We have all watched reality shows like Flip or Flop, where investors go into a dirty, run down house and buy it for pennies on the dollar. Then, after spending just a few weeks working on the home to remodel it, they sell it for a huge profit. In some cases, the profit is in the millions. However, most of these shows are overly dramatized and faked.
It is easy to watch these shows and think “I could do that.” The idea of making millions for a few weeks of work and with a relatively small up front investment appeals to almost everyone. However, there are a few catches the shows fail to highlight in their 45 minute long episode
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Watching an episode of one of these shows and thinking you know enough to try it on your own would be the equivalent of watching the World Poker Tour on TV and then attempting to win a high stakes game at a table in Vegas using only that knowledge. You would learn very quickly there is no camera allowing you to see what cards the other players are holding in their hands.
Tips To Become A Successful Real Estate Investor
Just as you would not walk blindly into a poker tournament risking a large investment, you cannot jump into a real estate investment blindly either.
Brad Hovis, author of Rollover to Retire, is a real estate investor who has mastered the art of investing in properties that provide constant passive income. He has three very important tips for prospective investors that could mean the difference between bankruptcy and financial freedom.
The first thing Brad notes about real estate investing is that it is important to do it in a debt free scenario. Being in debt on an investment property is a risk you do not need or want to take.
So how do you invest without going into debt if you do not personally have the capital? This is where Brad says “you have to know your role.” There are two roles in investing, he claims. The blue collar role and the white collar role are equally important, but if you want to be successful as an investor, you must know which role you should take.
The blue collar role is the person who can spot potential investment properties, and know enough about remodeling and flipping them to understand the cost associated with making them profitable. This person would be able to complete basic remodeling tasks, or have contractors on tap who can complete them in a timely manner.
The white collar role would be the person who has enough capital to purchase and pay for the renovations on an investment property. The white collar partner in an investment venture may not know exactly what home renovations need to be done, or even how much they will cost, but they have the ability to cover those costs.
Brad stresses the importance of avoiding bank loans to complete an investment. If the investment does not immediately turn a profit, a physical human partner is much easier to deal with than a bank when it comes to the capital involved. By utilizing a partner who has the funding to invest, you eliminate the need for personal debt.
One of the tips Brad offers potential investors is that it is possible to be the white collar partner in an investing venture by using retirement funds to invest in real estate. A typical 401K account only yields about a 5-8% return each year in growth, according to Smart Asset.
However, an investment property can offer a much higher percentage rate on the return in a much shorter time. Flipper Force says that a real estate investor should aim for at least a 10 to 20% return when investing in a property. Typical renovations on homes like this should take less than 4 months.
That means that an active flipper in a hot market can turn at least two or three properties per year. This equates to a much higher rate of return on money you already have invested.
One key point to remember is that passive income is king. Being able to flip a house for a relatively fast profit is handy for a young investor. However, as we age we tend to want to spend less time working and more time enjoying our life.
Active income is the money we earn by completing a task. For most of the world that involves working for someone else or owning a small business. Passive income is created when you find a way to yield profits without actively having to be involved in the production of those profits.
Investing in rental properties is a great way to build passive income. However, the keys to success remain the same. You must do it in a debt free environment. So, if you are not yet at the point of being a white collar partner, you need to find an investor who has the capital.
The third, and probably most important tip Hovis has to offer is that “you have to keep emotions out of the deal.” He says emotions are not your friend when investing in real estate and all investments need to be looked at with an eye for profit.
Basically, if you want to be successful in real estate investing, follow these three guidelines. First, stay debt free in your investment. Second, know which role applies to you and be good at it. Third, keep your emotions out of the deal and approach the venture logically and armed with good accounting skills. Following these tips can make anyone successful and ignoring them can bankrupt any unwary investor.