Real estate has some tremendous superpowers—not the least of which is its ability to help you find financial freedom and leave your terrible day job. Do you want to travel the world? Dedicate more time to volunteer efforts? Focus on raising your kids? A thriving real estate business providing you with passive income can be the key.
But there’s a catch: To achieve true financial independence, you have to really love real estate. Just because you’re ditching the nine to five paycheck doesn’t mean real estate investors don’t work. In many ways, it’s still a full-time job. You’ll just have more freedom to arrange their lives in the way that best suits them.
Start with the basic elements of financial freedom
Before digging into how you should build your net worth, let’s start with the basics: Getting your finances in order. After all, financial freedom won’t feel that free if you’re still trapped by debt and bad financial habits. Here’s what to look at before you start pursuing real estate.
Credit cards aren’t inherently bad—in fact, utilizing credit card rewards and the purchase protections offered by said cards can be a smart financial strategy! However, many Americans can’t use a credit card without overspending. If you have credit card debt, pay it down as quickly as you can. If you’re prone to impulse buying, consider either getting rid of your cards or pursuing financial counseling. Over time, you can change your mindset toward credit, and eventually can use these cards as intended: As excellent sources of rewards.
Do you have money set aside in case of an emergency? What would happen if you lost your job—before fully executing your wealth-building strategies, of course—or you have a significant unexpected expense, like a medical bill? Start with a small emergency fund (many experts say $1,000 is a good starting point), then build it over time. Ultimately, you should be able to cover six months of living expenses without your primary income. Consider creating a bank account explicitly for your emergency fund. Keep that money in your savings account until you need it.
Do you have student loans or a car loan? A large mortgage? You don’t necessarily need to pay these off before beginning your real estate investment career, but it is important to understand exactly how much debt you have. This will be important for lenders, too: Before lending, they’ll calculate your debt-to-income ratio. Many consider 36% the highest allowable ratio, including a new mortgage, if you need to take one out. Wrangle your debt before investing to ensure your best chances of landing a loan.
Should you quit your job to pursue real estate?
Before we dive into the nitty-gritty of financial freedom through real estate, let’s discuss whether quitting your job is truly the best solution for you.
Ideally, you should find what you love to do in life more than anything else and do that for a career. If that means teaching high school math, teach high school math. If that means traveling the world, then find a job that travels the world.
And if that means investing in real estate for a career… then invest in real estate for a career. Because full-time real estate investors still work—in fact, the job often feels more like a lifestyle. While there are some truly passive investments, such as REITs (or real estate investment trusts), full-time investing usually involves work. You’ll need to:
- Talk with troubled homeowners
- Send out massive amounts of direct mail
- Network with established real estate investors.
Does that sound like something you’d hate? Everyone can, and should, create a real estate portfolio as part of their strategy for retirement and wealth building—and many current millionaires have followed that exact path. But full-time real estate is a full-time commitment.
Ready to dive into real estate investing as a full-time career? Here’s your path to financial freedom.
If you’re unfamiliar with real estate investing, brush up on your basics. Do this before you even consider dipping a toe in the full-time waters.
Start by deciding which strategy will be your focus. There are a number of different types of real estate, and each type has unique pros and cons.
This process is where you locate amazing deals, put them under contract, and sell that contract to an investor or house flipper—and make a sizable profit doing so. Wholesalers master the most valuable skill for a real estate investor to possess: how to buy right.
Wholesaling works. However, while wholesaling might be fairly “simple”—it’s not easy or quick. It takes hard work, skill, motivation, and certain personality traits (like the ability to negotiate). Consistently finding deals that are worth pursuing can be a time-consuming job.
This can be an exciting and profitable way to earn income. You’ve probably seen flipping TV shows where investors turn a dump into a mansion in three weeks and profit hundreds of thousands of dollars. While this is possible, don’t enter real estate expecting this to happen to you. Make sure you understand both construction and the market before starting a fix and flip business.
Flipping houses is a lot of fun, and fantastic profits can be made. However, there are some important considerations to make before jumping in head-first to your career as a full-time investor:
- How will you fund your flipping business if you don’t have a job?
- How will you make your monthly payments if you don’t have a job?
- Is your location conducive to flipping?
Buy and hold cash flow investing
Buy and hold cash flow investing produces a stable of cash-flowing properties. That can add up quickly to provide significant income. This can be a great option for long-term investing, but keep in mind that you’ll need significant monetary reserves when things go wrong.
Educating yourself goes way beyond simply picking your favorite real estate strategy.
- Sign up for BiggerPockets. If you are reading this blog post but haven’t signed up for a free account, stop what you are doing right now and sign up. Trust me.
- Read the Ultimate Beginner’s Guide to Real Estate Investing. This is a quick, free online training manual that we put together to help you build a solid foundation for your future in real estate. Internalize it. Make it make sense. And if you don’t understand something, go ask about it on the BiggerPockets Forums.
- Fully fill out your BiggerPockets profile. Include a nice picture of your face. Detail your history, your goals, and your wants/desires on your profile. People look at these things! Make it count.
- Introduce yourself to the community in the New Member Introduction Forum.
- Ask questions and offer ideas. If you aren’t an active member of the Forums, you are simply missing out on one of the most powerful tools on the planet for becoming a real estateinvestor. Ask questions, get answers. Answer questions, get smarter. Build your online brand. People will start to follow you and help you out. They will give you honest feedback on your ideas, your plans, your goals, your timelines, and more.
Learn about your local market, too. Are jobs growing? Incomes? What does the population look like? Network with local investors and real estate agents—and make sure to visit homes for sale in your area before you start bidding. Knowing what your market offers in different price ranges is essential knowledge for all real estate investors, regardless of your strategy.
Create a customized business plan
A business plan works like a blueprint created by an architect.
Keep in mind: This plan is doomed to be flawed, despite your best preparation and education. Expect to change your plan as your understanding of the local market—and your abilities and interests—change.
Here’s what your business plan needs to address:
- What is the purpose and the model for my business?
- How will I raise capital for operations and for acquisitions?
- What is a good deal? What objective deal criteria will I stick to?
- Who is my target end-user? What do they really want? Where do they live?
- How will I find prospective deals? How will I convert them to purchases?
Too many beginners look for answers before they even ask the right questions. Phrasing the major cornerstones of a business plan as questions means that naturally, you will try to answer them. And when you lack good answers, go back to your educational resources or local professionals.
Think about your finances, too
If you’re ditching your job for real estate, you’ll need a plan for that, too. Quitting your job is a big deal—with big financial consequences. Entering the world of self-employment is a risky venture. Most startup companies fail, largely because they run out of money.
If you are looking to quit your job you are going to need to make some sacrifices—starting with your living expenses.
- Do you really need cable TV?
- How about that car payment?
- Gym membership?
If you are serious about making real estate investing a full-time gig, it’s time to cut your expenses. Decide right now what is essential and what is luxury. You can always add the luxury stuff back in later.
In addition to cutting your expenses, you’ll also need cash. Having a large financial cushion is imperative. The amount you’ll need is largely dependent on your personal situation, but try to have at least six months of savings before quitting your job.
One additional point to make here: a great sacrifice to make is your home itself. Buying a small multifamily property, living in one unit, and renting the other unit out (a strategy called house hacking) is a great way to live cheap—or free—and learn the real estate investing business.
Build your team and network
Identifying and recruiting excellent team members is key to financial freedom through real estate. Here is a list of my most important members, why they’re important, and how I plan to recruit the right people for this role.
Without money sources, the rest of your team members won’t matter. You can’t fix a fix and flip unless you can buy a fix and flip.
Build banking relationships with lenders who offer a home equity line of credit (HELOC), and work with private lenders to fund the balance of your capital needs. Unfortunately, finding a private lender is not easy or fast. It can take “slow dances” with potential lenders before one or more will commit their money.
You also want someone you trust, with long-term goals that align with yours. Long-term partnerships are essential to real estate investing.
General contractor / project manager
Unless you’re skilled in construction, you’ll need a contractor or project manager who can analyze repair costs, avoid large problems, and manage a rehab project from start to finish.
Here are some qualities to look for in a partner:
- Competency: Your contractor must be skilled in the world of construction. They should know costs and best practices for all of the trades you will be hiring—from plumbers to electricians. They also need to have all of the proper licenses and liability insurance.
- Honesty: Can you trust them? Do you pick up on dishonesty, even in small things?
- Organizational skills: Can this person handle many moving parts without dropping the ball? Maybe they’re old school with a planner and paper or totally digital. Whatever the case, look for a strong system.
- Low overhead: You’re not paying for big trucks, extra office space, or fancy staff to feed your contractor’s ego. You want lean, cut-to-the-bone overhead.
- Fun to be around: You’ll be talking to this person a lot. Will you have fun? Or will you dread having to talk with him?
Broker and expert listing agent
You won’t make money without buying and selling your inventory. So, you need to know everything possible about how to move houses as fast as possible and for top price.
Some real estate investors choose to become licensed real estate agents—and there’s nothing wrong with that. But if that’s not an avenue you’re ready to pursue (yet), partnering with an investor-friendly agent is key. Here’s what your agent should do:
- Consult with you while negotiating properties you’re buying
- Providing estimates of after repair value (ARV), including lists of the best comps
- Consulting on design, layout, paint colors, finishes, and other rehab choices
- Staging the house for showing
- Taking professional-quality pictures for marketing
- Marketing the property through all the traditional channels, like signs, MLS, online websites such as Zillow, and networking
- Being your eyes, ears, and advisor during negotiations with buyers
- Handling details required to get a deal to closing
That is a pretty powerful combination, don’t you think? Having an expert team member willing to provide these benefits will give you confidence.
Team members fill expertise gaps—and the business of real estate transactions can be a minefield of legal problems. Trusted legal counsel is a necessity.
In addition to looking for the basics, like being a straight talker, choose your attorney based upon expertise and experience in the following areas:
- Real estate contract litigation: No one wants to litigate, but attorneys should be able to draw up contracts based upon knowledge of how litigation will proceed. This expertise allows you to preempt problems by including specific language in contracts.
- Real estate transactions and title insurance: Look for someone intimately familiar with real estate closings. It’s even better if they have a team of paralegals on staff who can help manage minor issues.
- Basic entity structuring, estate planning, and asset protection: An attorney can help create a basic legal entity to perform your buy-sell business.
Before setting up your legal entity with your lawyer, talk to an accountant about the best option for your business. That may be an LLC, S Corporation, or C Corporation—but the right answer depends on your state and business strategy.
You may also want to consider a bookkeeper, eventually. Smaller investors can often get by using a program like QuickBooks to further organize accounting activities.
Decide what a good deal is (for you)
To help guide your business, create a detailed profile of a good deal. First, you’ll want to understand the basics of deal analysis. Here’s what you should know for each deal:
- Sales costs, such as commissions, closing costs, and home warranty
- Desired profit
- Holding costs, such as taxes, insurance, utilities, and maintenance
- Rehab costs, including labor, materials, and permits
- Acquisitions costs, such as attorney or title fees, closing costs, and inspections
For example, a fix and flip or BRRRR investor would subtract these costs from the property’s ARV to find their max purchase price.
Be careful with deal analysis: Numbers can be deceiving. In other words, everything that glitters is not gold—or everything that meets your formula is not always a good deal.
You need criteria beyond numbers. You must check the assumptions behind said numbers.
First of all, be careful with the rehab costs. This is why your contractor is so key, and it’s why pre-purchase inspections are always money well-spent.
Second, be careful with the assumptions behind your ARV. Consider making a “desirability checklist” of qualitative criteria about the house and location. If the house checks three or more boxes, consider passing. Overcoming that many negative factors can be difficult.
Problems to include on your list include:
- Unsafe neighborhoods
- Neighborhoods with mostly tenants and not owners
- Properties too far from jobs, shopping, and amenities (10-plus miles)
- Steep lots
- Busy roads
- Obnoxious outdoor smells or obnoxious next-door neighbors
- Large power lines nearby
- Extra-small house size
- Two-bedroom houses, if they’re hard to sell in your market
- Weird layout (e.g., walk through bedroom to another bedroom)
- In-ground pool, if you’re buying in cooler areas
Create a marketing plan to find good deals
All of this hard work is for naught if you can’t find good deals. You want to create systems that bring you opportunities to buy deals—or leads—so you aren’t constantly chasing them down. Consider including the following elements in your marketing plan.
A real estate license provides access to the multiple listing service (MLS). If you’re unlicensed, your agent can help you set this up. Use daily filters to send listed properties straight to your email inbox.
For instance, your MLS filter might look like this:
- Within your target location
- Status of new listing, change in price, or back on the market
- List price below 70% of your top retail price
- Square footage above 1,200 sq. ft.
Send letters to local professionals telling them that you’re buying properties in any condition for cash. But don’t expect an immediate rush of results: You’re building relationships. Over the long run, 25-50% of your deals will come from these sources. Potential sources could include:
- Attorneys handling probates, divorces, foreclosures, and bankruptcies
- Property managers
- Commercial real estate brokers, who can send you their small stuff
- Residential real estate agents, who can send their ugly properties
- Financial advisors
Focused online activity can generate leads from potential sellers. Specific projects might include:
- Create a website with video and content.
- Create a good BiggerPockets profile, including target markets. Make 10-plus Forum posts per week.
- Create a Trulia and Zillow profile and answer 10-plus questions per week on their Q&A forums.
- Create a LinkedIn profile and share an interesting tip or news update per week.
Build your ant farm
Recruit your family, friends, and local contacts to be “ants” and bring morsels—or leads—back to you. Ask them to be on the lookout for vacant or rundown houses during their daily routines. If they see one, the instructions are simple: Text me the address, and I’ll do the rest.
Article by Brandon Turner for biggerpockets.com