I’ve been investing in real estate for many years now. I’ve made money on deals, and I’ve lost money on deals. This particular year, I’ve probably lost the money that I ever have throughout my entire real estate career. Now, I’ve also been very fortunate to complete over 500 real estate transactions. Who’s counting, right? But experience has led me to believe that when you’re doing your first deal, you need to start small, slow, and cheap.
So let me talk about small, slow, and cheap. A lot of folks out there who I’ve come across and spoken with have wanted to work with me through one of my various companies. They all get excited about investing in real estate and this new passion that they’ve found. So then they go and borrow a lot of money and refinance where they live, or maybe they ask their parents and family to give them cash. Then they go out and buy every property they see or they buy the biggest piece of crap property known to man because they think they are good at renovating after watching one those fake TV flipping shows. Guys, bad idea, bad move. Don’t do it.
1. Choose an affordable area.
This is what I think you should do. Find an affordable area, predominantly a B or C-class area, even though I know it could be rougher from a property management standpoint. I also believe that you need to invest the least amount of money possible because the less money you invest, the lower the risk you will have. The more money you invest. the more risk. I say this because the likelihood of you losing and not doing well on that first transaction is very high. Unless you strike it lucky—and I don’t believe in luck—you probably won’t do well on your first deal. Even if you break even on that first deal. that is freaking great. I lost on my first five deals, so if you can do better than that, I think you’re doing well.
2. Don’t take on too much work.
Don’t give up if you lose and make mistakes because they’ll make you better. Trust me, after 500 deals, you’ll be thanking me for it. So start slow, start off small. Find a low-rent area, buy a property for the least you can, and make sure that it does not need much work. Forget about structural renovations, building foundation walls, major electrical work, and significant plumbing and roof work. You want to buy a property that does not need too much work. At best, you’ll find a property in need of a cosmetic rehab—paint, carpet, linoleum in the bathroom, linoleum in the kitchen, etc.
3. Negotiate long and hard up front.
Now, another thing that I would recommend you guys to do is something that I have done a lot of. That is to negotiate long and hard up front. If you are in a buyer’s market like I am in the Midwest—particularly Toledo, Ohio—there are a lot of sellers who want to sell because there is not much competition. So anyone who comes along with a firm, quick-close offer will accept the deal. Instead of buying properties that need a lot of work, buy them dirt cheap and spend four to six weeks renovating them. When you renovate, you take on a ton of risk because there are a lot of outside factors that you can’t take into consideration like contractors screwing you or the city shutting you down. And then, I would sell these properties for a decent profit to investors looking at buying. Now, even though I may make a bigger profit on paper because I bought a distressed property, fixed it, sold it and made my margin, what I’ve gotten smarter at doing is realizing that time is money. So now I am spending more buying properties that do not need that much work, turning them around quickly, and making less profit on that particular deal.
This is my message to all the beginners out there. I hope you can learn something. This is coming from someone who has done a lot of deals, made a lot of money, and lost a lot of money. Start slow, start small, start cheap, and negotiate well. Guys, remember, you do not make money when you sell, you make money when you buy. So make sure that you buy below market value.
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