Most investor wannabes I talk with want so badly to "flip properties" that they forget on the outset that they are talking about launching a business -- a real estate investing business. They simply think and say: "I want to begin buying and selling real estate."
Sounds pretty simple, doesn't it? Find a run down home, maybe a foreclosure; go through it repairing and painting walls, replace flooring, install new appliances; put it on the market and make $50,000 each time. Yeah, right.
Before you launch into the real estate investment world, first consider how the transaction went with your primary residence. The agent probably took care of many of the minute details, such as lining up contractors for inspection items, helping you with financing and insurance, and even getting the inspector. If you're going to start investing on a regular basis, then you'll want to develop relationships with these professionals yourself and follow these steps to begin your real estate business:
- Locate financing.
All investing hinges on this first action. If you don't have financing, most likely you won't be investing. You'll want to find a program that will allow you to put as little of your own money into the property as possible. In today's competitive mortgage environment, there are now investor programs that allow five percent down on the investor's part.
Since you may have remodeling or rehab costs, don't forget to look for programs that include money for those activities.
If you can get it, try to get owner financing as this can be the easiest way to get into a property. The owner holds onto the note until you've completed your rehabilitiation of the house. You can try to get the owner to take just interest-only payments until you sell, then pay them the balance once the property is sold. There are plenty of other ways to finance an investment property, so talk with several mortgage providers to find out your options.
- Set up a limited liability corporation. This protects you from any accidents that may happen during the refurbishing process. If someone gets hurt on your property, they could sue you -- the LLC purports to protect your personal property.
- Find a real estate agent who knows the marketplace you're interested in to find the properties.
- Line up your contractors. Unless you're going to do it yourself, then you have to ask the following questions:
- Do I have the expertise to handle tasks that require trade status, such as plumbing, electrical, HVAC?
- Can I lay carpet?
- Can I hang/repair drywall?
- Can I fix dry rot and carry out other carpentry work?
- Can I replace subflooring and deck work?
- Can I repair the roof?
- If you're repairing electrical and plumbing you may need to get proper permits and inspections.
- Find a title company to check out titles of properties.
- Find a settlement or escrow company for closings.
- If you're holding onto the property short term, you'll need a short-term insurance policy to cover the property until you sell it again.
- And then here's the kicker -- except for the LLC setup, you have to do each of these steps every time you want to buy another house, fix it up and sell it.
As you can see, this is another job when you're considering the refurbishing of property and selling. I haven't even gotten into the tax ramifications of short-term investing (you will more than likely owe capital gains taxes of 5-15 percent on all of your profit).
You CAN make a lot of money, and you're going to work hard to do it. The good part about it is that the returns are usually higher than what you'll find in any other business.
Before you get started, write down your financial goals together with your partner -- usually your spouse. Find a real estate agent who can walk you through real estate investing as it pertains to your area and then talk with your accountant about tax liabilities and benefits -- then, make your decision.