Suggested sequence for starting a real estate investment program

Posted by John Reed on Sep 23, 2015

1. Are you really sure you want to do this?

A real-estate-investment program will consume large amounts of your time, subject you to considerable financial risk, force you to engage in the generally unpleasant task of dealing with tenants and maybe employees and subcontractors (some approaches to real estate investing do not involve tenants, employees, or subcontractors), and saddle you with significant responsibilities. There are other ways to make a buck, you know. Is being a real estate investor just an abstract concept to you? Or do you really know what it's like to be a landlord (if you plan to own rental property)? If you do not know what it's really like, you'd better find out before you start down this road.

Are you a mercenary? That is, you have no real interest in a career in real estate. You just want to do it because you heard it’s lucrative. Because real estate “investment” is really a small business, not a pure investment like stocks, bonds and commodities, it is important that you be suited to the daily acquisition, financing, management, and disposition chores required.

If you plan to invest in rental property, I suggest that you start by getting a job as a resident manager of an apartment building or as a property manager. That will give you a taste of the property-management aspects of owning rental property. There are also the deal-doing aspects of real estate. For that, you might get a job as a real estate agent. I did that for two years to learn about the business when I was 26. But since real estate agents are only paid on commission, you may want to take a salaried job in the business instead---for example: real-estate-brokerage secretary, salaried assistant of a top-producing agent, real-estate attorney, title-company employee, or mortgage-company employee.

Guru Jane Garvey said I should add to this section that you must be sure both members of a married couple want to do this. She has been a real estate club leader in the Chicago area for 14 years and has seen many marital problems with couples where one spouse never bought into the plan to invest in real estate. In many couples, the husband takes the fun stuff—rehab and finding properties—and sticks his wife with the property management, leading to a revolt by the wife. I recently got an email from a guy whose wife was gung ho to do management and other stuff, but she was disastrously bad at it and violated all the rules of good management like going on her gut rather than getting a credit check on a prospective tenant. This is not the kind of spouse to have if you want to do real estate investment.

2. Are you suited to being a landlord?

Many people, maybe most, are fundamentally unsuited to deal with tenants, subcontractors, and employees. To be a landlord, you must be able to stand nose-to-nose with a fellow adult—tenant, subcontractor, or employee—and tell them "No," they cannot have what they are demanding. For landlords who cannot do that, rental properties are a disaster.

Signing your name on the dotted line for a deal involving hundreds of thousands of dollars, or more, is scary. Some people cannot handle it. When I was an agent, I saw a number of would-be home buyers and would-be home sellers get hysterical from their fears when they were trying to do a deal. If you are one of them, forget about it.

3. If you still want to do this, set specific goals.

If after following the advice I described above you still want to invest in real estate, you need a specific goal. It should be written down and have three components:

Specific net worth amount
Loan-to-value ratio
Specific date for reaching those goals

The typical real estate investor net-worth goal is five million dollars or some multiple thereof. I do not like that. It's probably too much. Five million dollars is a nice round number. It's impressive, especially if you are relatively young when you attain it. If you are doing this to impress your friends, or trigger envy in your enemies, you don't need real estate investment information, you need to grow up. Truth to tell, neither your friends nor your enemies care how much money you have.

The proper way to set a financial goal is to work backwards. Money should not be an end in itself. Rather it is a means to an end. So step one in financial goal setting is to make a shopping list. What exactly do you plan to buy with the money you want to make? Most people want a nice home, reliable cars, a good education for their children, health insurance, and retirement. What does that cost? The nice house requires an annual income of about $50,000 to $150,000 depending upon where you live and how you define a nice house. College costs about $50,000 a year per child at most. Retirement costs relatively little if your home is free and clear. If you can afford the big expenses—house and college—you can afford the other stuff. Furthermore, the amount you need rises and falls according to the age of your kids. Do the numbers. That's how much you need.

When you do the numbers, you will probably find that you need less than five million dollars. Your goal should only be what you need. There should be no additional amount the only purpose of which is to inflate your ego. Why not? Because every dollar you add to your goal increases the risk and therefore increases chances that you will subject your family to financial disaster. It's altogether fitting and proper to take risks to achieve worthy goals. But risking your family's financial future for ego reasons is irresponsible.

Every dollar you add to your goal also takes more time away from other things like health, family, and friends. Since more money than you need has little real value, and health, family, and friends have great value.

Your ultimate loan-to-value ratio goal should be to own your properties free and clear. A good generic goal that should work for most investors would be to achieve a net worth of $1,000,000 in today's dollars, combined with an overall loan-to-value ratio of 0%, in twenty years.

4. Start studying real estate investment.

Once you have made an informed decision that you really want to invest in real estate in order to achieve sensible financial goals, it's time to narrow your focus and to study the details of the real estate niche or niches you choose.

Most beginners seem to assume that there are thousands of dollars worth of worthwhile books and courses they can take. There are not. You can probably read all the good ones in a few months. I, of course, recommend my book How to Get Started in Real Estate Investment. Another book you should read is The Millionaire Next Door. It's not about real estate per se, but it is definitely about the reality of becoming a millionaire, as opposed to the fantasy world described by the vast majority of real estate gurus.

The only worthwhile national course I know of is the CCIM course. The IREM and Appraisal Institute courses were marginal when I took them in the '70s. The Bar Association and accountants organizations usually offer books, loose-leaf services, and seminars on topics related to real estate. I generally recommend them if they pertain to the real estate niche or niches you have selected. Some local areas have good adult education courses and/or good real estate investors associations. Take the good local courses if there are any in your area and join a good club if there is one in your area.

Sorry to tell you this, but you will probably have to learn by self-taught on-the-job training. The demand for good real estate investment information far exceeds the supply. However, a large group of con men have come forward to part undiscerning fools from their money by promising to deliver good real-estate information, but instead delivering a mishmash of stuff that sounds good to the ignorant novice, but which would be laughed at by experienced investors.

What real estate books should you read? Most of my books have long lists of recommended books, periodicals, and courses in the back.

Find as many of the good real estate books as you can and give yourself six months, and no more, to read them. Then get your butt out into the market and start doing deals! Do not study real estate endlessly.

5. Do it!

I am sorry that the above course of action has not rid you of all fear about the real estate investing career upon which you are about to embark. Get used to it. That's an unavoidable part of real estate investment. When you are experienced, you will lose most of the irrational fears you had as a beginner, but you will always have plenty of rational fears to worry about. You have to learn to live with that uneasiness. It cannot be eliminated. There will always be quack real estate gurus who will lead you to believe they can make your fears go away. But they are the same as the quacks who claim to cure cancer. They want your money. They will take it if you are dumb enough to give it to them. But they cannot help you. They can only give you a false sense of security.

6. Do not draw over broad conclusions from early results.

You will probably have initial success or failure. Do not jump to any big conclusions based on the first five years. You need 10 to 15 years to really understand real estate. In shorter periods, you don't see enough of both the ups and downs. The real estate world is full of guys who had a bad experience at the start of their real estate investment careers and drew the erroneous conclusion that you cannot make money in real estate. It is also full of guys who came in at a good time and drew the conclusion that making money in real estate was easy.

It's neither easy nor impossible over the long run, but it often looks like easy or impossible over the short term. Don't get in it unless you are in it for the long run.

Real estate is a vast field with many exciting opportunities to achieve extraordinary financial goals. Like any other business, success in real estate investing takes diligence, persistence, and luck.