Going From Beginner to Pro

It is all too common for ambitious entrepreneurs to jump into investment real estate and make costly mistakes. The following guide was devised by a group of successful full time real estate investors who learned the real estate investment business by trial and error, over a period of several years. This guide will help get your real estate business off the ground, and take years off the learning curve. Please contact the staff at InvestorDirector.com if you have questions. We’re here to help!

Most good businesses start by finding a trustworthy partner and setting a goal consisting of the exact dollar amount you and your partner will work to earn by a set date. One partner should get a real estate sales license while the other partner works to obtain a loan officer’s license. The licenses may never be used for their purposes, but the base of knowledge obtained in the required courses before actually investing in real estate is priceless. The importance of forming an honest partnership cannot be understated for beginning investors. It shortens the learning curve and hedges losses.

1. Evaluate each partner’s personal finances and credit scenarios. Several experienced, “investor friendly” mortgage brokers and business bankers should be consulted with to help determine if each partner is able to obtain various financing mechanisms such as mortgages, home equity lines of credit, credit cards or business lines of credit. This will help to gauge risk tolerance before borrowing money to invest in real estate. The objective in an overall financial and credit evaluation before investing is to pick an investment strategy that doesn’t strain the overall credit and financial scenario of the partnership, and to also suppress risk. For example, a partnership that has poor overall credit and very little money in the bank should focus on property wholesaling, which involves finding ugly homes and marketing them to investors or first time home buyers looking to do a rehab project. Wholesaling can also involve finding turn key homes for sale at prices below market value and selling them to investors who don’t want to perform a rehab. Essentially, a wholesaler is a bird dog, or middleman who matches properties to buyers for a modest profit per deal. Wholesaling is risk free because the properties are never acquired; they are other people’s properties that are simply marketed for sale with a small markup. This strategy helps new investors that lack credit and money to learn what a good deal is while also building cash reserves with each sale. Investment partnerships that have strong credit and deep financial resources can buy real estate to hold, try a rehab project, or even jump into new construction. However, the value of property wholesaling is immense – especially for first time investors. By mastering wholesaling first, risk is minimized before different strategies are tackled later.
2. Before any type of investment activity begins, form a Limited Liability Corporation (LLC), or consult with an attorney or tax advisor to form a corporate entity that best suits your business’ needs in the state you elect to do business in. Ironically, you should choose a corporate name that does not suggest that your main business activity is real estate investing. Banks don’t like issuing corporate credit to real estate investors, so naming your company is crucial. It is popular for savvy investors to have a corporate name with the word “Consulting” in it because a lot of your business activities in due time will involve consulting with other real estate companies and investors, or providing other cash yielding services. As time goes by, the partnership will want to get corporate credit lines that are not backed by personal credit and finances.  Obtaining corporate credit lines limits financial risk and can only be done by having a business bank account in the corporate name and obtaining an Employer Identification Number (EIN). Start to build corporate credit with small merchant accounts at business supply stores, gas stations and home supply stores. Eventually, your partnership can get large corporate credit lines used for buying and rehabbing homes or buildings, usually with two years of profit-showing tax returns, in combination with several business merchant accounts.
3. Build an investment team before looking for deals to wholesale or hold. Real estate investing is a people business more so than it is a house business. Focus on finding as many real estate investors as you can, get their information and find out what their investment “niche” is. Other investors have networks of real estate professionals you can tap into. They also have prospective buyers (who can be used to buy your wholesale deals) and various deals in their back pockets at all times. Other real estate investors will literally fuel your business. There are many ways to find other real estate investors. Mortgage brokers, real estate agents, title companies and appraisers work with investors daily. You may elect to run an attention grabbing ad in the news suggesting you have some super deals on houses. When the phones start to ring with curious investors, explain that the deals are gone but the next time you have a super deal you’ll get in touch with them; then collect their background information. The goal of this phase is to build a network of investors and real estate professionals so deep that you can acquire and/or sell multiple properties every month. You’ll know if you’ve built a good network if it only takes a few phone calls to find a good deal and sell that deal; using your network for the entire process. You can’t possibly build a big enough network in this business.
4. As you grow an investment team centered around a pool of investors that can connect you to buyers, as well as new investor-buyers, you can start looking for wholesale properties. Try to find properties for the seemingly hungriest buyers. To find homes that meet your investor-buyers’ purchasing criteria, call ads from sellers in the newspaper or go to www.craigslist.com and other websites and start looking at deals. Homes that are listed by real estate agents won’t work. You may also want to create small road signs that say “I buy houses – cash” and place them throughout your city. It’s okay if you don’t have cash or credit; you’re not buying property but rather tying property up until your buyers pull the trigger if the deal is good enough. The sellers don’t care where the purchase money comes from; all they care about is selling their house. As deals come into fruition, find out the area the property is located in, the seller’s bottom line, the appraised value etc. Remember to stay focused: you’re a middleman. You network with other investors, you find deals, you find buyers, and you make a commission. That’s it.
5. As you close some wholesale deals, you will really start to become efficient and learn what buyers want. You can start to divide up the business’ responsibilities between partners. For example, one partner could specialize in finding good deals while the other partner harvests buyers. At this time, it is a great idea to begin to broker the loans of your buyers by becoming a “net branch” mortgage company, which is a name given to small operations that broker loans through an existing mortgage firm that supplies a satellite support system. Becoming a mortgage net branch allows you to streamline the entire real estate sales process, versus sending your buyers to other mortgage firms for their financing. Brokering loans also becomes another profit center for your business while helping you to master real estate finance; a crucial piece to every successful real estate investor’s business. Investors who are on the cutting edge of bank guidelines and mortgage loan products have such a huge advantage over other investors. The Niche Report is an excellent loan broker specific publication that has many advertisements from net branch mortgage companies that you can look into interviewing to see which company offers the best broker advantages. You’d be surprised how lucrative brokering loans is.
6. Continue to link buyers with sellers and make thousands in commissions with every “quick turn” wholesale deal you complete. Originate loans for everyone in your blossoming network; the more loans you originate, the more you can track market conditions and build cash reserves. Real estate investing hinges on loan guidelines. Originating and closing loans teaches you the exit strategies you’ll need to execute on more risky deals that you will buy to hold or rehab in the future.
7. The next step is property rehabbing. By now, wholesaling deals and closing loans as a net branch mortgage operation has allowed you to truly master real estate investing and related finance techniques. Make sure you have at least $25,000 in your corporate bank account from your closed transactions before buying your first rehab project. Talk to several knowledgeable real estate agents who have rehabbed properties in the past along with some full time property rehabbers before you acquire a rehab deal. Every community has different rules – and penalties for violating those rules. For example, I once bought a property that had a demolition order on it. These are the lessons that you can either learn the hard way, or learn from experienced property rehabbers before you jump in. As you come closer and closer to actually buying  a home, your selected real estate attorney will hopefully be playing a more prevalent role in your business as you now have the cash built up from previous deals to afford one.
8. Look at hundreds of deals to find three good ones. This doesn’t mean going out and physically inspecting each home. This means finding a target area, looking at 100+ deals based on pricing, your target buyer and property features. Is your area a home owner type area? Are people leaving in droves or happily coming in to start families? Don’t even think about doing anything crazy with acquisition strategies such as short sales, bulk purchasing from banks or pre-foreclosure deals. Only use a multiple listing service (Realtor listed homes) to find your first few deals to acquire. There are so many foreclosure homes and listed homes that need TLC, so your time is spent in a much more efficient manner by searching listed homes versus trying any fancy acquisition techniques. Interview handymen before you buy and talk to other investors to find who the good contractors are. If you spend too much on your first few projects, you’re doomed as you’ll have to hold as a landlord or spend through your cash reserves.

This article presents a general method to create a sound real estate business from scratch. Buying property to hold as a rental, along with commercial investing, were not covered in this article because these are the final pieces to a professional investor’s business. It is important to note however, that most upper echelon investors at one point had to pass through the phases listed in this article. The steps outlined are essential growth steps to a new investor’s business who is trying to create a sound and reliable business.