In real estate investing the first thing to start with is to understand what it takes to get deals funded. There are many ways to get a real estate deal funded including creative financing and other “no money down” techniques. In this article I will only focus on the basics of getting started.
The most common way to fund a deal is with a lender or bank. Most lenders will look at your net worth or your personal income depending on how large the deal is. One common misconception is that the lender will only look at the value of the property and that will be enough to get the deal done. Most traditional lenders will be looking at your net worth for the deal. If the property is big enough, they may not look at your income to cover the mortgage and may only look at the income of the property. Most lenders will want to see that you (and partners) have about 1.3 X net worth of the loan amount. Let’s say you want to do a $1,000,000 dollar loan; you and your team would need to be worth about $1.3 million.
Net worth leads us to our next step. You need to decide how much you and your partners are worth. Use your collective net worth to decide what size (and price) of property you should be looking at. If you are worth $1 million, then you should only be looking at properties in the price range of $500K to $800K.
The idea is that you want to focus the majority of your time trying to close deals that you have a high likely hood of being able to get funded. If you are worth $1million then you should not spend much time trying to do a 10-million-dollar deal. The likely hood of you closing will be low and you may waste time and money trying. 80% of your time should be focused on trying to close deals within your net worth limits. 20% of the time you can go after the big deals that may be out of your range at the moment. You never know when you might get lucky, but remember luck is not a sustainable business model.
The next step is to decide how many units you can get for your price range. This will depend on the market you are in. In a more expensive market, you will get fewer units for the same price. Do some research in your area to see how much real estate you can buy for the applicable amount of net worth you have.
Now that you know what price range to be in and what size deal you can get a loan for, you can move to the next step. Finding deals.
The best place to find deals is through real estate agents. There are lots of ways to find deals but there are no “magic bullets” for finding real estate deals….no matter what anyone tells you or tries to sell you. Relationships with agents and brokers are the number one way to source deals. Start calling them today!
Now that you are ready to start calling brokers and agents here is the number one thing you will want to keep in mind. When you first call a real estate agent or broker, they are going to ask one very important question. “What are you looking for?” What they mean is what type, size, price, and locations you are trying to buy in. If you don’t have a good answer for them, you may lose credibility and the relationship may not develop as you hoped. Here is a list of items to be able to discuss when you first call a broker or agent.
- Type (single family, multifamily, storage units, etc.)
- Price Range
- Price per Door (Multifamily)
- Property Class (A, B, C, D)
- Area of the market you want to be in
- Cash on Cash (multifamily)
- Debt Service Coverage Ratio (multifamily)
- Capitalization Rate (multifamily)
The biggest tip I can give you is to just get started. Start with properties that you are comfortable with but get started!
For more information like this check out my blog at www.realestateraw.com and join my Facebook group Real Estate Raw for Multifamily Investors.
Best of luck!
Bill Ham
