The allure of real estate investing is easy to grasp: it offers residual income, price appreciation, and the safety of owning a hard asset. I grew up living in a rental home and remember thinking how lucky my landlord was to get money every month without having to do anything! In an effort to replicate his residual income model, I would rent my toys out to my younger brothers.
I was appalled, at the age of six, when my mother told me that I had to share instead of lend out my toys.
I learned the hard way growing up that owning assets — and real estate in particular — can be very difficult. The problem is that it is very capital intensive, particularly for those who don’t already have assets. Tightening lending standards, which are arguably a good thing for the safety of the greater economy, further prevent normal people from acquiring rental property. Down payments can be as high as 40% for income property, which is a ton of money for 99% of Americans.
FHA is a great option, but may require that you live in the home, which puts you in an ethical tight spot if you want to rent it out. There is also a dearth of property available in many of the desirable markets around the country. I used to feel that the very idea of owning rental property was a sham — only rich people were able to afford it!
The reality is that buying a good rental property is difficult, but it is also possible. Five years ago I graduated college, only to quit my private equity job in favor of a gig buying foreclosures for a company that paid me $3,000 a month. I was able to buy six rental homes in 18 months, which has since spring-boarded me onto larger and more profitable deals.
I can only really speak from experience, but I’m confident that anyone who is persistent enough can buy property using the steps below.
6 Foolproof Steps to Acquiring Investment Property
Step 1: Learn About Real Estate
In a lot of ways, this is the hardest part.
You — yes, you — need to learn a ton about how real estate actually works. I read books like Real Estate Finance & Investments: Risks and Opportunities by Peter Linneman. The first time I read the book, I probably only understood about 25% of what was in there, but I kept working through it, and eventually I understood most of it. If I didn’t know a term, then I would look it up on Investopedia or some other site. You can figure out anything with Google.
I would also talk about real estate to anyone I could. I was fortunate in that I was 22 years old, and people were eager to “impart knowledge” on me; it was socially acceptable for me to be ignorant. I looked very stupid for a while, but I was fine with it. In one of my first conversations, I asked a good family friend to explain what a “cap rate” was, a term that any basic real estate person should know. I was a little embarrassed that I didn’t know the term, but I was glad that I wouldn’t make the same mistake again. (Look up “cap rate” right now if you don’t know what it is… like, now! Go!)
The most important part of conversations is to ask questions. This is not a time to regurgitate every page of the real estate textbook you just read. This is a time to learn how someone else made their money. The beautiful thing about real estate is that there are a ton of ways to make a buck (investing, brokering, research, tech, appraisals, renovations, etc.). There is a reason that real estate is a huge driver for the US and global economy — it touches every aspect of life.
Take a pay cut to learn. It may be by shadowing a friend, spending your weekends doing an open house for someone or taking an internship that doesn’t begin to pay off your student debt. It is really hard for someone to say no to an offer to work for free. I should know — I offered myself to just about every real estate person I knew after college.
It is humbling, but it is worth it.
The last point to be made in this step is to really learn about real estate. I’m a huge fan of practical knowhow. If you know someone who is exactly where you want to be, then go and ask them exactly how they got there. It may be different for you, but you might as well get their story and learn what worked for them.
Step 2: Commit to Owning Real Estate
This is a crucial aspect of the process. I didn’t come from any family money, and it took me years to be able to buy properties, but I knew that I was going to do it. No matter what it took, I was committed.
It is becoming increasingly difficult for people to buy investment property for the first time. In many ways real estate is a game of rejection. I look at about 100 flip deals for every one that I buy. That is a clean 1% success rate. I had over 74 meetings before I convinced someone to hire me for a real estate job that I thought was helpful to my goals. I don’t look at percentages; I look at whether I got the task done or not.
Related: When Will You Be Ready to Buy Your First Rental Property?
Embrace the struggle, and use it as motivation. If you are committed, then you will get it done — period.
Step 3: Develop a Strategy
I’m going to give you a strategy that I think is attainable for most people: Buy a single-family house with an investor, and rent it out for income and price appreciation. Focus on this strategy and this one …read more