Very early on, starting out as a part-time real estate investor, I recognized the enormous challenges in the vast ocean of real estate but also the numerous opportunities that exist within that ocean.
It can become overwhelming, and almost crippling and intimidating, especially when you are starting out as a part-time real estate investor to identify:
Where do I start?
How do I start?
On what do I focus initially?
Then, even beyond that, where should I start to set my goals and aspirations to build on that business?
I am basing my perspective on my own personal experience as a former part-time real estate investor here in Dallas, and now a full-time investor and owner of a HomeVestors franchise.
Perhaps you can apply some of my learning from the school of hard knocks into your own part-time real estate investing business and maybe save yourself some pain along the way and accelerate your path to success.
The way I looked at that vast ocean of real estate investment opportunities was to identify three fundamental avenues for myself in regard to building my part-time real estate investing business:
- One, I could invest in residential rental properties.
- Two, I could start out investing in residential rehab properties or fix-and-flip properties.
- Three, I could also invest in wholesaling residential real estate.
So I saw these three opportunities were all doable, attainable and potentially very profitable. I had to figure out, “Well, where do I start?”
I had to figure out how to sequence these three components of real estate investing properly so that not only could I get started, but also build and sustain a viable real estate investment business as a part-timer, then ultimately as a full-time real estate investor.
I chose to start with residential rental properties
I will admit this is the least glamorous way to enter real estate investing. We have all heard the horror stories of being a landlord or owning rental properties. It’s not real sexy, glamorous or exciting. But I will tell you without a doubt – based on my own experience and the experience of others – it is an incredible real estate investing approach to take for building long-term sustainable wealth.
I entered real estate investing by purchasing my first rental property more than 10 years ago. Looking back, there were three key aspects from which I learned and which prepared me well for where I took my business.
Number one, it helped me look at residential real estate from an investment perspective versus an owner-occupied perspective. I had purchased several houses for me and my family over the years, but when I went to buy my first rental property I realized you look at houses very differently when it’s an investment.
The purchase is very much a numbers decision versus an emotional decision and the need for a solid understanding of the financials of the purchase overshadows all other decision factors.
Second, buying my first rental taught me how to navigate the financial mathematics of investment properties. Or more importantly, “How am I going to buy a property and get it to cash-flow?” I had to work hard to find properties where the market rent minus the monthly principle, interest, taxes and insurance would produce an acceptable profit, even after making some assumptions for annual maintenance and vacancy.
Then finally, starting with rental real estate helped me build a critical network of partners that I still use and leverage today. Buying that first rental property enabled me to seek out and find a good lender as well as good contractors – painters, electricians and plumbers. It helped me find a good insurance provider for rental real estate. It helped me identify a good Realtor or two who knew rental real estate and could help me buy these properties and even help me rent these properties.
So buying that first rental property and focusing on that niche as my initial step into investing benefitted me on multiple fronts.
Moving into rehab properties
Then, that first phase set me up for the second phase of my real estate investing business: moving into rehab properties. These are much more time-consuming, as they are much more involved and a more active type of investing. Rehabs also are a lot more fun and exciting, and the gains are more short-term, whereas gains in rental investing are long-term.
As I moved into rehabbing properties, in addition to continuing to rent properties, I was able to leverage the expertise I gained by buying that first rental property. A key difference was that I found I had to buy rehab properties at an even bigger discount to be able to fix them up and sell them to make a profit versus rent them for cash flow.
So my skills as a rental buyer were built upon as I became a rehab property buyer. I also leveraged the network of partners I mentioned earlier as I moved on and started buying and rehabbing properties. I learned in this phase of my business how to sell properties versus rent properties.
And that was a whole new world. But my background in renting and leasing properties provided a great platform to help me as I moved into rehabbing and retailing, or selling, properties.
Moving into wholesale properties
As I moved down the path of rental real estate and rehab real estate, ultimately, over the course of several years, I moved into wholesale property investment. So now I was renting properties, rehabbing and selling properties, and I had entered into this third phase of wholesaling properties.
Now this is the quickest — and some may say the easiest — way to make quick cash and quick profit in real estate. It’s very exciting, very enticing. And it is a whole different world when it comes to real estate investing. This particular area is not for the novice, for several reasons.
Number one, you have to have access to residential real estate at deeply discounted prices. When you are a wholesale real estate investor, you are buying and ultimately selling properties to other investors. In order to have properties appealing to other investors, you have to offer them at very attractive pricing. That means you have to buy them at even more attractive prices. You have to leave enough “meat on the bone,” so to speak, to allow your investors to buy those properties from you and still have a healthy margin for them to turn around and rent them out and cash-flow them. Or, to turn around and rehab them and make a nice profit on the retail market.
So number one on wholesale properties, you have to buy them deep.
This may indicate to you why I waited last to enter into the wholesale end of residential real estate. I needed the experience, the network and the knowledge.
I leveraged my rental background and my rehab background because now I was selling residential real estate to other landlords and other rehabbers. I drew on my own experience as a landlord and as a rehabber. That experience I had was critical because I now knew what my customers wanted – what my investors were looking for – because I had done it. I had rented properties before and I had rehabbed properties. Because I had done it, and I knew what they needed, I was an effective wholesaler. I could market properties successfully to them at attractive prices that allowed them to accomplish their investing goals.
Networking with other real estate investors
Another aspect of wholesaling, which I did not really encounter when I was renting properties or rehabbing them, is that I was now heavily engaged in networking with other investors. This is a critical element to being successful at wholesale real estate investing. This is one of the reasons you cannot dive into wholesale real estate investing right away.
- Number one, you don’t have access to deeply discounted properties.
- Number two, you don’t have access to investors who are ready and waiting to buy those properties from you.
It takes time to build a network of investors who trust you and can count on you to identify and find good wholesale real estate properties you can pass on to them so they can meet their real estate investing goals – whether it is rental or rehabbing.
As you move through your real estate investing — and maybe you follow the path I did with rentals, then rehabs and wholesaling — resist the immediate temptation to rehab properties. It’s what you see. It’s what you hear. It’s what you watch on TV. It’s exciting. It’s sexy. But it’s high risk. And it takes an incredible amount of involvement, knowledge and activity. And, you have a learning curve you need to go through before you rehab your first property.
So I caution you. Like I said earlier, I waited awhile until I starting rehabbing. I built my knowledge with rentals first, before I moved into rehabbing and retailing property. I caution you to do the same.
Second, resist the temptation to go right into wholesaling properties. I know it seems easy and it’s quick and exciting because you can make quick cash profits. In many cases you do not even have to put money down in those situations where you assign properties that you have under contract, but have not yet closed.
You’ve got to build a great network of investors in order to be able to sell to them. And you’ve got to develop some unique sources that you can use, and leverage and work to buy deeply discounted properties off-market at a price attractive enough that you are able to sell them to other investors.
It takes time to build your network, your knowledge base and your experience in order to be a successful wholesaler.
That is what led me to those rental properties first. I thought it was a great low-risk entry point into real estate investing as a part-time investor. It was a great learning platform. And it was a great first step to building long-term wealth and success.
When it comes to building wealth, the earlier you start, the better, because obviously it accumulates over time. And that’s my recommendation to you. If anything — whether you follow my path or a different path – I encourage you to take that first step. I encourage you to start now toward building your wealth through residential real estate investing as a part-time investor.