There are magnitudes of books written on becoming a real estate investor. Infomercials on late night television entice would-be investors to "Buy My Real Estate System" to learn all of the insider's tips and tricks. In reality, these so-called systems were mostly designed by people who want to profit from selling a system. If they really had a secret to being a profitable real estate investor, would they offer it to the world for $39.95 with a money-back guarantee?
Don't give up just yet. There are several ways to be a profitable real estate investor. It takes hard work, due diligence, trial & error, and patience. Did I mention that it also takes money? Real estate investing is not a get-rich-quick scheme. Sure, short-term profits are achievable by flipping properties -- if they're bought correctly in a market with limited supply / high demand. But believe that the properties that scream "obvious buy" to you are also on the radar of other real estate investors that likely have more experience and capital than you. So what is a guy or gal with a dream supposed to do?
Decide Your Approach and Research, Research, Research
If you are going to be a house flipper, you will need to do your homework. This involves finding out how much it will cost to do repairs in your area.
Go to home repair stores and look for material costs, and research labor costs by contacting contractors for free estimates. You might be better served by providing the materials on your own, and then hiring contractors at labor-only rates. It is all-too-common for contractors to inflate their prices for a job because they know how the find the best prices on materials, and they'll increase their profit margins by passing a higher materials cost on to you. Some big-box home improvement stores offer contractor rates at a significant discount to the retail prices listed on the shelf. Find out what it takes to get the contractor price. Usually it's a dollar amount required to spend. When you're flipping properties, remember the golden rule: every dollar counts. Every couple hundred left on the table adds up to thousands that can cannibalize your expected return.If you're not interested in extensive renovations but plan to invest for the long haul, you need additional data. It's imperative to understand that not every neighborhood is suitable for long-term real estate investing. In both scenarios, you will need a REALTOR willing to provide detailed neighborhood information and extensive market data including average days on the market, changes in prices per square foot over the last few quarters, and more. You'll need rental comps to get a feel for what the expected rents are for that area should you decide to invest in rental properties.
Put Together a Spreadsheet
A well prepared spreadsheet should run multiple scenarios to decide whether it makes sense to go forward with any given real estate investment. Basic principle criteria for a long-term real estate investment should start with your purchase price and work down, taking into account everything from your closing costs to purchase and your eventual closing costs when selling, expected rents over a period, estimated appreciation of the subject property over a period, and property taxes / HOA fees. Discount all these rates back to today using available spreadsheet formulas to determine how much any given real estate investment will earn in today's dollars.
For a flip property, your spreadsheet should start with your expected selling price of the property, and work your way backwards to your purchase price. Your spreadsheet should include formulas that will show you at what price purchasing any given property is no longer acceptable, i.e. when it doesn't meet your required rate of return. Accept the math. Remember: the numbers don't lie.
Final Thoughts
Deciding to become a real estate investor requires proper planning and due diligence. Don't rush to make a decision that you might end up regretting. Find a REALTOR in your area who understands the differences between neighborhoods and who can refer you to qualified contractors. Do the required math and only then will you be on your way to becoming a successful and profitable real estate investor.
Tips on How to Become a Profitable Real Estate Investor