Investment in any industry isn’t easy, and real estate investment can be particularly challenging. Here are six things you need to get a handle on before you start pouring money into a real estate investment.
1. You must know your market.
When I first jumped into the real estate business, I found myself trying to generate deals anywhere I could find them. It became evident very quickly that I wouldn’t be able to engage my entire opportunity pool in a marketing campaign with my limited budget — my sphere was much too large. So instead of mortgaging my firstborn child, I limited my marketing to small specific geographic areas where I could become an expert. I call these areas “target markets.”
Every real estate investment business should have one or more target markets. These are the neighborhoods where you know the types of houses, likely repairs, reliability of potential buyers, property values and pitfalls for everything within its borders.
Knowing your market allows you to identify opportunity quickly and take immediate action when deals present themselves.
2. You must define your exit strategy.
Your exit strategy will impact many parts of your business — cash flow, return on investment, marketing and negotiation. To be successful in your real estate business, you first need to define your exit strategy or strategies.
My favorite strategies are the most consistent and conventional methods of investing in residential real estate. This includes buy-fix-and-flip, buy-and-hold and wholesale.
Every real estate investment business owner should pair the strategy with his or her own tools, assets and comfort level. Knowing where you want to go will help to define your next step in the journey.
3. You must consistently market for seller leads.
Leads are the bloodline of the business. The only way to consistently find enough leads to feed your growing business is to consistently market to motivated sellers. Focus on the types of properties that fall within your target markets and fit the criteria for your exit strategy. Build a marketing plan based on the types of properties that you want to find. Then implement the plan.
4. You must trust your numbers.
Numbers do not lie, so don’t try to fool yourself. It can be tempting to believe that you can trim a few thousand dollars here or there from the cost of your project. That’s why it is important to use a checklist or construction generator with predetermined values on it. When you run your calculations, stick with the values that these tools generate. Even though it is tough to walk away from a deal, sometimes the best investment is the property you never bought.
5. You must define a process and stick to it.
At one point, my homebuying business was generating up to 400 leads on a weekly basis and wholesaling eight to 12 properties each month. This would never have been possible without some defined processes and procedures. The structure provided the freedom my business required to grow and thrive. If you want a growing business, you’ll need to work on processes that can be duplicated easily.
6. You must be honest and realistic when working with others.
If you want to separate yourself from the competition, tell the truth.
There are a handful of industries where you can make a large amount of money in a relatively small amount of time. Real estate is one of them. It seems that these types of businesses also tend to attract scammers and hooligans.
Sellers have a right to an honest and realistic explanation of your intentions. If you are wholesaling the property, you can let them know that your funding partners will need to see the house and fund the transaction. If they are asking for too much money, let them know. If you cannot close in their time frame, let them know.
Your buyers deserve the same respect. When you present the property value to a buyer, do your best to make sure the numbers are accurate.
Bending the truth will only make you look like a crook or, at best, like you’re incompetent. Neither option is the image you want for your business or yourself.
As you build and grow your business, make sure to keep an eye on what’s important. Now go make some money!
(Special thanks to Joshua Weidman for collaborating on this piece.)
Chris Haddon is an entrepreneur based in Washington, D.C., a partner at Hard Money Bankers and a co-founder of REI360.net.