Getting Started as a Real Estate Investor
Every day we get calls at Western Capital from fired-up, real estate investors needing financing for their first deals. Unfortunately, there are plenty of pitfalls that we see.
Here are a few tips that can help position one for success:
1. Start small
In conventional, owner-occupied lending, the amount a buyer qualifies for depends largely on their income. In hard money/private lending, the amount of money a buyer can raise for down payment and show for reserves, determines the price a buyer qualifies for.
Lenders are looking for borrowers with “skin in the game”.
There is no such thing as “no money down” in this hard money lending world.
The more complex the property type, e.g., a gas station or a 40-unit apartment complex, the higher the down payment.
Fortunately, most private lenders seldom care where the money comes from and won’t require sourcing or seasoning.
Many first timers experience “sticker shock” when they review terms of their new loan and realize how much is required to close, ranging sometimes from 20% to 50% down of the total cost of the project (sales price plus rehab budget), upfront. This may be too steep, making the deal non viable, so start small.
2. Representation is priceless
The team is key to success.
A savvy real estate investor should bring along to every transaction, a realtor, a title company or a lawyer in some states, an accountant, a contracting/subcontracting team, and a lender.
The realtor represents buyer interests free of emotion – from disclosure of property material facts, driving discourse on uncomfortable conversations such as pricing renegotiations, earnest monies that needs to be returned.
A good title representative will ensure that matters pertaining to the property that are on record with the city, county, state, or federal government that could delay closing, such as liens that were not discussed prior to purchase contract, are addressed.
An accountant will help file taxes appropriately with regards to acquisition and sale of property to avert trouble with the IRS.
Real estate investors are constantly building relationships with teams of subcontractors such as plumbers, electricians and a contractor who can help create the project budget and manage day-to-day activity at the property, should rehab be needed.
The loading station at your local Home Depot is perfect for networking with others, including other investors working on their own projects. They may share their contacts or tips on pricing, planning and how to get started.
Finally, a good lender whom you can trust to line up financing, like Western Capital, is a must have.
3. Raise capital
Regardless of how great your team is, first time investors are largely alone when it comes to down payment or upfront closing costs. Unless a deal is structured in a manner where partners will cover these costs, investors have to fund their own start-up.
4. Ramp up your credit
Hard money lenders like the ones we work with here at Western Capital want to know the creditworthiness and character of the person they are lending money to, even if the loan will be in an LLC or a company name.
The less regard a hard money lender gives to credit, the more expensive the money will be.
Care must be taken when calculating return on investment (ROI) on deals to make sure that you, the real estate investor with skin in the game, are going to make money.
It surprises us every time we speak to a nascent investor who is ready to buy a property, but they don’t know how much to allocate for rehab budget or what they hope the after repair value (ARV) will be. It is necessary to do your homework and be able to speak knowledgeably about your project.
We hope that as a real-estate investor you will maximize the opportunity to make great returns for yourself and those who depend on you in this wonderful venture you are getting ready to embark on. Please email us at firstname.lastname@example.org if you have any inquiries on how we can help you grow your business.
This is Part I of our Getting Started Series.
Akinyi Williams is the President and Chief Operating Officer at Western Capital, a lending broker for non-owner occupied residential and commercial properties. She is also a real estate broker licensed in Minnesota and Wisconsin. She lives in MN with her husband and 2 children. Akinyi can be reached at email@example.com.