That’s right, if you can master this one simple principle in your real estate investing career, and have the fortitude to follow through on deals (even if they become sour deals) you will become a success in real estate. You see, many folks that I have talked to and tried to help to get started in real estate have the wrong idea, they see real estate as a long term investment, and that you can’t really make money today. While I agree that the best real estate investing is for the long haul, you shouldn’t approach your prospective properties with that mentality. You have to adjust your brain to think about making money as soon as possible on the property, as well as for the long run.
So how is that accomplished? How can we get the right mindset to properly enter into a new investment property. Well, you can try it your own way first, and you will learn this simple principle (that’s what happened to me in the beginning, I tried to do the deal my own way, and trusted people that had a vested interest in themselves, not in me making money on the deal). So learn off my experience this simple principle:
BUY RIGHT! IT’S THAT SIMPLE. YOU MAKE YOUR MONEY IN REAL ESTATE WHEN YOU PURCHASE THE PROPERTY.
I know this isn’t brain surgery here, but it’s so simple that many people miss it. They think that the property will go up exponentially in the future, and therefore paying today’s market value won’t hurt them. But that’s a mentality that will set you up with a bunch of rental properties that you don’t make any money on, and have to sacrifice time and resources to maintain. It just isn’t worth it. The smart money says to buy in well below market price, factoring in all repair costs, etc., leveraging your cash with mortgages, and then recouping that money as soon as possible through renting or flipping the property.
Now, I know what you are thinking here, how can I buy in well below market value, and what target should I look for when buying in?
That is an excellent question. Most owners that have houses that are in good shape want to get market value for them when they sell, especially if a realtor is involved. So you have to look for other avenues to find properties. You have to find properties with motivated sellers, a term we will look at more closely in the coming articles. But for now, you have to find properties where owners are willing to part with the property for less than market value, significantly less.
My target pricing usually falls around the 60-70% of market value range, depending on my valuation method. Now, when looking for long term rental property, many investors go by the 1% rule. What in the world does 1% rule mean? It means that whatever the investor thinks they can get in gross rent should be about 1% of the total cost of acquisition (purchase price + closing costs + any additional post closing repairs). I like to get more than 1%, not because of greed, but because the market that I am in usually deals with old houses, that tend to need more repair than newer homes. So to help cover those costs, I like to get in around 1.5%-2%. It just makes good business sense.
So now you understand the key to real estate investing success. So stay with me as we look on to the next articles to find out how I go about finding distressed properties and motivated sellers.