How to Start in Real Estate Investing – Step By Step
If you don’t know how to get started in real estate, first let’s assess how you are financially and knowledge-wise:
Financially, you would like to consider your 401(k), savings, credit cards, how much credit lines you have, and lenders, whether banks, hard money, family, and friends.
You also need to assess or at least have an idea where you’re standing. First, you need to understand how much you know about real estate. What is a power team? I’m pretty sure you’ve heard about that. Do you have any lawyers? Do you have any realtors? How much time do you have? How dirty are you willing to get? Do you want to do everything hands-on, or do you want to delegate that to someone else to help you? Did you consider that’s going to affect your profit?
Real estate is very time-consuming when you’re trying to set it up, and even afterward, unless you have a way to automate everything, it’s going to require some of your attention, and if you have a full-time job, you’re going to have to deal with that.
Let’s run some numbers. I’m not sure if you knew about this, but there are two ways to take money out of your 401(k). You can borrow it, or you can completely cash out against it. I don’t recommend cashing out because first, you’re going to get hit with a 10% penalty. Second, you’re going to have to pay taxes for the money you take out because it will be considered an income, but you don’t have to pay any taxes on it if you borrow against it. What’s going to happen is you’re going to have to repay it monthly, but you can adjust it with your brokerage house how you want to repay that 401(k). You can borrow up to 50% of your money. You will have to do a little bit of research on that, but when I took it out in 2007, it was $50,000 max.
Now in terms of savings, you can borrow up to, let’s say, $25,000.
People have a very negative conception about credit cards, I know, but credit cards are great. They can help you get where you need to get to if you know how to manage them very efficiently. Let’s assume you have a total of a credit line of $20,000.
In terms of the lender, that’s based on your credit. The general rule is if you go to the bank, they will borrow or lend you up to three to four times your annual income, so whatever you declare in your property taxes, you take it out, and they’re going to assess the whole picture holistically. Assuming that you have good credit, most lenders require at least a $620k. If you don’t have a $700k, but if you have a $620k, that’s enough to qualify for a mortgage.
I’ll leave that number for you to fill it out, but considering all of these three, you’re going to have a total of $85,000 for a down payment. Most places typically require you to put down a 20% if you’re not going to live in that area, in that specific house, in that location, or you can put 5% down if you plan to use that as your primary home. What you can do, you can buy anything from a single-family, and they just rent it out by a room, or just live there for one year, and then move out and just rent it out or just get a duplex, you live on one side, and then you rent out the other side.
There are so many ways to go about this. It is just the beginning, and of course, we’re going to consider some of the ideas as we move along the other posts, but this is just to get started on the thinking process. It is what you are in terms of how much you know financially.
Moving along to the personal aspect of it in terms of knowledge, you need to understand how much you know about real estate. Most of us have an idea, we know about the realtor, we know that we can leverage some of the knowledge you learn in HGTV, you can go online and look at Zillow, Redfin. In New York City, we have StreetEasy, and some of those pages that you can use to sort of get an idea, but it’s more than just the pictures. How do you know about the local economics, the stats? Were there any jobs in the area and things like that? Do you even know how to search for it without having to travel down to that location?
Let’s say you want to invest in Florida, but you live all the way up in Massachusetts. You can’t afford to take a trip down there every time you find a house on Zillow and, “Oh, let me just move out.” Once you have done the proper assessment, you could leverage any of the tools on the internet. Tools like Google Earth, and if you have a good relationship with the realtor and so many other pages that will help you understand the local economics.
Then the power team, how many people do you know in the real estate field? It’s more than just the realtor. You’re going to need contractors, and you’re going to need an attorney to help you with the closing. You’re going to need a lender as well, because if you don’t have the money, then chances are you’re not going to be able to close, and cleaning services, a gardener, things that you usually don’t think of, but they all are part of the whole picture. Then how much time do you have? I have a full-time job, and I have to juggle a lot with what I could do outside those 40 hours.
A full-time job routine
I had to get very creative. I leveraged the full hour of my lunch break. I used to take time off my lunch break and get ahead with work to build in my portfolio. I had to take a full hour lunch break. I eat at my desk, grab my computer, my laptop, and my cellphone, step out, and have those conversations with a realtor, multiple lenders. All during, I’ll say the process of three months while I was negotiating.
In the evenings, I had to sacrifice my gym time. I love exercising. It helps me keep healthy. Then that’s something you need to assess and ask yourself, “How much time do I need to set aside, and if I have it?” If you don’t, figure out what you can move around to make this investment happen because this is not just an investment on a property, It’s an investment in yourself, your future, and happiness.
If you don’t have the time, how much can you delegate? Do you even have people that you can trust? I empowered no one while building my portfolio, mainly because I wanted to learn how things work. I figure you can read a lot of books, but until you get hands-on and you know how to get things done, that’s the only way you’re going to be able to learn about the pain points, learn ways to automate it so that it can work for you and build your relationships.
To build my portfolio, I didn’t delegate anything to anybody. Why? Because I needed to learn, I didn’t want to be one of those investors who would just hire people and eventually get ripped off along the line. I know it was a little slow because I was getting in the way of things moving efficiently, but I needed to understand the pain points, what was working for me, and how I can recreate this in a very efficient way sometime around the future.
You need to assess that yourself. Do you have a partner that you can delegate to, which will help your life easier? In my case, I didn’t have that. I have a silent partner. She had the money that allowed me to invest, but I had to do everything myself. She didn’t know. She had an idea what I was doing, but she wasn’t going to take the time out of her busy schedule and assess that and do the work herself.
Try to be truthful to yourself. All of this is not a competition. It is not about, “Oh, I need to do this as fast as Lucy.” Do it at your race. I did it fast because I feel that time is ticking, and I ran out of time in terms of spending time with my family. You need to find out what works best for you, considering all of these talking points in your mind.
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