investing 101

Real estate investing can be a bit confusing for an outsider’s perspective. Most people are used to buying from the MLS, using a realtor, and maybe getting a small percentage knocked off the sales price based on your negotiations.

Real estate investing, simply put, is buying a property at a discount and either reselling it on the retail market (on MLS), rehabbing it, assigning it to another investor, or holding it as a rental property. You buy it at a low enough price, while accounting for any repairs needed, so that you’re able to make a profit once you sell it (or rent it out).

Let’s go over some common questions about real estate investing that prospective investors normally have.

  • Is it legal to buy or sell real estate without a real estate license?
    • Yes, you can buy homes as a business or individual without the assistance of a realtor.  As a homeowner, you have the right to sell your asset without the assistance of a realtor.  The key is to own the properties that you intend to sell and market. If you do not own the property, you need a licensed realtor to market the home but you do have the right to market and sell an assignable contract… you are selling your equitable interest in the contract not the actual home it self.  Some states do not allow assignable contracts so it is important to speak to an attorney before attempting to assign a contract that you have on a property.
  • How much money do I need to buy my first investment house?
    • Before we go into buying the property, you need to understand that generating leads will cost money or hard work and sweat. We talk more about advertising cost down below in another question.
    • For buying the property, it largely depends on your exit strategy (buy and hold, wholesaling, rehabbing, assigning, wholetailing) and whether or not you’re using OPM or “other people’s money”. Most investors do not use their own funds to do the majority of their deals. The more OPM they have, the more deals they can buy without having to worry about funds depleting.
    • Traditionally, if you’re closing on the property, you’ll need 20% down.
    • If you’re assigning the property (based on legalities in your state), you aren’t closing on the property so therefore, you don’t encounter any closing costs. This is a great way to get your foot in the door, get comfortable with meeting with sellers, and you don’t have the worries about closing costs at all.
    • When dealing with repairs, some lenders will provide the funds for the repairs. It’s important to have a solid repair estimate, broken down room-by-room and as detailed as possible. This will not only help them understand your repair total, but will help insure that you and your contractor are on the same page.
  • How do I find investment properties?
    • Generating leads is critical in this business. There are various ways that you can find leads and they vary in cost as well. If you’re on a budget, driving through neighborhoods and writing down addresses that look vacant or distressed and writing them a letter letting them know you’re interested in their property will cost just a few bucks. You’ve got your stamp, letter, and gas is all.
    • You can also purchase a list of leads based of certain criteria that you’d like to mail postcards or letters to. These lists can be pre-foreclosure, high equity, over a certain age, those who are divorced, out of state owners, etc. and you pay for both the list and for the postcards. Costs vary on purchasing lists but this is what a lot of investors do so they aren’t spending their time looking for properties in distress.
    • Additional ways to find motivated sellers is going to be through social media and paid advertising. This option is not cheap but if done right, can produce lucrative results.
  • Is MLS where I should start looking?
    • The simple answer is NO. MLS is going to have “retail” priced houses normally so they aren’t going to be discounted enough to make it worth your while. Occasionally, you’ll find an “investor special” on a property that needs work but be careful that you aren’t buying too high.
  • What are the first steps to take if I find a distressed property while driving through town?
    • When you find a property that looks like it needs repairs or is vacant, it can be a good idea to research the property, including information about the owner so that you can reach out to them via phone, mail, or in person. It’s good to learn about how much they owe on the property, how long they’ve owned it, if they live in the property currently, etc.
    • A benefit to finding the property through your own efforts is that you can hand write the letter to the homeowner and make it very personal. With a personal feel, the more likely it is that it will be opened.
  • Why does advertising cost so much?
    • Advertising is a numbers game and you have to impact thousands of individuals to find a potential lead that needs the services that you are offering.  With this being said, the majority of your advertising is wasted on people that do not desire your service, but you need to get you message in-front of as many people as possible to find the people that actually need your assistance.  You can minimize your advertising costs by being as targeted as possible with your marketing to eliminate wasted marketing efforts.  
    • Many new investors buy the cheapest data (marketing list) available and fail to realize that the data is being bought by many other investors and most of the people on the list do not need their services.  
    • Additionally, in today’s media, consumers are being bombarded with ads and our marketing efforts are often watered down from all of the other noise in media.    
  • How do I know what to offer?
    • Offers are made based on the true value of the property after it has been completely updated to the neighborhood standards.  In the industry, we call this the “After Repaired Value” or ARV.​ You need to determine the value the property by analyzing the factual data that is provided when comparing local comparable home sales (comps).  You access this data via the MLS. We use these comps to determine a properties After-Repaired-Value (ARV). You do this by looking at the comps, identifying comparable sold homes (similar build, age, location, size), figure out the average price per square foot for the comps, and multiply that number by your subject properties square footage.  These examples will help you best understand this process.​

      Price per square foot formula –

      • property sold price/square footage
      • Example: $100K/1000 sq ft = $100 per sq.

Average price per formula –

      • comps price per sq ft/number of comps
      • Example:
        Comp 1 price per: $98
        Comp 2 price per: $100
        Comp 3 price per: $102
        Average price per: $100

        ARV Sample: 1000 sq. ft. X $100 price per = $100K

 

    • Once you developed your ARV, you then need to estimate the cost of the repairs needed on the home to get it up to the standard of the comps that you used.  
    • First you need to analyze the comps to see the condition of the homes were when they sold. Then you need to walk your potential property to evaluate the needed the repairs and the costs associated with making these repairs.
    • Lastly, you need to decide your desired margin/cushion.  We generally use a 30% margin when making offers. This margin allows for a decent profit and for us to cover unforeseen repairs, holding costs, financing costs, and closing costs.  Historically, we see an average of 12% of the selling price go towards these associated costs.
    • Now that you have the three critical data points (ARV, Repars, and Margin) you can run a simple formula.  ARV multiplied by the remaining balance of your potential margin, minus the cost of repair.

      Let’s do an example using the above numbers and assume there is $20K in repairs.

      ARV – $100K  
      Repairs – $20K
      Margin – 30%
      Offer = $50K

      $100K (ARV) * .70 (30% Margin) = $70K
      $70K – $20K (Repairs) = $50K (Offer)
  • What type of contract do I use?
    • Contracts are state specific so we suggest that you speak to a local real estate attorney to find the best practices in your targeted state.  In Texas, we use a standardized contract (One to Four Family Residential Contract) that is written and maintained by the Texas Real Estate Commission.  We use this contract as it is standardized and unbiased between both parties. Most sellers feel much more comfortable when they learn that we do not have control of the verbiage in the contract and that it is was written to be fair for both parties.  We walk our sellers through the entire contract, explaining each section, and fill it out with them watching.
  • How do I get financing if I have no experience to show?
    • The key to getting financed with little to no experience is to purchase the property at a deep discount so that your lender has a large margin if you have problems completing the deal.  Most lenders are going to require 30% or more margin and may require that you put money down to get it below the 30% margin. See above section about making offers to understand the 30% margin.  

Real estate investing can be a life changing career. It’s one of the few industries that allows you to be your own boss, make a difference in the community, and make huge profits, if done right.

Learn the foundations of real estate investing and take action! Whether it’s through coaching, mentoring, or trying it out on your own, start generating leads and meeting with sellers.

Don’t limit yourself.

I'm the content manager here at FlipNerd.com and have a passion for real estate investing and have a background in writing and business. I focus on providing content that is aimed for newer real estate investors and those who have the drive to become a full-time real estate investor. With so many strategies to utilize within the real estate investing industry, I aim to break down any barriers and showcase that real estate investing is obtainable and can truly bring financial freedom.