Real estate investing can be a great way to generate passive income and build wealth. But where to start? We know there are lots of guides out there to kickstart your investing journey, but we believe in breaking things down in the simplest way possible. In this article, we will discuss the big steps to take when you're starting out on your investing journey. And since we can't get enough of a good acroynym, you can remember the 6 steps with the shorthand, "SIMPLE."
The first step to investing in real estate is to familiarize yourself with what makes a sound residential real estate investment. We have resources available on our Insights blog, but the best way to get educated is to start digging into real market and property analysis. We built our Research and Invest technology to make it easy for investors of all stages to dive into the fun of analyzing local market dynamics and understanding what makes a property a great rental opportunity.
Once you have a good understanding of how to evaluate markets and properties using Picket tools, the next step is to define your overall investment strategy. Are you a buy and hold investor looking for properties that will appreciate in value over years while providing some cashflow along the way? Are your next-level DIY skills suited for a fix-and-flip model? Do you want to bring a renter into your own primary residence to help offset the mortgage (the quintessential "house hack")? There are multiple ways to invest in residential real estate, and it's essential to decide which strategy best aligns with your goals, risk tolerance, skill set, and capital out of the gate.
Hope is not a plan. Before you start earmarking capital or seeking out financing, figure out what you want and need to get out of your investments to make them viable. Using your overall investing strategy as a guide, determine what market(s) you want to targeting and why. Define a budget for the purchase and stabilization of the rental asset (asset stabilization refers to the renovations and repairs you'll need to make on the property before you can start making money). Figure out how much of your own capital you can afford to invest based on your personal budget, cash flow, and cash reserves. Think about the most cost-efficient way to finance any debt you'll need to take on. (You can consider a number of different financing options, including traditional bank loans, private lenders, and hard money loans. The key is evaluate each option carefully and choose the one that aligns with your strategy and goals.) Define the capitalization rate (projected net operating income/purchase price) you're targeting. And start vetting critical resources you'll need in order to purchase and manage a property, including a local real estate agent, lender, and potentially a contractor and property manager. One of the simplest ways to test the soundness of your plan at the outset is to state it aloud to a trusted confidant. Walk them through your strategy, your investment criteria, and your goals. Tell them as succinctly as possible how you plan to manage your investments and measure your returns. If the logic flows from your macro strategy to your specific execution plan, and if your confidant can easily follow your line of thinking, you're on the right track. Now comes the fun part.
Once you've defined your investment strategy and set your goals, the next step is to find investment opportunities. With Picket, that process couldn't be simpler. Our platform helps you select your strategy and define your investment criteria based on your goals, and then our algorithms go to work analyzing every active listing on the market. We'll return to you a stack-ranked list of properties that fit your investment criteria along with an automatic analysis of their rental potential, including projected sale price, capitalization rate, rent, monthly expenses, and cash flow. You can supplement our analysis and adjust our assumptions by going one level deeper and using all the comps we provide along with awesome local data (including things like school scores, income and population growth, and crime rates that you can see visually on a map down to the block level) to bring additional context to property evaluation.
Due diligence involves researching the property's condition, location, and potential for profit to pressure test your initial analysis. We can connect you immediately with an agent from the Picket Agent Network to help you through this process, which can be particularly useful if you're not in the same location as the property you're evaluating. Our agents come with experience buying and selling investment properties and can set you up with a home inspector and help provide the local insight you need to build confidence in your assessment. As you consider the highly specific factors of the property, don't forget to look into local zoning laws and regulations: check with the local government to ensure that the property is zoned for rental use and that there are no zoning or regulatory issues that could impact your ability to rent out the property.
Ok, we've included a lot in this deceptively innocuous "last step." But if you've spent serious time on steps 2 and 3 (Investment Strategy and Make a Plan), then a lot of the legwork here should be well underway, and now you're just putting the pieces in place. Call your lender to initiate pre-approval (if you haven't done so already). Then, with the preapproval letter in hand, you can work with your agent to submit an offer and negotiate with the seller. Once your offer is accepted, you'll move forward with the loan application process, close on the property, and kick off the process of making any necessary repairs or renovations before getting it listed to rent. If you're self-managing, a host of great tools exist to help you create your lease, market your property, and communicate with leads and new residents. If you're outsourcing property management, your property manager should be handling the key steps of that process on your behalf.
Investing in real estate can be a lucrative way to generate income and build wealth. It can also be daunting. While there's no doubt successful real estate investing takes commitment and work, Picket can help make it easier. Follow this SIMPLE guide to get started, and we'll be there every step of the way to help you achieve your investing goals.
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