Many people ask me how the can set up a Real Estate business as I did. Just to be clear, I am not talking about my Real Estate company or my consultancy business; I am talking about a Real Estate business composed of many properties that you buy and rent out (typically kept under an LLC). This is comparable to your own Real Estate Trust. Currently, my Real Estate includes 10 units and generates about $1400 in passive income every month.
How to set up a Real Estate business
You can certainly set up a Real Estate business in many different ways. However, what I explain in the following is the way I used to set up my own business. Not only my business is working fine, as I also witnessed at least one of my clients to experience the same degree of success. So, without further due, let us get to it.
Step 1: Save some money
I would attract way more viewers from Google if I wrote: “buy Real Estate without any money down” or “invest in real estate without money”. However, I will be pretty honest with you… You’ll need some money to set up a real estate business as I did. I personally bought my first property (a condo) all cash, after liquidating my stock portfolio. It was about 35K for me. However, I invest in Portugal, where properties are cheap (especially if you compare them to most markets in the US).
Say you don’t have a good pay and you really have to struggle to save some money. Well, I am not going to lie to you, this may be time-consuming. If your salary is low, you need to find other ways to increase your income and save money aggressively.
If your salary is high enough, you’re all set. Simply throw money to a savings account every single month. The minimum you need to spend is 20% of your first property (for the down-payment to the bank, assuming you need 20% down) plus the closing costs on the property. Those you need to check from property to property.
Step 2: Get credit approval first
I’ve seen a lot of people making this mistake: going out for shopping without credit approval. This is a big mistake because you may never get approval, which means that the entire period you were looking for a property is wasted. It may also mean that you submit an offer for a property which you don’t have enough money to back up.
Don’t waste time, or even worse… get yourself into trouble. Simply get your letter of approval from the bank before anything else.
Important note: in many countries like Portugal, you must have a property under contract before the bank gives you approval. Talk to me if you have questions about this process.
Step 3: Find great, honest contractors
I always invest in distressed properties because typically rehab costs are not priced correctly in distressed properties.
As such, I need to surround myself with great contractors. I always get to know if contractors are legit and honest. The truth of the matter is, there are many dishonest contractors. Their job is simply favorable to report extra hours or extra materials: nobody is there to really check how long they worked and what materials were in fact used.
My recommendation is not to go shopping without getting to know two different contractors. Here are some great tips to hiring contractors.
Step 4: Make friends with proactive Real Estate agents
I can’t stress this enough.
Unlike the stock market, where pricing rules don’t really depend on the brokers you know, Real Estate is not like that. Real Estate is a much more personal business, and most of the aspects of your deal depend on other people. But it doesn’t end with the tenants…
Knowing proactive Real Estate agents is the key to finding great deals. At least it has been for me. I made sure I got to know many real estate agents and became friends with them. Eventually, I was offered many deals before they were actually released to the public. I highly recommend you to check local legislation and check whether this is legal in your state or country. This is absolutely fine in my markets, according to the local legislation. Make sure you don’t get yourself into legal problems.
Step 5: Find deep value deals
This is probably the hardest step to accomplish. It also shows why you need to be good friends with Real Estate agents: this will accelerate and make the process a lot simpler.
If you check my real estate and previous posts, you’ll see that I focus on multi-units that I can buy at a huge discount. For instance, I explained my strategy to find awesome multi-units for low prices. I am not saying you should necessarily go for multi-units. I am simply saying that for me, they are like a sweet spot in my markets. Maybe they won’t be the sweet spot for you, I don’t know. But my point is… come up with a sound strategy and test the market until you find your sweet spot. Your corner. Once you do, stick to it.
Regardless of what corner you choose, make sure you always go for the deep value deals. What is the most effective way to make money through Real Estate. I always buy properties that are worth 2-4 times more. How can I possibly lose money that way?
The trick to finding deep value deals? Seeing value where nobody does. A distressed property that looks like the last place where you want to live is likely to be undervalued. The reason for that is because people look at Real Estate emotionally. They wouldn’t live there, so it is must be worth little… they won’t do the math and sum whatever they would have to spend to make it look good.
You, as a Real Estate investor, have that ability. Just find those properties. Instruct the agents you work with you to find them. Look for them yourself. Relentlessly. That is the secret.
Step 6: Always inspect the properties before closing
Remember I advised to get to know good, honest contractors? They will come in handy in this step: just call them up and let them know you are considering a property. Asked them to visit the property with you and estimate rehab costs. They may be wrong because contractors won’t be able to accurately estimate the costs unless they usually check the foundation (which is not always checkable without damaging the property). However, this will give you an idea of how much you should look at. My advice? Increase the estimate by at least 20%. Play safe, no surprises.
OK – you’ve got the numbers. Run them. Is it a good property (I use the 7-year rule to check that)? Close, then!
Step 7: Remodel the properties… intelligently
Renovating a rental is a heck of a whole new topic. You can simply remodel the property and throw a lot of cash into it, or you can do things intelligently. The truth of the matter is that you can rehab one property in various different ways with the same budget, but some make it look much better. I provided several examples on a different post, which show that 10 dollars worth of tiles can make a bathroom look way better:
I also suggested having a look at magazines to have ideas for your remodeling!
Make sure to track the expenses on the property since day one, too!
Step 8: Monetize!
Any investment has to yield a return. Unlike stocks and bonds, in Real Estate, it is up to you to monetize it. Your properties won’t return any money unless you monetize them, that is the cold hard truth. There are some tricks to monetization, though.
The first thing I recommend is to use craigslist (and craigslists competitors) to advertise your properties. Note that there are many housing scams on craigslist, so do not strange if people ask too many questions and double check data often. I like to use facebook pages. The big advantage to Facebook pages is that you can invite your friends to like it and you can ask your friends to invite their friends. I talked about this in my series of tips to Real Estate investors).
The key trick is to have as much exposure as possible. If a lot of people see your property listed for renting, you’ll rent it out eventually. This is not rocket science.
Remember… always create value!
If you follow my blog you already know my philosophy, when it comes to Real Estate investing… above-average quality for below-average prices. In fact, that is my philosophy for every single one of my businesses, including my consultancy business.
The truth of the matter is that if you want to buy and rent one home, you don’t have to be concerned with value markets. However, if you set up a business, you’ll have to make sure that you know the market numbers and you pay with them. Setting above-average quality to below-average price is really how great businesses are built. If you wonder why this is sustainable, be aware that I recommend you to find deep value deals. That means that you will have huge margins to play with. And what I suggest is to leverage those margins to offer great products at great prices. This will not only make you find tenants quicker – it will also make you have tenants for longer periods. And vacancies must be taken into account when calculating ROIs too!
Is there anything missing in this strategy, in your opinion? Let me know, I will cover that too!