[Transcript Summary] Have you ever wanted to learn how to get started in your first real estate deal but have no idea where to begin? Well, today we’re going to discuss how to find your first deal, even if you have no prior experience. Welcome back to Money Mondays, where we release new content every Monday to help you become a better investor. And guess what? You can learn from us and venture out on your own real estate journey, or if you prefer, you can invest with us.
With over 700 million in assets under management, we have bought and sold over 5,000 units across the beautiful Sun Belt and Texas region. Our track record includes providing over a 20% average annualized return to our investors on all of our deals. So, let’s dive into step number one – buying your first deal.
Research is Key
Start by educating yourself on how this whole process works. Read books, listen to podcasts, and explore the plethora of free or low-cost content available online. Gain an understanding of investment strategies, risks, promising areas to invest in, and specific property types. Absorb all this knowledge, even if it feels like drinking from a fire hose. A solid educational foundation is crucial because rushing into your first deal without it puts you at risk of being taken advantage of or potentially losing money, and even worse, jeopardizing your investors’ trust.
Building the Right Team is Paramount
Surround yourself with the right partners and vendors who will help you throughout the process. And no, I’m not just talking about those who will close deals with you (although that’s important too). I mean finding reliable lawyers and legal teams, especially if you’re planning on Syndicating – an SEC attorney is a must. Avoid relying on just any lawyer; these specialized documents require expertise from the proper individuals.
Having a reputable title company is crucial for establishing valuable contacts and securing reliable vendors. In today’s landscape, insurance costs have skyrocketed, making it even more vital to have an insurance agent well-versed in commercial real estate policies. Equally important is finding a knowledgeable mortgage broker who can navigate various loan options and negotiate the best terms. Property management is another critical aspect to consider. Do you want the headache of late-night plumbing emergencies, or would you prefer an experienced property management company to handle it all?
Define Investment Goals
As you gain knowledge and assemble your team, it’s crucial to define your investment goals. Specify your preferred location, such as Houston, Texas, and target Class A properties from the 1990s and onwards, with a focus on 100-unit projects and larger. Ready yourself for success by laying a strong educational foundation, collaborating with the right experts, and pinpointing your goals.
Never underestimate this process. Identify your unique investment strategy, known as your “buy box.” Clearly define the types of deals and areas you’ll be targeting, along with the potential returns you project. This information will allow you to effectively communicate and engage with potential investors. Be open to adjusting your approach based on their preferences. Once you have established your buy box, connect with real estate brokers who handle the majority of deals. Build a rapport with them, explaining your investment criteria. They will keep an eye out for opportunities that align with your objectives. When you find a suitable property, thoroughly evaluate and secure it. Avoid being distracted by shiny objects or chasing multiple possibilities. Stay focused and committed to your investment strategy.
Build a Strong Network
Build a strong network of real estate professionals and investors that you can rely on for advice. Reach out to potential mentors in your local market who have a solid track record and an impressive portfolio.
Earlier in this video, we discussed the importance of building a strong network. This network includes investors, partners, and various vendors who contribute to our success in this team-oriented sport. Attending networking events and cultivating relationships with investors is crucial for those venturing into syndication or seeking capital. Additionally, finding the right partner can amplify our achievements beyond simple addition, as one plus one can equal three when synergy is found.
Moreover, we rely on reliable partners such as insurance agents, mortgage brokers, and legal teams, all playing vital roles in our journey. Collaboration with these professionals enhances our ability to navigate the complexities of real estate. Remember, we can’t accomplish everything alone, so embracing teamwork is key.
Choose the Right Property Management Company
Once you’ve purchased the property and closed your first deal, it’s crucial to find a reliable general contractor to handle the necessary work. Not everyone wants to swing hammers or oversee the crew, and that’s perfectly alright. It’s important to have a skilled general contractor who can effectively execute your value-add business plan. Equally significant is selecting the right property management company. This is where the real test begins, folks. I cannot stress enough the importance of choosing the right property management company. It could be a third-party provider, or perhaps, after gaining some experience, you may decide to start your own management company.
The Deal
Now, let’s circle back. After building your network, educating yourself, and identifying your buy box, you’ve received a suitable deal from your real estate broker. Time to secure financing and assemble the capital stack – the term used to describe structuring the loan and equity for the deal.
Typically, the responsibility for equity lies with the GP sponsor or syndicator orchestrating the deal. It involves a down payment in cash, accompanied by reserves and escrows. A knowledgeable mortgage broker can help determine the ideal loan for the property, area, and business plan.
For a value-add heavy flip, where funds are invested in improving underperforming units and the property is acquired at an advantageous price, a bridge loan might be preferable. Refinancing into a permanent loan, later on, allows you to leverage your enhanced equity position. Understanding different loan products and lenders is crucial to align financing with your investment strategy and investor expectations.
Consider factors like your buy box, investment thesis, desired holding period, required capex, location, and mortgage options. Collaborate with your mortgage broker and partners to identify the most suitable product. Securing financing is pivotal in successfully buying your first deal.
Now, let’s say you’ve established a strong rapport with a broker, connecting on a personal level. After months of waiting, they present you with an exciting deal. But now it’s time for due diligence.
Due Dilligence
Up to this point, your focus has been on financial due diligence – assessing spreadsheets and reports to evaluate the deal. Now that you have a contract, it’s time for on-site due diligence. A reliable property management company and competent general contractor (GC) are essential.
During the first week of the contract, conduct on-site due diligence with two primary tasks. First, the property management company will audit the lease files to verify rent accuracy. This confirms tenants are paying as stated.
Next, the property management company will perform a comprehensive unit-by-unit walk-through. This confirms occupancy status and identifies units in poor condition or potential issues. Exterior and amenity inspections may also be performed. Focusing on these crucial due diligence aspects ensures informed decisions and property investment success.
Analyze the Comps
When evaluating a property, it’s crucial to analyze the comps, or comparable sales, in the area. This step ensures that you have accurate and up-to-date information on market rents and property values. Armed with this data, it’s time to engage with a general contractor during your due diligence phase. This professional will collaborate with you to create a comprehensive capital expenditure (capex) plan. From painting to roof repairs, they will assess the costs and timeline for each task, helping you determine if your financial projections align with reality. Sometimes unexpected issues arise, such as corroded plumbing, which can significantly impact your budget. In such cases, open and honest discussions with the seller are essential. While it can be tough, walking away from a deal that no longer meets your criteria may ultimately save you from financial pitfalls. Remember, in today’s volatile market, it’s vital to approach investments strategically.
