Which order should a new investor start?

Question

Hello,

I've read a ton of investing books but never really got an answer on the best order to start investing.  I want to put a buy and hold rental property in an LLC.  Is this a good order before I start to make offers?

1. LLC creation with a lawyer

2. Accountant

3. Financing

4. Property search

5. Offer submission

6. Purchase

Any suggestions or advice would be greatly appreciated.

Eric Fernwood · Answer

Hello @Jonathan Winkler,

I recommend the following:

• Loan pre-approval - It's important to determine what you can afford before you begin the investing process.
• Location - Live wherever you like, but invest where you can make money. The location is the most important investment decision because the city determines all long-term income characteristics, including:

Whether rents will keep pace with inflation
How long your income stream will last
How reliable your income stream will be
How much of your rental income is lost to overhead
Whether you or the government control your property

If anyone would like a free guide on selecting an investment location, DM me.
• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property
• Investment team - Find an experienced investment team in your chosen city. The information you learn in seminars, books, podcasts, and websites is general information. However, when it comes to real estate investment, you are not buying a generic property in a general location. You will be purchasing a specific property in a specific location that is subject to specific local rental regulations. You need detailed, local information and the only source for such information is a local investment team with years of experience working with investors. Also, you can not replicate years of experience by a team of experts. Furthermore, working with an investment team does not cost more than working with any other realtor.
• Property selection - An investment property is no better than the tenant who occupies it.  To permanently escape the daily grind, your property must be continuously occupied by reliable tenants. A reliable tenant is someone who stays for many years, always pays rent on time, and takes good care of the property. Reliable tenants are the exception, not the norm. To increase your chances of always having a reliable tenant, work with your investment team to select a tenant segment with a high concentration of reliable tenants. Once you've identified this segment, find out where and what they are currently renting, and buy similar properties. Following this process eliminates guesswork and opinions. We've successfully applied this approach to over 480 investment properties, and our results have been excellent.
• Property evaluation - When evaluating a property, consider all recurring costs, but only include those that are known. For example, we know that the average annual maintenance cost for our properties is about $350, and we have an average tenant stay of over five years, so we know the annual vacancy cost is about $400. However, averages do not accurately represent the costs of individual properties. Therefore, we have not included depreciation or other tax savings, which are larger than the combined maintenance and vacancy costs. If anyone would like a free guide on how we calculate returns, DM me. Also, work with your investment team to estimate both renovation costs and renovation risk. Both should be factored into your property evaluation.
• Get a property under contract - As soon as we get a property under contract, we solicit buy-down interest rates from multiple lenders. We then work with the client to select the best option for them. Without using interest rate buy-down, I don't believe any property will initially have a cash flow with a 7% or 8% interest rate. If anyone would like a free guide on increasing initial returns, DM me.
• Decide on the best form of ownership for your situation. Of the 180+ clients we have worked with, some put their properties in an LLC, while others set up an umbrella policy. A large percentage did not take any additional action. This is a relatively safe option in Las Vegas because there is not a lot of frivolous litigation, unlike in other states. Additionally, you can greatly reduce your litigation risk by doing the right things during renovation. Note: I am not aware of any lenders who will finance a property with the LLC as the owner. Our clients typically close the loan in their name and then transfer ownership to the LLC afterward. Additionally, in Nevada, the state has a do-it-yourself site for setting up an LLC. To my knowledge, none of our clients used an attorney to set up an LLC. You need to evaluate the litigation situation and options in the city where you plan to invest.
• Tax strategist - Investing in real estate has a significant advantage in terms of tax savings. However, simply using TurboTax on April 14th will not maximize your tax savings. Moreover, most CPAs can only input numbers into forms. To take full advantage of all the savings that real estate investing offers, you need to work with someone who knows how to structure your taxes.

Loan pre-approval - It's important to determine what you can afford before you begin the investing process.

Location - Live wherever you like, but invest where you can make money. The location is the most important investment decision because the city determines all long-term income characteristics, including:

• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property

If anyone would like a free guide on selecting an investment location, DM me.

Investment team - Find an experienced investment team in your chosen city. The information you learn in seminars, books, podcasts, and websites is general information. However, when it comes to real estate investment, you are not buying a generic property in a general location. You will be purchasing a specific property in a specific location that is subject to specific local rental regulations. You need detailed, local information and the only source for such information is a local investment team with years of experience working with investors. Also, you can not replicate years of experience by a team of experts. Furthermore, working with an investment team does not cost more than working with any other realtor.

Property selection - An investment property is no better than the tenant who occupies it.  To permanently escape the daily grind, your property must be continuously occupied by reliable tenants. A reliable tenant is someone who stays for many years, always pays rent on time, and takes good care of the property. Reliable tenants are the exception, not the norm. To increase your chances of always having a reliable tenant, work with your investment team to select a tenant segment with a high concentration of reliable tenants. Once you've identified this segment, find out where and what they are currently renting, and buy similar properties. Following this process eliminates guesswork and opinions. We've successfully applied this approach to over 480 investment properties, and our results have been excellent.

Property evaluation - When evaluating a property, consider all recurring costs, but only include those that are known. For example, we know that the average annual maintenance cost for our properties is about $350, and we have an average tenant stay of over five years, so we know the annual vacancy cost is about $400. However, averages do not accurately represent the costs of individual properties. Therefore, we have not included depreciation or other tax savings, which are larger than the combined maintenance and vacancy costs. If anyone would like a free guide on how we calculate returns, DM me. Also, work with your investment team to estimate both renovation costs and renovation risk. Both should be factored into your property evaluation.

Get a property under contract - As soon as we get a property under contract, we solicit buy-down interest rates from multiple lenders. We then work with the client to select the best option for them. Without using interest rate buy-down, I don't believe any property will initially have a cash flow with a 7% or 8% interest rate. If anyone would like a free guide on increasing initial returns, DM me.

Decide on the best form of ownership for your situation. Of the 180+ clients we have worked with, some put their properties in an LLC, while others set up an umbrella policy. A large percentage did not take any additional action. This is a relatively safe option in Las Vegas because there is not a lot of frivolous litigation, unlike in other states. Additionally, you can greatly reduce your litigation risk by doing the right things during renovation. Note: I am not aware of any lenders who will finance a property with the LLC as the owner. Our clients typically close the loan in their name and then transfer ownership to the LLC afterward. Additionally, in Nevada, the state has a do-it-yourself site for setting up an LLC. To my knowledge, none of our clients used an attorney to set up an LLC. You need to evaluate the litigation situation and options in the city where you plan to invest.

Tax strategist - Investing in real estate has a significant advantage in terms of tax savings. However, simply using TurboTax on April 14th will not maximize your tax savings. Moreover, most CPAs can only input numbers into forms. To take full advantage of all the savings that real estate investing offers, you need to work with someone who knows how to structure your taxes.

Hope this helps.

Eric Fernwood · Answer

Hello @Carl Trube

Thanks for the kind words.

Regarding your questions concerning an investment team. In this post, I will explain:

• Why you need to work with an investment team
• Residential vs investment realtor
• How do you find an investment realtor

Why You Need to Work With an Investment Team

Everything you learn from books, seminars, podcasts, and websites is general information. You will buy a specific property in a specific location subject to local rules and regulations. The only source of the hyperlocal knowledge you need is a local investment team. Plus, a local investment team has years of investment real estate experience dealing with everything you need to find, validate, close, renovate, and manage investment properties. A local investment team is your shortest, safest, and least expensive path to real estate success. Working with an experienced investment team is also the only way to learn real-world investing. Lastly, working with a team doesn't cost you any more than working with any other realtor.

Residential vs Investment Realtor

How do you find a good team? Begin by finding an investment realtor. Note that an investment realtor is not the same as an "investor-friendly" realtor.

Residential or "investor-friendly" realtors facilitate the buying and selling of homes. Homebuyers select properties, and the realtor provides MLS data sheets and access to the property. Once a property is chosen, the realtor helps with the offer and closing process. While some residential realtors may sell real estate that will become rental properties, they typically provide little beyond MLS data sheets and property access. MLS data sheets provide little value for investors.

Below is a table comparing an MLS data sheet with the information an investor needs to find an income-producing asset.

Instead of selling homes, investment realtors sell income-producing assets. Also, investment realtors are always part of a team. Only a team of experts can provide the end-to-end processes, skills, and knowledge necessary to bring a property to market. See below for a diagram of the process we follow.

While the process illustrated above is our process, all investment teams will have a similar process.

In summary, residential and "investor-friendly" realtors sell homes. Investment realtors sell passive income assets. As an investor, you will buy an income-producing asset.

How Do You Find an Investment Realtor

There are usually thousands of residential realtors in a metro area, but only one or two investment realtors. How do you find one? Start by compiling a list of candidates. Get names from

• Real estate investing websites (such as Biggerpockets.com)
• Property managers
• Local investors
• Talk to real estate brokers
• Google searches
• Local meetups

After creating a pool of candidates, evaluate each one using the following interview questions. The primary purpose of these questions is to determine the individual's character and capabilities.

Before starting the candidate interviews, create a list of 10 or fewer questions. You will not have time for more. Ask the same questions of each candidate and note their responses. Below are sample questions, along with acceptable answers. It is unlikely to find a candidate with the "right" answer to every question, but they must provide reasonable responses.

• Tell me about your investment team. - You're looking for a response like, “I've worked with X property manager for years. We've completed X properties. "I work with several renovation companies..."
• Do you or have you owned investment properties? - If they have not personally owned investment properties, reject the candidate.
• How many investment properties did you close in the last 12 months? - Some realtors only sell two or three properties per year. Even if all were investment properties, it's not enough repetition to have the needed processes, experience, and resources. I believe a minimum of 12 investment properties per year is necessary to be proficient.
• Did you or your client select the properties? This is an important question. Residential and investment-friendly realtors do not pick properties. They send MLS data sheets for the properties the client selected. The client evaluates the properties and selects one or more to make an offer. The realtor adds almost no value if you do all the work. Reject the candidate if the client selected the property.
• What were your primary selection criteria? - It could be the initial return, appreciation, tenant pool, or something else. You're looking for a plausible answer based on analytics, not opinion or “feelings.”
• How did you estimate rent and time to rent? - A good response to the question "How do you evaluate investment properties?" would be to describe a process, such as "I examine recently rented comparable rentals." Another viable answer is that the individual works with a property manager who supplies this information. However, if the person's response involves citing websites such as Zillow, Redfin, or Rentometer, they do not know how to evaluate investment properties. Such online real estate sites do not provide reliable estimates of rent or the time it takes to rent a property, which is critical information when seeking investment properties.
• Tell me about your renovation process. - You are seeking a response similar to: "I collaborate with the property manager to identify a list of renovation items. Then, I partnered with XXX company to obtain a quote. After the escrow closes, the renovation company completes the work, and the property manager provides final approval.”

If the candidate answered all questions satisfactorily, you can reasonably assume they know what they are doing and can provide the skills and resources you need.

Summary

An investment team possesses knowledge, processes, resources, and experience that cannot be replicated no matter how many podcasts you listen to.

Another important consideration is that if you have a local investment team, the location of your investment doesn't matter. Whether you invest locally or across the country, your investment team will handle all the legwork. In our case, out of the more than 180 clients we've worked with, only 8 to 10 were local. All other clients lived in other states or countries. With a repeat business rate of over 90%, we know remote investing works.

Live where you like but invest where you can make money.

Lensdarly Dieujuste · Answer

You can Invest safely first with a company that allows for that security to learn and grow which is how I feel comfortable enough to at least dish that advice out to you now as it is something I'm experiencing myself.

Mike Dymski · Answer

#3 is table stakes to play the game.  Start with #4 and #5.  Everything else will occur organically.  There is nothing more important to get started in real estate investing (and accelerating the learning curve) than sourcing real opportunities.  Everything else is a crutch or a reason for inaction.

Carl Trube · Answer

@Eric Fernwood

Wow. Amazing Response!

That said, I do a few follow up questions:

1. When building a team for out-of-state rental properties, how do you evaluate them to ensure  efficacy and trust?

2. What team members are necessary at first when looking at out-of-state properties? I instinctively think of realtor and loaners.

Thanks for your help!

Julio Gonzalez · Answer

I would agree with some of the other comments about starting with financing. Get that squared away so that you can start searching for properties to buy. You can always move the property into an LLC later on and you won't need/want the cost of an accountant prior to having a property.

Stefan St. Marie · Answer

Start with 3,4,5. You can set up the LLC after you're under contract. And depending on the loan it will need to be in an LLC or not able if its a personal or second home mortgage. Accountant can jump in many months after purchase, engage as soon as you're ready but it doesn't hold up a purchase. Happy investing!

Scott Bowen · Answer

LLC may not be necessary but depends on the strategy you're pursing and how many units you plan to scale to.

Bjorn Ahlblad · Answer

@Jonathan Winkler welcome to BP! I would start by learning to underwrite, become very comfortable with the numbers, see what you can qualify for and what kind of loan you want to use, find a property, submit the offer and make the purchase. I would join a local REI association in order to network and learn. Yes, get an accountant along the way. You will rarely need a lawyer. Unless you are buying an apartment building, forget the LLC for now. Decide on your goals and adjust them as you progress. All the best!

Which order should a new investor start?

Most Popular Reply