JESS WANTS TO INVEST IN REAL ESTATE
Four Steps for His First Investment
Re-published by request
I received a call from Jess this weekend. A very successful mid-level manager in a big company, he is in his late 20s and engaged to be married.
Investing in real estate is something he wants to do. In the long run, it seems like the best investment. What do you think?”
There are a lot of choices when it comes to investing, I told Jess. Wouldn’t you agree?
So, I asked him to tell me about his experience investing.
SAVINGS ACCOUNTS. As a child, Jess remembered how his grandfather gave him a ten-dollar bill for his birthday one year. He pulled Jess aside and advised him to put one dollar in the offering plate at church and one dollar in a savings account down at the bank. Savings accounts are one place to invest our money. These days they don’t provide a very good return, Jess noted.
STOCKS and MUTUAL FUNDS. As Jess grew a bit older, sometime in his teenage years, his grandfather sat at a computer one day and introduced Jess to stock trading. He helped him buy his first stock, actually a mutual fund that invested in a large basket of stocks.
Jess said he noticed how stocks had proven to be a “better” investment than his savings account. They had increased in value quite a bit. He also noticed that in the 10 or 15 years he has had his mutual funds how the value goes up and goes down, as it did recently.
OTHER INVESTMENTS. Jess had researched and talked with some of his friends about investing in gold or cryptocurrencies and other investments. Some people, he learned, liked these alternatives.
I asked him what their benefits were and he understood them pretty well. Precious metals, he thought, provided some hedge against inflation. And they were tangible as compared with “paper” investments like mutual funds. Crypto was very volatile he said, pretty new. He heard about people making a lot of money with cryptocurrencies, and others who lost a lot. It seemed rather speculative, he noted.
REAL ESTATE. And then he talked about real estate. He realized this had different possibilities such as buying single-family homes, flipping them or holding onto them and renting them.
He also had heard of investing in office buildings or mobile home parks or storage facilities or apartments. He realized there are many choices when it comes to real estate investments.
It seemed to him that real estate was out of reach for him. He had saved up a good bit of money. He realized he didn’t know very much about real estate yet. He began to ask me questions.
Over the next few minutes, I shared with him four steps he would be wise to take as he explored his idea of investing in real estate. Here they are…
HOW TO INVEST IN REAL ESTATE
LOCATE. Jess and I talked about how he might find some real estate to invest in. This is the first step – locate.
I asked him – “In what kind of real estate asset might you be most interested in investing?” Would it be raw land? Would it be single-family homes? Would it be some type of commercial real estate?
He said he was most interested in single-family homes. But, he wondered how he could find a home to buy. He had saved up and had some capital to invest. He wanted to diversify beyond his mutual funds. He wanted to start building wealth for the future. But, how would he locate a property?
I told Jess about a friend, Charlotte, who is regularly “driving for dollars” as she says, taking different routes to work or to shopping and looking for properties that might be a good find.
I told him about another friend, Theo, who has built lists of out-of-state owners, people going through probate, properties with liens, landlords filing evictions, pre-foreclosures, and other groups of owners who might have a need to sell.
Once Theo locates a possible property, he makes phone calls and sends text messages.
Another friend regularly posts on Facebook and Twitter, hoping that someone who has a property to sell will call him.
In order to invest in real estate, the first step is to locate a potential investment.
Of course, Jess and I talked about locating the money to be able to make the investment too. How much would he invest himself? Would he need additional money from a bank or private investors?
EVALUATE. The second step is to evaluate that investment.
“How would you know if the investment makes sense?”, I asked Jess. “How would you know if the numbers work?”
Evaluating real estate takes a bit of work. It is not as easy as finding out what the interest rate on a savings account would be. It is not as easy as looking up a stock price or the track record of a mutual fund or cryptocurrency.
Carrie, another real estate investor friend, who lives out west, has studied the home prices in her community. She is fairly confident she can determine the value of a home based on its location and condition. She also has a contractor friend who helps her inspect a potential purchase and estimate the cost to make repairs – roofs, kitchens, floors, painting, electrical upgrades, etc.
In her evaluation, Carrie is able to determine what she will be able to offer a seller for the house.
If you are going to invest in real estate, this second step is important, learning how to evaluate the value of a property. This includes determining values both before and after making any improvements.
Jess realized he needed a bit more education. He had a lot to learn about evaluating properties.
Then comes step three.
NEGOTIATE. Once you find a potential seller of a property in which you have an interest, I told Jess, you have to sit down and work out the details of the purchase. This is the third step – negotiate.
Here are some of the things you have to work out between you as the buyer and them as the seller…
· The purchase price
· The terms for paying that price – at closing or over time
· How long before you actually close on the deal
· Among others…
If Jess and the seller can work out the details, they can sign a contract for him to purchase the property. I reminded Jess that he will have to do some work between negotiating and actually closing to make sure it actually closes.
I told him some of my stories about solving problems while approaching the closing date. Then we talked further about actually owning and operating his real estate investment.
OPERATE. Buying, fixing, and renting properties was what Jess wanted to do. According to what he had read, this is the path to long-term wealth, which is what he and his fiancée wanted.
We talked further about some things to think about once he got to that point in his real estate investing business.
A SIMPLER WAY TO INVEST IN REAL ESTATE
I expect that Jess will locate and evaluate and negotiate and operate a deal soon. He is that kind of guy, a focused, hard worker. And it does take hard work to invest in real estate actively.
There is a simpler way.
Many people choose to be less active as investors in real estate. They find someone who does the hard work and then invest with them in their deals. This allows many people to participate while being more passive.
This simpler way is more like investing in the stock of a company. You do your research and choose a solid company with a good track record, then you buy their stock and let them do the work. If you have invested wisely you watch your money grow.
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Harland leads our Investor Relations. He is a “repurposed” Pastor and Army Chaplain. He is an author, speaker, mastermind facilitator, and coach. Harland lives with his wife, Barbara, in DeLand, Florida.