You’ve been thinking about real estate investing. Maybe you’ve already done some research.
Why You're Not Ready to Start Investing in Real Estate Yet
But how do you know if you are ready to start investing? How exactly do you start the process of becoming a real estate investor?
To help you, we put together a list of five ways to determine if you’re NOT ready (yet!) to invest in real estate. But don’t despair — if any of those things apply to you, you’ll at least learn what you may need to do or get in order to start investing in real estate. We also provide a few tried-and-true tips on how to start your journey as a real estate investor.
So, here we go. Consider yourself NOT ready to invest in real estate now, if:
1. You don’t know your specific goal(s) with real estate investing.
What is your “why” for getting into real estate? If you don’t know your “why,” there’s no way you’ll be able to figure out what real estate investing strategy you should pursue in order to accomplish your goals. Your goal may be financial freedom, having more time to spend with your family and doing things you enjoy, and/or wanting to be your own boss. Once you’re clear on your goals, find real estate strategies that match them. As you think about what you want to achieve, consider how much stress you’re willing to tolerate along the way.
For example, if you feel exhausted by just thinking about renovating homes or working with contractors, then flipping houses may not be the best real estate investing strategy for you. Unless, of course, the benefits of flipping the house — opportunity to make significant profit and flexible schedule, to name a couple — outweigh your disdain for home renovations and the stress seems manageable to you.
You can always change your strategy later if the one you choose initially proves not to be quite the right fit, but the main point is to just know why you are getting into what you are getting into. If you don’t know that, it might not be quite the time to jump into real estate investing. Yet.
2. You don’t know the numbers.
This is a big one that a surprising number of people forget. Well, guess what. You can’t succeed in real estate without numbers! It just can’t happen.
You absolutely have to understand how to run the numbers on any prospective real estate deal. In addition to running the numbers, you also need to know what the numbers mean and you need to know how likely those numbers are to actually pan out.
Knowing your numbers will become crucial when you’re looking for financing, or a lender, and have to decide on the best option.
It may sound a little overwhelming, but numbers are pretty simple once you learn them. But, you have to learn them. If you don’t know how to run numbers on a real estate deal that you are pursuing, then you aren’t ready to start investing. Yet.
3. You can’t explain why you are choosing the property you are choosing.
Remember back in your school days when you would take a math test and you would get the right answer but your teacher would take points off for not showing your work? Well this is similar to that. Actually, it’s a lot more critical than it was on your math test. In real estate investing, you are going to be headed for a whole heap of trouble if you simply “guess” which property you should buy.
Why are you buying the investment property that you are buying? What (specifically) makes it a good deal? Why choose this property over others? Is it the numbers that have you sold? If it’s the numbers, how do you know those (projected) numbers are likely to hold up?
Think about it as if there was an actual interview process for becoming a real estate investor and your homework going into the interview is to select a prospective investment property and present that to the interviewer. In order to be hired on as a real estate investor, you have to convince the interviewer why this property would make a good investment. Could you convince the interviewer why you are confident this property would make a good investment? If you can’t, you aren’t ready to start investing. Yet.
4. You can’t identify the risk factors associated with the property you’re choosing.
If you really want to knock the socks off your interviewer, not only would you explain why the property would make a great deal, but you would then swoop in with identifying the risk factors associated with that specific property.
Every real estate deal comes with risk. If it didn’t, everyone would do it. There is no such thing as a risk-free real estate investment. But there is also a large spectrum of risk. You can buy the riskiest of properties or the least risky of properties. So going into a deal, can you identify where on the risk spectrum any particular deal is and why?
Not only will identifying the risk factors impress your [pretend] interviewer, but being able to identify the risk factors with any property you analyze is critical. When you know and understand the risk factors you are dealing with, you can make moves towards mitigating those risks as best as possible. Why should you care about mitigating those risks? Because risk factors in real estate investing can end your investing career in some very big and expensive ways! If you aren’t completely hip to the risk factors you are taking on, then you aren’t ready to start investing. Yet.
5. You are losing sleep.
At the end of the day, no investment is worth losing sleep over. While financial returns and gain are great and extra financial stability is certainly a bonus, none of it is worth any major level of stress. Real estate investing can be tough, there’s no question about that.
There’s a good chance that if you are losing sleep over the thought of investing, it may be because you fall into one of the aforementioned categories: you aren’t clear on your goal, you don’t know the numbers, you don’t necessarily know why you are choosing a particular investment, and you aren’t clear on the risks associated with what you are doing.
If you are tossing and turning at the thought of real estate investing, then you aren’t ready to start investing, yet!
So how do you address the above contingencies and become a real estate investor? Here are a few tips.
How to become a real estate investor
There are a lot of technical how-to guides out there, but sometimes it’s more helpful to first look at big picture. Here’s a tried-and-true method for becoming a real estate investor. It’s only FIVE steps, and the order of the steps is important.
- Research everything you can find. Just start exploring. Read everything you can find (be sure to always consider the source), find a real estate author you can relate to and read more of his/her material, listen to podcasts, attend seminars (don’t go too expensive on those to start), and go to some networking events to hear other people speak about their investing. Just start to get a feel for what is out there.
- Narrow your focus. Of everything you learn and hear during your researching phase, decide what you seem to jive with and/or what stands out to you. Compare it against your goals and interests, and when you find something that seems to be a good fit.
- Get educated on that focus. Start learning everything you can about that particular real estate investing strategy, such as house flipping, for example. Learn the advantages, disadvantages, risks, and basic fundamentals. Talk to other people who flip houses. Start focusing more on the technical information. Get to the point where you can answer all of the earlier questions about your strategy!
- Get your feet wet. Often, the best way to learn something is by doing it. In real estate investing, the education phase is especially important because while you learn best by doing, you also don’t want to be making such costly mistakes that you lose everything you have. But once you have that education under your belt, you’ve got to dip a toe into the water.
- Learn from your mistakes, rinse, and repeat. It’s okay if something goes wrong. Those are learning experiences. If you can learn from them, then you will be greatly prepared to try again. Don’t be afraid of failure — there’s no such thing as long as you see your mistakes as learning opportunities: every big real estate investor has lost at some point along the line. You have to keep going.
Remember, you can change up your real estate investing strategy at any time. You don’t want to change it so often that you can never gain traction, but if you learn something new along the way that tells you there’s a better fit in another strategy, then go for it. Having a written business plan also helps to stay focused, measure success, and keep yourself (and all your business partners and vendors) accountable.
Property investing isn’t easy, but if you take the time to learn the fundamentals, get clarity on your goals, and stay open to the possibilities, then you will have a chance to have fun and make some killer money!
If you’re looking for inspiration to get started, here are a couple of LendingHome customers who shared their journeys into real estate investing and how it has turned out for them.
Learn how Cathy Gould-Harrison, a grandmother and former elementary school teacher, started flipping houses in California and get her tips on running a successful business.
Read Paul Falcone’s story and the advice he has for aspiring property investors.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post belong to the individuals referenced. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.