First Step in Becoming an Investor - Know Thyself

by Robert Shemin, JD, MBA

Shakespeare says, “Know thyself.” These words speak true for real estate investors, too. Early in my business, I learned quickly what I am not good at…accounting. I stashed receipts in shoeboxes for the first nine months of the year. The other three months, I tried to figure out what I did the first nine months. That is no way to run a business! Now I hire a service that takes care of these bookkeeping and accounting activities that still stress me out.

To “know thyself,” write down the real estate activities you like. If you love to talk to people and sell, you’ll be good at recruiting tenants, putting deals together, and selling them. Maybe you love detail and finance. You could happily pull together mortgages and financing deals. If you easily get irritated at people, you probably do not want to manage property, and so on.

Determine your answers to these questions, then build your team:

• What do you like to do? And not like to do?
• What kind of people do you like to be around?
• What kind of deals would fit your personality?
• What aspects of real estate investing best fit you?

Your Business Plan

Most real estate investors have absolutely no plan. They set out to find that property, they buy it, then figure out what to do by accident. When tenants do not pay rent, for example, they quickly evict them without researching options. Let me save you a lot of headache by insisting you write a plan.

In the next 48 hours, sit down with your loved ones and write out your goals. Decide what you want to have for your 30-day plan, followed by your 60- and 90-day plan, your six-month and one-year plan, your five-year, ten-year, and 20-year plan. Schedule time to record these goals and structure your plan. Remember, it doesn’t have to be long…between two and six pages…and it should include:

• How much property you want to have (during each time frame)
• What type of activities you want to do
• How much money you want to make (in each time frame)
• How much net worth you want

Next, write down how you will reach your goals. How many phone calls will you make? How many properties will you look at? Realize that stating goals means nothing if I don’t determine how you’ll meet them. If you do not have the energy to write down your goals, I can assure you, you won’t have the energy to make your real estate deals happen.

Your Perfect Day

Tie your goals into creating a “perfect day.” Decide how it would look. Would you have a big office, a little office? Would you work out of your home? Where would it be located? What is the nature of your business? What kind of deals are you making? What does your portfolio look like? How much money can you make? What will you do to bring in money? Whom do you work with?

I planned my perfect day at work a few years ago in Nashville, Tennessee. I saw myself by the beach. I would wake up and exercise, ride my bicycle, take some phone calls, do some deals, have lunch, rest or swim in the afternoon, check messages, put some deals together, and spend time with family and friends. And I would also travel a lot. Today, I live in a beautiful condominium apartment overlooking downtown Miami and the beach. I wake up early and work out on the beach, come home, check messages, make calls, listen to a few tenant requests on voicemail, go to lunch, work in the afternoon, and travel a lot…just as I pictured.

Your Finances

Also, take a financial snapshot of where you are today. How much cash do you have? How much credit? What is your credit score? Requesting a copy of your credit report and getting a financial statement from a bank or mortgage company will help you determine what you want to do with your real estate investing. Six months or a year from now, you can compare your snapshot then to now.

Decide how much can you borrow (if you have to) to make real estate investments. How much access to cash do you have? What are your assets? What do you own? Houses, cars, investments. What are your liabilities? What are your debts? Mortgages, credit cards. How much is your life insurance? Your retirement account?

Your Action Plan

So take the next two days, the next 48 hours, to make a plan. Decide where you are and where you want to be. Write down your goals and share them with others. When you do, you are on your way to living the life you know you want.

3 Questions to Spot Good Real Estate Deals

Analysis paralysis: one of the biggest blocks of successful investing. That’s when you stumble into a good deal, then stop dead in your tracks. You worry about the decision but never do anything.

In my first six months of investing, I looked at hundreds of great deals and froze. How did I know it was a good deal? How did I know I could make money? If I made an offer, I was scared I might have gotten the deal…and then what?

To overcome analysis paralysis, (1) get lots of information and (2) make sure you have a really good deal (because even if it’s not as good as you think, you still have a margin of error to work with). If I told you the exact cards that will come out on the blackjack table, without a doubt, you would play them because you have information about what will happen. When you gather lots of meaningful information, this also can be true in real estate investing.

Information Gathering

Ask the following questions first. They will help you decide if you should make an offer:

1. What is the property worth today?
2. What repairs are needed and how much will they cost?
3. What can you get it for?

1. What is the property worth today?

To develop a successful real estate investing career, your job is to find deals and put them together. Your job is not to become an appraiser or a closing attorney or a management expert or a repairperson. Use professionals! How do realtors, appraisers, and banks determine what a property is worth? They look at comparable sales, usually three to five sales of similar property close by. Realize that the properties have to be similar for a true comparison.

Next, get a list of comparable sales and see the sales price of every property bought or sold (and when it sold) for the street you want information about. Also ask active professionals what the market is like. Whenever possible, get information in writing via fax, email, or letter. Put comparable sales lists and information in a folder for future reference.

2. What repairs does the property need?

You can find the cost of the repairs from two different sources: from the owner or the seller (most are truthful; a few are not) and from a good contractor who is licensed, bonded, and referred to you. Make sure that person is “referred” and that you get bids from more than one contractor, all recommended by respected realtors or other investors.

3. What can you get it for?

When sellers are motivated to move a property worth $100,000 and it does not need any repairs, they may say, “We’ll let you have it for $70,000.” (This is about 30 percent below market value. Rule of thumb: A good deal should be at least 20 percent below market.) Would that be a good deal? Yes. Now you can negotiate an even better deal and get a signed contract. That’s where you make money in real estate. By not negotiating, you may have potentially left a lot of money on the table.

Every property’s value is in the eyes of its beholder. If you own a lot of real estate and you are being sued, you might make a case that your property is not worth much and needs repairs. On the other hand, if you go to the bank to borrow money against the property, you’ll want it appraised as high as possible using the highest comparable sales. And when the tax assessor calls to figure out your new taxes for next year, you’ll say the rents are low, the buildings need work, and so on. Since property has different value depending on who is looking at it, make sure you talk to professionals active in the market who tell you honestly what people are paying for properties today. You can also determine market value by attracting an offer through a newspaper ad that includes details of the property. If the phone rings, people want what you offer. Likewise, if you want to see how much rent should be, run a For Rent ad and see if anybody calls. If no one calls, you don’t have much of a market.

Now Do Your Analysis

You have negotiated a good price and put it under contract with a contingency clause. Now do your analysis. (Beginners tend to analyze for six weeks but by the time they find out the age of the water heater, the condition of the roof shingles, and the opinions of neighbors, their opportunity may have disappeared.) Instead, do a quick survey to see if it is a good deal, document everything, put your offer in with a contingency, then do your compete analysis.

If you experience analysis paralysis, you’ll lose a lot of deals. That’s why it’s important to gather your information well and act boldly.