Why invest in real estate? Because we want to create passive income, we want more time with our family, we want to dictate our own schedule and invest our hard earned money into a more secure, less risky, investment vehicle.
We reviewed numbers and the outcome of different investment paths in part one of this series, A Very Simple Formula. Again, the WHY for us is to create passive income so that we can enjoy more time with our family. If we continue to work a typical 9 to 5 job with a 2 week vacation each year we should be content, right? I don’t mind working 40 hours a week, I simply want some flexibility. I want to be able to help my kids move into their college dorms, visit with them when they need me. I want to be able to attend the meet the teacher events on time for a change… I want to be able to spend quality time with my family members. By creating a passive income stream that provides income for us we are achieving this goal! I know that there will actually be something left at the end of the rainbow, not simply left to hope that the stock market does well and I don’t lose all of my savings! Real estate investments are certainly not without risk, but they are much more in our control than handing off our paychecks to our 401K each week and hoping the market doesn’t tank. I can drive by my houses each week and know that my equity is safe, insured against loss, and growing.
Real estate investing is not an individual activity. It truly takes a team of people to effectively put deals together, close them, and finally get them rentable or resold. You will need a banker, a real estate agent, an attorney, a title agent, an insurance agent, an accountant, and a construction team member, and a property manager; if you choose to use one. You don’t have to wait to begin putting your team together, start now. Reach out to your networking circles and begin introducing your idea to them all. Remember that failing to plan is planning to fail!
Banker – Ask a banker to lunch, talk about your plan. If he or she can’t help you they will more than likely be able to introduce you to someone that can. Ask for some kind of preapproval from them so you are assured that when you are ready to buy you don’t have to wonder if you can get financed. They will give you the parameters of what they can do. If nothing else, bankers deal with real estate transactions often and can give you some valuable insights.
Real Estate Agent – Sit down with them and discuss your plan, they can easily send you an automated MLS report on a daily basis showing you every house in the area you are interested in. Have them run a comparative market analysis (CMA) once you find something of interest. This will show you all properties that are for sale, pending, and sold near the prospect. It also gives you much more information such as average square foot pricing. This is a great metric to use when doing a quick analysis of a home. If the average sales in an area show $75 per square foot for similar houses; then you have something to compare to. Remember, we are looking to pay 70% or less of market value. So in this $75 per square foot neighborhood we are looking for properties that are priced at $52.50 or less. This may seem impossible at first glance but believe me, they are out there. Don’t forget to include your rehabilitation costs in your $52.50 target. Be patient.
Attorney – This one may be a bit more difficult unless you pay for their time. But look around, many attorneys still give you a free consultation, just ask. Study your states real estate offer form and be ready to ask questions that your real estate agent could not answer. They are typically pretty straight forward and after a couple of deals this part will go pretty smoothly.
Title Agent – This is something I learned late in the game. Team up with an agent that knows your plan and will assist you. Now I call on my title agent before I even make an offer. There are some properties that have so many title issues, liens, and fines levied against them that you should just pass. Maybe you are a dedicated problem solver and want to jump in and deal with it. For me, I don’t mind working through some title issues as long as it is worth my while, in the form of a good discount on the property. Visit with a few title company agents and discuss your goals, you will find someone that is a good fit. They make sure you have a clean and marketable property title and you won’t have issues to deal with later. A good title company is a very important part of your team.
Insurance Agent – Not every insurance company will want to insure your rental houses. You will have to search around to find a good agent and underwriter. An insurance agent is just that, an agent representing one or more underwriters. Call on a few agents and discuss your plan with them, they will let you know very quickly if they are a good fit. The next step is to price shop your insurance plans, make sure the underlying limits are the same for each quote. In other words, compare apples to apples. Once you have multiple properties it is a good idea to obtain umbrella coverage as well, make sure to discuss this with your agent.
Accountant – This person will be your go to for long range planning. A good accountant can help you know the outcome of your real estate transactions before you even purchase them. Planning, this is what this team member is GREAT at. Ask them. Share your entire plan, they will give an accountants advice on the type of corporation and structure to create. Make sure to set up quarterly meetings to review your books and PLAN for your year end. This will help you minimize your taxable situation and maximize your use of cash.
Construction Team – This is where the rubber hits the road. As a General Contractor myself I have a real advantage. I know the costs, timelines, requirements, positives and negatives. You don’t want to learn all of these lessons the hard way. Find references from your networking circle. Follow up on them, call them, go see the work. Once you find a great contractor they will become your rental companies’ best friend. The most important consideration here is to only pay for completed work. Did I say completed work? Yes, only completed work. Good contractors do not ask for money up front as a general rule. Of course there are exceptions but for the most part just run and thank me later! lol
Property Manager – A property manager can be your best friend, taking most of the headaches and simply handling them. You will want to have a clear agreement with them up front. Most will require either ½ or 1 month of the initial rental. Some will require 10% of the rents going forward. Any combination of these can work, the most important aspect of this transaction is to find one that communicates well. Additionally, you can authorize them to go ahead with repairs without your consent
I have mentioned networking several times above. This can be at Meetups, local real estate investment clubs, or homebuilders associations. You never know where you can meet a great team member. You have to get out and shake some hands to meet people! Before you know it you will have a world class team that is helping YOU reach YOUR goals!
The next article in the Building Wealth series will be on finding the right property, this will be a brief overview of several different tactics to find a perfect investment property.