4 Ways to Start Small as a Real Estate Investor
Insight Weekend Investor

4 Ways to Start Small as a Real Estate Investor

The most common question that I’m asked as a real estate investor is, “How can I get started doing this?” I find that year after year, my answer to this question remains the same—regardless of the person with whom I am speaking, regardless of current market conditions and regardless of what I am currently focused on as an investor.

First and foremost, I speak from my experience when I say that taking that first step is one of the most significant and common obstacles for a new or part-time investor who is looking to get started. Most people struggle to take that first step. I’ll admit it is the most difficult step and probably the least rewarding one.

Here’s what I am talking about when I say “step:” It’s buying that first rental property.

I equate it to the first step a small child takes. As we have all experienced in our own lives, you watch young children take that first step and can see how very hard it is for them. They fret over it. They prepare for it. When they ultimately do take it, it’s probably not pretty. They probably do not go too far, and the rewards are probably very limited on that first step. And oh, by the way, it’s probably very difficult for them.

And it’s exactly the same for that new investor just starting out, or thinking about starting out. When it comes to that first rental property you purchase, you may stumble. You may fall. And, I will warn you, you may not get that much out of it in terms of financial reward.

But just wait. Just like that child, once you take that first step, each subsequent step gets easier. With each property you buy beyond that first one, the difficulty level goes down and the reward goes up. Just like that child who is eventually running across the room, you will be full of exuberance and confidence. I guarantee that you will laugh someday about how you fretted over this terrifying first investment-buying step, the mistakes you made and the frustration and worry you endured. But it will all become a memory—just like that child’s first step.

The key, though, is to take the first step and buy that property, and go from there.

The source of most new investors’ hesitation is to buy that first property. They do the preliminary math, or they talk to a friend or relative or buddy or someone else who has taken the first step and they conclude that, “Wow, I am going to buy a rental property and I am only going to generate how much a month?” That one property is a lot of difficulty for very little return, it may very well be true. I speak from experience.

My first property was the most difficult property I ever bought, and the reward that it generated was the smallest reward that I have ever earned in terms of monthly cash flow. But what I found was, when you prepare properly for that first property and you prepare to go beyond and buy additional properties, that is where you will find the reward, satisfaction and ultimately the wealth you have been seeking.

You have to set a goal or destination just like that child who takes the first step. The child has a plan: “I’m going to get across that room. And I don’t know if it’s going to happen today or tomorrow. But that is my objective and I am going to learn to get over there, not by crawling, but by walking and ultimately running.” You have to do the same thing as a real estate investor. You have to determine your goal, your objective, your plan and your destination.

These are the four simple steps I recommend:

No. 1 – How much do I want to earn?

As that new part-time investor, determine how much you ultimately want to earn in passive income from your real estate investing.

Let’s say you have a full-time job. Maybe your ultimate goal or dream is to be a full-time investor. That’s great, but in the short term, how much do you want to earn from your rental properties?

Let’s just say for easy math you determine you want to figure out through real estate and rental properties how to generate $30,000 a year in income above and beyond what you are currently earning in your full-time career. That’s step one.

No. 2 – What and where do I buy?

This one is a little more difficult to figure out.

Determine what and where you want to buy, by looking at the rental market and rental rates in your area.

Ask yourself, “What should I expect to earn per month off the type of property I can afford and the type of property I want to buy?”

Let’s just say you determine, based on the rental rates and the monthly mortgage payment, you are going to purchase a property that will generate $500 a month in passive income or cash flow. That $500 a month is equal to $6,000 a year. So now you have a goal: you want to get to $30,000 a year in passive income or cash flow.

You have determined the type of property you can afford, the type of property you want, the type of property that is accessible to you and that will generate $6,000 a year in passive income. That takes you right into step 3.

No. 3 – How many properties do I buy?

How many properties do you need to buy, then, to realize that $30,000 a year in cash flow? Take your goal of $30,000, divide it by your annual cash flow per property of $6,000, and you’ve just determined that to reach your dream goal of $30,000 you’ve got to buy five houses. Now, for the final and fourth step.

No. 4 – How long will it take?

How long do you want to give yourself until you earn that $30,000?

Is it going to take you one year to get there? Or, is it going to take you 10 years? Let’s say this is your thinking: “Five years from now I want to own enough rental real estate to generate $30,000 a year in annual income in addition to my current job.” Figure $30,000, divide it by $6,000 per house—you need to buy five houses. So if you want to get there in five years, you have to buy one house per year to get there.

Now you’ve got a plan. Now you’ve got a vision. Now you’ve got a destination and a place you want to go. You can see how that first step now becomes much more exciting. You can get energized and motivated about buying that first property because you can see where you are headed. “I’ve got to get that first one, so that I can ultimately buy those four more and reach my goal of $30,000 a year in passive real estate investment income as a part-time investor.” How long would it take to get that size raise in your current job?

If just that doesn’t excite you enough—the fact you know where you are going and you know how to get there—think about what it would take for you to generate a $30,000 raise in your current job. Yes, it can be done. I will be the first to say it can be done in the professional corporate world, but I also will say with the majority of jobs, a $30,000 raise in five years is not easily obtainable and may not even be feasible or realistic. When you put that context around it, you can start to get very excited about giving yourself that $30,000-a-year raise by buying five properties in five years. Ultimately, you are creating that passive income for the rest of your life, almost like an annuity.

Going back to where we started—that child taking that first step—it hurts, it’s difficult, it’s not pretty, it’s not exciting, and it takes a lot of motivation and courage and energy to do it. Picture that child looking across the room at his or her favorite toy, or at Mom, waiting, with her arms wide open. The minute that child sees that destination—that goal, that reward and the path to get there—it becomes much more attainable and exciting. You will be surprised, but that child will go quickly from a step, to a walk, and then to a run.

Your experience as a real estate investor will be the same. Keep in mind every single real estate investor out there started small: One step, one house—that is how it all began for everybody. When you put your destination and plan in place and go from a step, to a walk, to a run in your real estate investing, you will see how the difficulty dissipates and the rewards increase.

Maybe that ultimate reward for you is leaving your current job and becoming a full-time real estate investor. Maybe it’s just creating incremental passive income on the side. Maybe it’s just something you want to do in your free time to build wealth in the long-term. All of those are great and will serve you well.

Just like every great business was built one sale at a time, one store at a time, one customer at a time, one product at a time, one step at a time, your real estate investment business is built one house at a time. And your wealth from real estate investing is built by taking that first step, buying that first house. You are going from a step, to a walk, to a run and reaching that end goal, whatever that may be. Just make sure you define your goal before you begin and don’t worry about the individual steps to get there.

As I have said previously, “You go as far as you can, and when you get there, you will see farther.” I was told that from someone else. I can’t take credit for it. But I think it’s true, and key, in order for you to take that first step as a part-time or new investor and get started and buy that first property.

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.