Looking back to when I started as a part-time real estate investor 10 years ago, I remember feeling some concern or even worry about whether I was prepared enough. Regardless of the amount of due diligence and effort I put into my business plan or even the general preparation I put into my business, I wondered, “What am I missing? What are the unknowns that are critical to a real estate investor’s success but that I don’t see out ahead of me?”
And that can be very unsettling. I know it was for me. And it probably is very common and very unsettling for most potential, new, part-time and even some full-time real estate investors.
I would even venture to say this fear of the unknown is probably the single most common factor keeping many people from getting into real estate investing—or even into any small business.
So I want to share some things from my personal experience that I think may help. These are some things that were unknown to me when I was starting out. But despite my not recognizing it at the time, these components were critical to my ultimate success.
Unknown No. 1: How to get leads
The first critical component of your business infrastructure is your lead source, your lead machine or your lead-generating activities. It’s very important for a new real estate investor to understand that this is the foundation of your business. Your ability to generate leads—to identify distressed houses or distressed sellers who are willing to sell their home to you at a discount—will determine the success or failure of your business. If you do not have an effective lead-generation system in place, your business will literally collapse like a house without a foundation.
A common misconception is you don’t need a lead generation component as a real estate investor, that you can just buy houses straight off the MLS where everybody else buys houses. And I would tell you if this is your premise for generating leads, you will be disappointed in the outcome.
You’ve got to take the initiative and make the investment to build a lead generation component. The most common way to do this is by direct mail. It’s affordable, and it’s very executable. It produces very good results. You buy targeted data, targeted mailing lists and you mail to those lists on a frequent basis. You advertise the fact you are interested in buying homes like those of your targeted recipients in their area for cash, as-is, with a quick close.
As I’ve talked about in the past, my advertising—which is my lead generation machine in my business—is my single largest annual business expense outside of what I spend to purchase or rehab homes. It is my business’ single largest overhead expense. And there’s a reason for it: It’s the most critical part of my business. As I’ve said, it’s the foundation of my business and likely will be the foundation of yours, too.
Unknown No. 2: How much capital?
A second critical component for your business is capital. Capital is a great unknown. I can remember venturing into my own real estate investing business with a certain amount of capital but it was probably the one element that gave me the most unrest. “Do I have enough capital? How do I know how much capital I need? Will I be able to get more capital if I do find myself in a situation where I need more?”
I look back on my corporate career of over 20 years prior to real estate investing and remember that we spent a lot of time building very comprehensive capital plans. We actually were quite good at looking at the long term—like five to 10 years out—and accurately mapping our capital needs. But keep in mind that in the real estate investing business, it is very unpredictable.
There are many times when I end my work day having easily spent $100,000 or $200,000 that I had no idea I was going to spend when I woke up that morning. And that’s the nature of real estate investing.
When great opportunities come to you in form of your lead generation, you have to have the ability to act quickly. A real estate investor has to have the capital and connections to buy high-priced products like houses. It’s not always easy to predict when you are going to need capital but when that time arrives, you need quick access to cash so you can make those quick purchases. What this means is you’re going to have to secure capital.
A significant part of your day as a real estate investor will be spent looking for new capital sources. As you deplete one source, you’re going to need to replace it with another. As you use your own capital you’re going to have to find ways to replenish it. As you exhaust one means of capital—such as a credit line from your local bank or capital from a family member, friend, private lender or any other source—you’re going to have to seek out and prove yourself to a new private lender.
You’re really going to have to refine your skills and ability to get new capital to keep your business afloat. Think of it like this: Leads are the foundation to your company, whereas capital is the framework. Similar to the way a foundation supports a house, the capital is your framework to support your business. And without it, your business cannot be supportive on top of the foundation you built.
Unknown No. 3: Where to find partners
A third critical element of real estate investing is a network of business partners. This is another element I didn’t have when I started my business. I probably even underappreciated how critical it would be.
These aren’t necessarily formal business partners. Instead, these are tradesman such as electricians, plumbers, foundation repair crews and HVAC repair people. These are all the different types of tradespeople you need to fix houses, to repair and maintain houses. It is also your partners such as banks, title companies and insurance providers who who are going to prove critical to your success.
You may not have them today as a new or potential investor, but you can’t overlook how critical they are going to be to your business.
Another type of partner is the buyer of the homes you purchase and invest in. If you are doing rental homes or fix-and-flips, a significant buyer network is very critical.
As a new investor, you may be interested in becoming a wholesaler. Wholesaling properties is wonderful for the new investor because it’s a quick way to generate cash flow and profit. It has very little limited capital requirements. But you are still going to need a network of investors who are going to buy those properties.
For me, buying a HomeVestors franchise enabled me to get both my business partner network and my buyer network. That’s not to say you can’t succeed without a franchise like this. It might not be what you want to do, or it may not be right for you. And that’s fine. But keep in mind you will need to engage yourself so you can build these networks of business partners and buyers for your properties.
For many of you, the way to do that may be by attending a couple local real estate investor clubs. These are great places to build and assemble your network.
Think of your network as the “finish-out” of your business. If lead generation is your foundation and your capital is your framework, the finish-out for that “house” or business is your assembled network. The finish-out is everything you put inside—the drywall, the fixtures, etc.—that makes it great. Likewise, your network is critical to making your business great.
These are what I call the “no debates.” These are the things that cannot be ignored. Remember: You’ve got to have these in place to ultimately support you as a real estate investor.
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About the Author
Kevin Guz is a Dallas, Texas-based residential real estate investor with more than 10 years of investing experience. He owns a HomeVestors (or “We Buy Ugly Houses”) franchise as well as the Clear Key companies, which focus on residential real estate wholesaling, rental property management and self-storage leasing. He also is a licensed real estate agent in the state of Texas. He enjoys sharing his ongoing personal experiences, perspectives and learnings from his start as a part-time or “weekend investor” and full-time corporate professional through his ultimate transition to a full-time real estate investor and business owner. You can listen to his podcasts at http://www.blogtalkradio.com/kevinguz.