You’ve decided that real estate investing is for you, but there’s one problem. You need some startup capital. Here’s a tough truth about this business: unless your family has left you with a fortune, you most likely will have to spend some time building up available cash to invest. Once you have generated enough cash, however, you will be well on your way – and it won’t take as long as you fear to get the ball rolling.
Warning: this plan will only work if you are:
- Willing to put in long hours after your day job
- Willing to get over the fear of rejection
Follow these steps, and you’ll build a stream of monthly, passive income and be standing on a firm investing foundation within five to seven years. I know this sounds like a long time, but good things take time. In the grand scheme of things, five to seven years really is not that long.
Step 1: Generate Extra Cash
If you currently rent a two-bedroom apartment, find a roommate. This lowers your overall cost so you can save money. All homeowners and heads of household: if you rent or own a home, offer the other rooms for rent or Airbnb to create additional monthly income!
Do whatever it takes to build investment capital. Find small buy/sell opportunities such as buying items off Craigslist and selling them on eBay or Amazon. In college, I made extra money selling classic cars I bought off Craigslist on eBay. It was tough, but worth it. Once you have consistent cashflow, you can start investing.
Step 2: Wholesale Your First Property
Wholesaling real estate is one of the best ways to start investing. You’ll learn the vocabulary and network with investors without the major financial risks associated with buying investment property.
Your objective: pair a motivated homeowner who is willing to sell at a discount with a willing buyer and receive compensation for that service. I’ve summed up the process in five easy steps:
- Find your buyers. You can find buyers at networking events, local real estate investment associations, and meet-up groups. Compile their information to create a buyers list.
- Find motivated sellers. You can do this by knocking on doors, sending mailers to out-of-state owners, or posting bandit signs.
- Get the property under contract. Get a home under contract using a Purchase and Sale Agreement. I’ve got some very important details about this process in my course online. Make sure your contract allows ample time to find a buyer and for due diligence.
- Advertise the deal to your buyers list. Once you have a buyer, assign your Purchase and Sale Agreement to them using an Assignment Agreement. Use a closing attorney and title company to process the closing.
Step 3: Buy Your First Rental Property
Owning rentals before jumping into flipping will allow you to build a foundation around your core objectives of financial freedom, passive income, and wealth generation instead of wandering off-course.
My Rental Purchase Breakdown:
- Buy one property where your all-in cost (acquisition + renovation) is less than $130,000.
- Rent the property for a minimum of 1.2 percent of all-in cost and hire good property management.
Note: Your all-in cost should be less than 70 percent of the after-repair value (ARV) of the home.
Step 4: Invest in a Small Flip
Now, it’s time to invest in a property that you can flip quickly (within six months) and build your cash reserves. Don’t be intimidated by a hot real estate market.
My formula for flips in a hot market:
Maximum Purchase Price = (65% x After Repair Value) – Cost of Repairs.
If anyone disputes this formula, tell them to jump in a lake. This formula gives you peace of mind knowing that you’re not playing into the hype of the market.
Step 5: Create a Blueprint
It’s time to decide how you will use the extra income you created to buy property over the long haul. Here are a few options:
- Single-Family Rentals. Using income generated from Steps 1 through 3, purchase additional rental properties.
- Flipping on the Side. Expand your flipping efforts to grow a side-flipping business.
- Buy Bigger. Use income from Steps 1 through 4 to purchase duplexes and triplexes for long-term cashflow.
Resist the Temptation
Don’t let your blueprint look like this: Use income from Steps 1 and 2 to buy one rental property, upgrade your car, buy new clothes, get a bigger home, and fail to execute on Steps 3 and 4. Creating a blueprint that matches your personality and goals is key to your success. If executed properly, it’ll work wonders. If executed poorly, financial ruin awaits.