Can you guess what my favorite place to invest my money is? If you guessed the Internet or technology sector, you’re wrong.
It’s actually real estate. And it’s not because I dream about owning multiple homes in different cities. Nor do I care to brag to my friends how awesome my home is. The reason I love real estate is because there is a ton of emotional sellers that you can make money off.
When you can’t find emotional sellers, you can typically find someone who is in a financial jam that is looking to just wipe their hands clean.
If you are looking to invest in real estate, here are a few things I’ve learned over the years:
You can always find a deal as long as you look for it
Have you heard people say that the real estate market is turning around? Or that there is no quick money to be made in real estate anymore?
Yes, they are correct about the real estate market turning around, but that doesn’t mean you can’t make money quickly.
I recently bought a penthouse condo at the Mandarin Oriental in Las Vegas. The developer was looking to wipe his hands clean because he has been stuck with these units for one too many years.
A buddy of mine who runs a hedge fund decided to buy up a lot of the penthouses. Because he was buying in bulk, he was able to negotiate a good deal. I myself decided to go in and was able to buy a 2,160-square-foot unit at $250 a square foot.
We were able to get a good deal because banks aren’t financing units within that building due to it having less than 50% occupancy. So the sellers were looking for cash buyers. Plus, we were buying in bulk, which helped the building get closer to 50% occupancy.
Within 60 days of buying it, I now have a buyer in escrow for $356 a square foot. After paying realtor fees, I will make $175,132.80 in profit, which isn’t too bad. How was I able to make a 32% return on my money in just a few months? It’s because I had an awesome realtor.
Never work with rookie realtors
If you want to make money in real estate, you need to find a good realtor. Here are some qualities I look for:
- Realtors who are experienced and successful – these tend to be the ones who are most well connected and learn about deals before anyone else.
- Realtors who are good at math – if they can understand market trends and what is considered a bargain, you are more likely to make money. They’ll guide you and tell you what to do and what not to do.
- Realtors who won’t give you answers when they are unsure – if you push a realtor to give you an estimate on what someone is likely to sell a home for or what a unit is worth, they will probably give you an uneducated answer. But if they tell you they need to do their homework and get back to you, you are working with someone who is smart.
- Someone who is hungry – you don’t want a realtor who just takes you to all of the open houses you are interested in. You want someone who will knock on doors and look for deals that aren’t on the market yet. And trust me, there is a ton of deals that aren’t on the market yet.
Now that you know what to look for in a realtor, you need to retrain your brain when it comes to buying real estate.
Retrain your brain
Most people buy based on their emotions. That’s the last thing you want to do because emotions will cloud judgment and cause you to lose money.
If you follow the 6 rules below, you’ll be able to find a great deal and buy using logic:
- The best sellers are motivated sellers – you should only be bidding on properties that have been on the market for 6 or more months. These sellers are either really stubborn when it comes to negotiating or they will be desperate to sell.
- Views are everything – it took me roughly 60 days to have a serious buyer on my Vegas property. Sure, I am making money on it, but it would have sold faster and for a lot more money had it had a good view of the Las Vegas strip. Yes, that would have cost me more money, but I would have made a higher return on my investment. If you can, buy a property with a view because such properties are more desirable.
- Plan for the worse case scenario – I recently found a condo in San Diego that I liked because it had a great view and was on the market for a very long time. The issue was it was priced at $2,000,000, which didn’t make sense to me. Assuming I had put 25% down, my mortgage payment would have been $11,188 a month (which includes property tax, home owner dues and insurance). If I had wanted to rent that unit out, I would have realistically gotten $7,000 a month. That means I would have had a negative rental disparity, owing $4,188 a month. In essence, that would have been a bad buy because it wouldn’t have given me a positive cash flow. And you should always be cash-flow-positive with any rental property.
- Know your buyers – eventually you are going to sell. So before you buy, make sure you know to whom you could ideally sell. For example, had I bought that $2,000,000 condo I mentioned above, I would have had to target someone under 30 as it’s a place for a younger person. The issue is, not too many people under 30 could afford to buy a $2,000,000 condo, which makes it risky.
- Optimize for returns – you typically make money on the buy, never the sell. No one buys a home for more than it is worth, which means if you buy for less than property’s market value, you’ll be making money from day one. Not only should you aim for a good deal, but you should also buy in a strong market that is growing, has a ton of job openings and doesn’t have a ton of inventory.
- Schools and kitchens matter – although I don’t care what a kitchen looks like or what kind of a school district is near, other people do. Don’t take these aspects for granted because homes with these types of desirable attributes usually sell fast. Plus, homes with good school districts usually have a lower crime rate.
Now that you know how to be logical, you need to know some tricks of the trade to get the best deal.
Real estate tips and tricks
I have a few tricks up my sleeve to maximize my outcome. You can easily follow them too:
- Don’t use clean numbers – when I put offers on homes, I use random numbers. For instance, instead of placing an offer for $500,000, I will place an offer for $490,492. That number is so random, it usually makes people feel that I don’t have much more money, which typically makes them friendlier to negotiate with.
- Close fast – people who close fast tend to get the deals first. If you can, offer cash. If you want, you can always refinance later and pull out the money. Or if you can’t offer an all-cash deal, try to get pre-approved for and start working on your loan, which should help. I would also recommend that you stay away from major banks like Bank of America or Wells Fargo as they tend to take months to approve a loan versus a small mortgage company.
- Never show interest – the more interest your show, the harder they are going to be when negotiating with you. Let them know that you are looking at other properties and that if they can offer a better deal, you’ll go with them.
If you haven’t ever invested in real estate, you should consider trying it out. There is a ton of money to be made in real estate, especially over the long run. You just can’t be impatient as it is very rare that you’ll make a killing in the first year or two.
Before you buy your first property, however, make sure you really think it through. If you make a mistake and want out, you’ll lose 6% in realtor fees.