In real estate investing, there isn't a one-sized fits all approach to your strategy. With the exception of some emerging REITs and ETFs, there is no obvious way to get into the market without getting your hands dirty. Investors that are looking for out-sized returns through fix and flips, long-term rentals, or other similar strategies need to do the work to put themselves in a position to profit. But the market can be complex with potential pitfalls around every corner. Experience will be your best guide, but if you're just getting started you need to know where to look to identify risks in your plan.
With our many years of experience working closely with real estate investors and investing heavily ourselves, we've accumulated a list of questions that every investor should ask themselves before they dive in head-first.
These questions primarily pertain to single- and multi-family homes, but the same logic can be applied to larger residential and commercial projects.
Who will perform the renovations and repairs?
Even if you were to buy a turn-key investment property, repairs will still be a big part of your day-to-day efforts. The time you will need to put into repairs is even more drastic if you're investing in a distressed asset. While many potential investors have the drive and know-how to perform basic aesthetic fixes around the property, few have the ability to do the heavy lifting that may be required in terms of electrical, plumbing, or foundation work.
Having a clear idea of what you are capable of, and what you aren't, is one of the key components of success in real estate investing. It's okay for there to be skills that you don't possess, but you have to be able to recognize this fact and adjust accordingly. Build out a network of skilled (and unskilled) contractors that can perform that work that you can't (or don't want to). It may feel like you are throwing money at problems that you could fix yourself, but in the long run, you will need to lean on others in order to maximize your investment potential.
Do I have a comprehensive investment strategy tailored to this deal?
There are a number of cookie-cutter strategies that the majority of our investors employ. Whether it be the BRRRR Method, Fix and Flip, or any other, we have seen many people realize huge returns on their investments. But having one of these brand name methods isn't the same as tailoring a strategy to the deal in front of you. In order to find success, you will need to know every possible variable associated with the property and have a comprehensive understanding of how changes in circumstance could affect your profitability.
Start with the basics. What is the purchase price? How much will repairs cost? What is the timetable for selling or renting the property? There are likely another 100 questions that you could ask and you should have specific answers for each of them.
Are my assumptions accurate and reasonable?
It's not enough to simply answer the questions once. You should have a range of answers in case your initial expectations are off the mark. Without seeing the specifics of your deal, nobody can give you a detailed list, but you should seek out potential circumstances that could affect the financial reality of your property. Many investors begin a project with the expectation that everything will go according to plan. We hate to tell you this, but it won't.
Understanding the likelihood of both your low-end and high-end range should give you a clear picture of your potential for success. If you apply the worst-case scenario to your investment and are still able to forecast a profit, you know you have a good deal on your hands.
What do I hope to accomplish with this project?
Everybody goes into the project with the goal to maximize their profit and make as much money as possible, but it's important to understand what that means with dollars and cents. Determine baseline profitability that you want to achieve with your project and work backward to determine a strategy that can make that a reality. For a fix and flip, that means knowing what you can get on the resale market and tailoring your budget to ensure that level of margin. If you're doing the BRRRR strategy, anticipate what your monthly rental income might be relative to your costs for refinancing.
Maybe your goals are more long-term and you're hoping to acquire assets for profitable disposition down the road. Whatever your goals may be, make sure that you can clearly articulate them and that your strategy is supporting your vision.
How am I going to finance the acquisition and renovation?
Every real estate investment requires capital to get started. But it doesn't have to be yours. Financing your investment property is the most foundational aspect of your project and will be the difference between success and failure. Those who have been in the market for a while may have the cash on hand to tackle their next project. Others who are just starting may need to lean on OPM (Other People's Money) or hard money to acquire their first asset.
Wherever you are, there are likely a number of options available. What's most important is that you have a detailed understanding of what the financing is going to cost and whether those costs align with your aforementioned strategy. Keep in mind that there will be a number of hidden costs along the way. The last thing you want is to be in a position where your funding has run out, but you haven't completed your project.
Hard money is an excellent option for both beginners and experienced investors alike. Though it can be expensive relative to traditional institutions, our ability to navigate your needs is what sets us apart. Combined with our ability to finance both the acquisition and renovation without appraisals or credit checks and it's clear why successful investors continue to use hard money lenders.
Asking these questions is only the tip of the iceberg. Finding the answers will require asking many, many more questions before you start to arrive at concrete answers. But this act of exploration is a good thing. It will help you better understand the world that you're operating in and will leave you better prepared than your competitors who are shooting from the hip.
If you have questions that you can't answer, or don't know where to turn next, reach out to us. We're more than happy to have the detailed conversations required to help you along your real estate investing journey.