Why should you, an entrepreneur invest in real estate in the first place? Isn’t your 401K or those three stocks your Dad recommended enough to put you where you need to be in a few decades?
The answer is this: if you want to have enough money to live on when you no longer can or wish to work, NO. To put that money aside, just in the market is asking for serious trouble. You can put some there, but there’s other factors at play. You’ve got to diversify, and you also have to accumulate enough to offset inflation and the taxes that erode our savings. And for that purpose, real estate is an excellent solution.
The great thing about real estate is that even in a bad economy, it will usually fare better than stocks. Land, after all, is a finite resource. People need a place to live, work, shop and play — so real estate is really just a matter of supply and demand. What’s more, we recommend you look to a broader market than just where you happen to live. We recommend you consider buying real estate in an up-and-coming market—right now, that spot is in Medellin, Colombia.
There are many reasons this is a terrific investment, but first, let’s discuss real estate in general.
Regardless of what the stock market is doing, real estate will continue to appreciate, and despite occasional slow-downs in the economy. In fact, it’s proven to be the best way to create wealth, and an investor need not be a genius or a millionaire to succeed.
What’s more, real estate isn’t a complex financial instrument, like bonds, annuities, CDs or mutual funds. It’s relatively straight-forward, and simple. A house is, after all, made of commodities. Aluminum, plastic, wood, metal, iron, copper, concrete, etc. If you can watch videos on “how to fix my…” online, you can do all the repairs and other work yourself. If manual labor isn’t your thing (and frankly, it’s not for a lot of us) we recommend you find yourself a handy man and pay them to do everything for you. These days you can buy real estate and rent long term, short term or even live in part of a home or apartment building yourself. With so many options and varieties of investing to make, it’s no wonder we believe real estate is one of the very best options for you to protect your money beyond the stock market today.
Here are some tips, then, for entrepreneurs on getting started and succeeding in real estate investing:
1. Do — plan your financial goals.
Before you buy that first property, or do your first analysis, determine what you expect from your investments. What are your financial goals? We often discuss the “time vs. money” concept: The more you have of one, the less you need of the other to reach your financial goals. This means that you shouldn’t shy away from taking the time to understand your goals and make sure each investment is a step toward achieving them. If you are unsure exactly how to create financial goals, meeting with a financial advisor is an excellent first step.
2. Don’t — spend a fortune on books, tapes and seminars, then just put all that information on a shelf.
You absolutely do need to learn some basics before venturing into investing. But, we know of more than a few guys and gals out there for whom buying (but not reading) books and courses has become a habit. So, be sure to do some studying, but don’t let “buying and collecting” information become your endgame. Again, having goals in mind will make the process much more straightforward. It’s easy to get so tied up in the “research” phase that you never actually take action. Instead, write down specific questions you want answered or goals you want to meet before delving into the latest book/seminar/etc.Do — look at plenty of properties.
3. Do — look at plenty of properties.
Don’t just grab the first property you look at. Too many investors buy properties because they “look nice,” or the investors don’t want to put the work in to look at what’s really out there. Remember, you won’t be living there, so don’t make your investment decision based on your personal preferences. While you shouldn’t fall into the trap of analysis by paralysis (the circumstance where you think yourself into inaction), make sure you are thorough in looking through properties. Give yourself a wide range of options, then narrow them down based on the criteria (goals) you have set for yourself.Don’t — postpone starting your investment program because you’re waiting for that perfect “unicorn” deal. We also like to recommend that during your search, you take the extra time necessary to meet as many people in this world of real estate investing as possible, because in this world connections are what makes you a success!
4. Don’t — postpone starting your investment program because you’re waiting for that perfect “unicorn” deal.
That’s the flip side to number 3, of course. Plenty of beginning investors suffer from “a-better-deal-may-be-just-around-the-corner” syndrome. This can backfire in a big way, and you could potentially let a great deal slip just because you’re holding out for something better. Your task may feel difficult if this is your first property, but you must realize that the “perfect deal” rarely (if ever) exists. Better to execute on a deal that meets most of your criteria than wait for another that may never come.
There are proven strategies that work, when buying Medellin real estate. Read 11 of them here.
5. Do — a thorough financial analysis.
Be realistic. Look at different alternatives to determine which makes the most financial sense. And never buy property at a higher price or on less attractive terms than your analysis says made sense. Be wary of sellers that try to over-estimate the value of the property through pro-forma (estimated) data. While you can certainly use a pro-forma to start the conversation, make sure you know the real numbers before closing. Look at previous years’ tax returns, property-tax bills, maintenance records, etc. to get a good idea of the real income and expenses.
The most important figures you should know are:
- Net income (income/expenses)
- Cash flow (net income/debt financing payments)
- Return on investment (cash flow/investment)
- Cap rate (net income/property price)
- Cash-on-cash return (cash flow/investment)
- Total ROI (total return/investment)
In each case, “investment” refers to how much you invest in the property. “Debt financing” refers to any loans you may have to take out to buy the property. And “total return” refers to cash flow, equity accrual (i.e., equity gained from your tenants paying their rents), appreciation and taxes.
Once you have understood these figures, you should have enough information to determine whether or not acquiring the property fits with your financial goals.Don’t — try to buy property that the seller is not motivated to sell.
6. Don’t — try to buy property that the seller is not motivated to sell.
If the seller is motivated to sell, you’re not likely to get the price best aligned with your financial goals. So, how do you know if a seller is motivated? Look at the asking price. For example, If the property has been on the market for a year for, say, $200,000, with little-to-no price reduction, the seller is clearly not very motivated to move the property. However, if that same property has been on the market for a year and has had its price moved down considerably, the seller most likely wants to do whatever it takes to get the property off his or her hands. Of course, this raises the question of how to find motivated sellers. There are many approaches, and not all of these will work for you, depending on what property you want. But a few trusted methods include:
Attending open houses
Looking for vacant/unattractive properties that are for sale
Spreading the word about yourself and what properties you are looking for — truly
Going the old-fashioned route and looking in the classifieds of your local paper
These are just a few ways to find sellers, but there are potentially dozens of other methods, depending on what type of property you’re looking for.
7. Do — know the difference between real estate investing and the business of real estate.
As an entrepreneur, you already have a business, and real estate investing is best used to support that business, not replace it — unless that’s your intention. In other words, don’t get so caught up in executing transactions that your core business falters. If that happens, you’ll be facing a bumpy road to get back to stability. Unless your business is itself real estate, or you’re looking to get into the business full-time, always remember that pursuing these deals is a means to an end, not an end unto itself.
So, if you’re interested in staying ahead of taxes and inflation while building security for the future, real estate investing may be for you. What are you waiting for? Anything is possible, including ownership in a South American paradise.