Following a Game Plan for Successful Investing in Real Estate
It is important to develop some ideas on using real estate to become debt free and build your cash reserves. Many investors start out in real estate thinking that they have to “have money to make money”. That is not the case at all. You will need one of two things: either cash or good credit. And remember, it doesn’t have to be your cash or credit. It is okay to start out with other investors until you can make it on your own. It is better to share the profits and have some of something than have all of nothing.
The goal is to buy only when you can be paid and still cash flow the property. For example, you find a property that has an after-repaired value (ARV) of $100,000. Because the property needs $20,000 in work, you can buy it for $50,000. Now you will be in the property at 70% of value once the work is completed. Whether you paid cash, borrowed from relatives, or got a hard-money loan for purchase and rehab makes no difference. Once you have a $100,000 property, you can refinance at 80% loan to value (LTV) and, after closing costs, pull out about $7,000 to $8,000 in tax-free cash. Yes, you do not pay taxes on borrowed money. Just remember that it is still borrowed money and has to be paid back, even if tenants are paying it back. You should not refinance over 80% LTV. This way, you still have some equity for your financial statement and the property should cash flow with no problem.
Now, what do you do with the cash-out from the refinance that you just received? You do not buy a new car, go to Las Vegas, or anything like that. You simply pay off a credit card, installment loan, your car, your equity line, etc. You can buy real estate and get cash to pay off your personal bills and increase your cash flow from the rents at the same time. If the property you just bought and refinanced has a $200 cash flow and you used the cash out to pay off your car that has a $300 payment, how much did you really increase your cash flow? $500!
Every time you buy a property, think about what bill you will be able to pay off. Once you have all of your consumer debt paid off, you start paying off the home you live in. Once you pay off your home, you go to your banker and get a line of credit on your home to use to buy and rehab properties. Then, you simply refinance once the work is completed and pay off the line of credit.
It is much easier to negotiate with a seller when you can simply write a check to purchase the property. When you ask a seller the least he will take if he can have a check by Friday, you can back it up. Sure, it may take some time to get to this point, but once you have become debt free (with the exception of rental property, of course), it opens up many options for you to do things that you have never been able to do. And you can have peace of mind.
What gives some people the drive and determination to succeed while others fail? Many investors and entrepreneurs have followed one of the following courses, from overnight success to plodding, sit-on your-butt-and-do-nothing failure. Some people get off to a great start and then fade away, and some piddle around and never seem to get anywhere. Some of those people make a very successful living, and some of those people even become super wealthy.
Is there a magic formula for success? Unfortunately, there is no more magic in being successful than there is in anything else worthwhile in life.
The most common roadblocks that can detour an entrepreneur’s rise to success are discussed below.
Roadblock 1. Lack of Focus
Focus is concentrating only on the work you must do to succeed in your business, avoiding all distractions, and not being sidetracked by every “great idea” that pops up. It’s not easy. The world we live in is filled with things that beg for our attention. We live in the “Information Age”. That’s great, except this bombardment of information makes it hard for most of us to sift through the junk and come up with the good stuff. That’s why most of us have problems staying focused, even when we’re trying to concentrate on something we know will make us wealthy.
There are a million ways to make a million bucks, and every day a new avenue for riches is presented to us. Nevertheless, I’ve learned through trial and error (lots of error) that the only way to make something work is to filter out everything else and stick with what I know works. I get frustrated when I see people with tremendous potential for this business get off track with a so-called “get-rich-quick” scheme (and there are a lot of those schemes – just watch a little late-night television). If you dabble in one business, jump to another, then try something else completely different, you’re not likely to be successful at any of it. Focus takes work, determination, and discipline. Sometimes it hurts, such as when you have to say no to your family and watching sports on television so you can go out and make them five or ten thousand dollars. Believe me, when your increased income starts showing up in trips to Disneyworld, new clothes, and cars, your spouse and kids won’t have a problem with it.
Roadblock 2. Getting Into the Rental Business Before Your Cash Flow Needs Are Met
When I first got started with real estate, I decided to buy all the rental property I could. I figured that with many tenants in a lot of houses, the cash would just fall in to my lap every month, right? Wrong. It was the biggest single mistake I made for a very simple reason: I just wasn’t ready. Like yours truly, many beginning real estate investors get in the rental business because they think it’s some kind of quick path to wealth. But, it’s not. It’s slow and long-term.
Soon after I built my “rental empire” in the 1980s, I discovered that my daily cash flow needs were not being met. I had a huge amount of capital tied up in equity and a thin stream of income. And, I had a family to feed! Don’t get me wrong; I have nothing against rental property as an investment. However, if you don’t have a cash cushion built up, you’d better get really good at buying properties dirt cheap. Even when you do, you’ll discover a million ways to spend down your cash flow.
Busted toilets, leaky roofs, paint, and carpet all eat great big holes in your wallet. Even if you do have enough ready cash to get into the rental game, you need to know what you’re doing. For instance, do you know about “professional tenants” who make their living by “getting over” on property owners? These creeps know the landlord-tenant code and eviction laws inside out, and they can make your life a living hell before you finally get them out of your houses. If you want to become a professional property owner, you’d better understand how the game is played and get the education necessary to deal with all the potential problems.
Bottom line: Make some fast cash by quick-turning a few houses before you get yourself mired down with rentals. Get into some low risk, high-return deals before you start piling up equity and dealing with tenants. Then, when you do become a “Super Landlord,” your chances of retiring on your rental income will be much better.
Roadblock 3. Listening to Poor Advice
This is something you probably already know. As you go through life, there never will be a shortage of people who want to give you advice. Your parents, your spouse, friends, in-laws, kids: they all have opinions about what you’re doing and what they think you should be doing. Very often, the value of their advice is worth exactly what you paid for it – nothing!
I’m not saying these do-gooders aren’t honest, intelligent, and well intentioned. However, you must ask yourself, are these folks qualified to give you advice? Have they had any experience in what you’re doing? It seems to be human nature for people to offer advice on subjects they know nothing about.
What baffles me is how often the recipients of this so-called wisdom will listen to it and even act upon it without ever questioning the credentials of those giving it. Through many painful experiences, I’ve learned that when you take advice from people who don’t know any more about the subject matter than you do, the quality of that advice is, at best, suspect. Very often, listening to unqualified advice can have a negative impact on your focus (see Roadblock 1 above).
So, to whom should you listen? I believe in taking advice only from people who are:
- Qualified experts in their field and
- Making a whole lot more money than I am.
And, those people are out there.
Don’t be afraid to seek help; just be careful where you go to get it, even if you have to pay for it. I think you’ll find that if you pay for the opinion of a bona fide expert, the advice you receive will be more than worth the price.
Roadblock 4. Listening to Negative Thinkers and “Dead Heads”
Nothing kills the entrepreneurial spirit like negativity. With all the challenges you face in business, you need to keep a positive, upbeat, enthusiastic attitude about what you’re doing. It’s the only way you’ll be able to perform at your best. Negative thinkers and “Dead Heads” will suck the energy out of you and bring you down to their own miserable level. (Generally, these people have failed in their own lives and enjoy trying to make failures out of those around them.) They’ll make you question yourself, doubt what you’re doing, and, if you listen to them, eventually give up entirely.
I’m sure when you first told friends and family you were going to be a real estate entrepreneur, you heard things like,
“You really believe that stuff they sell on TV?”
“You can’t make money in real estate, the market’s too slow”.
“There’s not enough appreciation to make a profit and didn’t they change the tax laws or something?”
Meanwhile, they’re working three jobs and won’t answer the phone at night for fear it will be a bill collector. I don’t think your true friends or your family intentionally would hurt you or bring you down. Usually, they think they have your best interests at heart. However, in the process of “trying to make you see all sides” or “just giving you a few facts about the real world”, they’re pouring buckets of ice water on the fire you need to keep burning in order to keep succeeding. It may be impossible to cut yourself off completely from these people. I suggest you simply tell them in firm, no-nonsense terms that you appreciate their interest but have no use for their negative, sarcastic, or skeptical comments.
One of the best ways to avoid negativity is to seek out positive and supportive people. Find successful people or a group with common interests where you can share ideas and discuss successes and failures with people who are genuinely in tune with what you’re doing. This is where clubs and associations can play a big role. If you’re not a member of a real estate association, I strongly suggest you consider joining one.
Having said that, let me caution you: Not all club members are doers. There are people in every group who are going nowhere and are never going to achieve anything in their lives. Pick out the winners and connect with them. When you become a successful real estate entrepreneur (and you will), one of your greatest rewards will be to share your blueprint for success with others.
“What goes around, comes around.” Before you know it, that sharing will attract people to you like a magnet. I can’t tell you the many profitable deals that have come my way through people who wanted to be around me because I was willing to share my knowledge.
Roadblock 5. Lack of Action
There’s an old saying, “Even a turtle won’t get anywhere until he sticks his neck out.” You have to make it happen. You have to get things started. You have to put the wheels in motion. And, if the wheels stop, guess who has to get them started again? You guessed right. Movement, action, activity, progress – they’re essential in any successful business. Without activity on your part, nothing positive will happen for you.
It starts with that first call, that first conversation with a seller, even the first visit to a realtor. But, your ship can’t come in if it never is launched. By action, I don’t mean running in place. You can go to the seminars and listen to the tapes so often you memorize everything on the tapes. You can acquire all the tools you need to do this business. But the time comes to either do something or do nothing.
All the education in the world is worthless until you put it into practice. The best time to start is now. You need to put something in motion. Do something that will get you going on your first deal. Call a realtor for leads. Call a couple of sellers in the classified ads in the newspaper. Drive around looking for FSBO signs or place your own “I Buy Houses” ad in the paper. Just Do It. You’ll be surprised how taking a tiny step will propel you forward toward your goals. You see, any one action on your part can produce a result. Of course, the more actions you take, the more results you’ll get.
Roadblock 6. Wasting Time with Unmotivated Sellers
They may be interesting. They may be wonderful people. They may have heartbreaking stories to tell. However, if they’re not motivated to accept your offers, they’re wasting your precious time and sucking dollars out of your pocket. If you waste enough of your time waltzing with people who aren’t serious about doing business, then you’re not going to be in business for very long. It’s just that simple.
Unmotivated sellers will think up so many reasons “why not” and give you so much grief that you’ll soon become convinced this business works for other people but not you. Unmotivated sellers are people you must avoid like the plague. But, to avoid them, you have to learn to recognize them, figure out their game, and move on. With a little experience, it shouldn’t take you more than 5 minutes to pre-qualify a seller. Do not be rude to unmotivated sellers because in the future they may become motivated sellers.
Roadblock 7. Chasing Dead-end Leads
Chasing dead-end leads is very similar to dealing with unmotivated sellers and can be a tremendous waste of time and energy. Unfortunately, many people never learn how to avoid it.
You can solve this problem very simply. Pre-qualify every prospect who comes your way. If you spend as little as 5 minutes getting pre-qualifying information on a prospect, you may avoid spending hours and hours gathering details about a property you never have a chance of buying. Moreover, any time you can spend minutes to save hours, it’s like putting money in the bank. You should not take a phone call from a prospect and rush right out to look at a house hoping something will develop, especially if business has been slow. Don’t begin measuring for carpet and gathering useless facts before you know if you have a chance to put the house under contract. This is a crazy waste of time, especially when you know you should never leave your desk without a solid reason to do so.
Properly pre-qualifying a prospect will help you to determine if further action is warranted. When making initial contact with a prospect, you should ask yourself 3 questions to determine whether you can make a deal:
- Can I buy the house wholesale?
- Can I create a subject-to deal, seller financing, or both?
- Can I option or lease/option the house?
If the situation doesn’t fit one of these three models, you don’t have a deal. It’s that simple. There is no reason for you to waste any further time on the conversation, much less travel across town to look at a house you’ll never own. Five minutes is all it should take to determine if you could create a deal with the prospective seller. Of course, you’ll have to take the seller’s word on things like the condition of the house, mortgage balances, liens, and judgments. However, if the information seems reliable and you feel the seller is motivated to pursue 1 of the 3 money-producing models outlined above, arrange a meeting and verify your assumptions about the viability of a deal.
When you leave your desk, your chances of putting a house under contact should be about 80%. Instead of being a professional fact finder, you should get into the business of being a professional offer maker. If you use the pre-qualifying procedure on every lead, you’ll save yourself many wasted, unproductive hours, and you’ll start to see your business coming together.
In Part Three, we’ll discuss setting goals for your business and getting started as a Real Estate Entrepreneur.