decent estimate of what the property / unit will rent for.
  • Include other income sources such as parking, laundry, utility recovery, pet rent, storage, etc. 

Cap Rate

  • Short for Capitalization Rate
  • Capitalization rate is calculated by dividing a property's net operating income by the current market value.
  • This ratio, expressed as a percentage, is an estimation for an investor's potential return on a real estate investment.
  • Cap rate is most useful as a comparison of relative value of similar real estate investments.

What Next??

After you are confident in your ability to underwrite your real estate deals, you'll want to determine your best financing option.  Please read the next article in this series: Real Estate Financing | What are the Options?

 



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