⚡ Get All Content for 20% Off ⚡

The 7 Tips Entrepreneurs Need to Know Before Investing in Real Estate Don't just dive in. Carefully assess your financial goals first.

By Steven Kaufman

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Why should entrepreneurs invest in the first place? The answer is: to have enough money to live on when we no longer can or wish to work. To put that money aside, however, we have to accumulate enough to offset inflation and the taxes that erode our savings. And for that purpose, real estate is an excellent solution.

Related: 4 Business Principles Learned Getting Rich in Real Estate by Age 30

The great thing about real estate is that even in a bad economy, it will usually fare better than stocks. Land, after all, is a finite resource. People need a place to live, work, shop and play -- so real estate is really just a matter of supply and demand.

What's more, real estate will continue to appreciate despite occasional slow-downs in the economy. In fact, it's proven to be the best way to create wealth, and an investor need not be a genius or a millionaire to succeed. Here are some tips, then, for entrepreneurs on getting started and succeeding in real estate investing:

1. Do -- plan your financial goals.

Before you buy that first property, or do your first analysis, determine what you expect from your investments. What are your financial goals? We often discuss the "time vs. money" concept: The more you have of one, the less you need of the other to reach your financial goals. This means that you shouldn't shy away from taking the time to understand your goals and make sure each investment is a step toward achieving them. If you are unsure exactly how to create financial goals, meeting with a financial advisor is an excellent first step.

2. Don't -- spend a fortune on books, tapes and seminars, then just put all that information on a shelf.

You absolutely do need to learn some basics before venturing into investing. So, be sure to do some studying, but don't let "buying and collecting" information become your endgame. Again, having goals in mind will make the process much more straightforward. It's easy to get so tied up in the "research" phase that you never actually take action. Instead, write down specific questions you want answered or goals you want to meet before delving into the latest book/seminar/etc.

Related: How to Live Rent-Free While Building Your Business

3. Do -- look at plenty of properties.

Don't just grab the first property you look at. Too many investors buy properties because they "look nice," or the investors don't want to put the work in to look at what's really out there. Remember, you won't be living there, so don't make your investment decision based on your personal preferences. While you shouldn't fall into the trap of analysis paralysis, make sure you are thorough in looking through properties. Give yourself a wide range of options, then narrow them down based on the criteria (goals) you have set for yourself.

4. Don't -- postpone starting your investment program because you're waiting for that perfect "unicorn" deal.

That's the flip side to number 3, of course. Plenty of beginning investors suffer from "a-better-deal-may-be-just-around-the-corner" syndrome. This can backfire in a big way, and you could potentially let a great deal slip just because you're holding out for something better. Your task may feel difficult if this is your first property, but you must realize that the "perfect deal" rarely (if ever) exists. Better to execute on a deal that meets most of your criteria than wait for another that may never come.

5. Do -- a thorough financial analysis.

Be realistic. Look at different alternatives to determine which makes the most financial sense. And never buy property at a higher price or on less attractive terms than your analysis says made sense. Be wary of sellers that try to over-estimate the value of the property through pro-forma (estimated) data. While you can certainly use a pro-forma to start the conversation, make sure you know the real numbers before closing. Look at previous years' tax returns, property-tax bills, maintenance records, etc. to get a good idea of the real income and expenses.

The most important figures you should know are:

  • Net income (income/expenses)
  • Cash flow (net income/debt financing payments)
  • Return on investment (cash flow/investment)
  • Cap rate (net income/property price)
  • Cash-on-cash return (cash flow/investment)
  • Total ROI (total return/investment)

In each case, "investment" refers to how much you invest in the property. "Debt financing" refers to any loans you may have to take out to buy the property. And "total return" refers to cash flow, equity accrual (i.e., equity gained from your tenants paying their rents), appreciation and taxes.

Once you have understood these figures, you should have enough information to determine whether or not acquiring the property fits with your financial goals.

6. Don't -- try to buy property that the seller is not motivated to sell.

If the seller is motivated to sell, you're not likely to get the price best aligned with your financial goals. So, how do you know if a seller is motivated? Look at the asking price. For example, If the property has been on the market for a year for, say, $200,000, with little-to-no price reduction, the seller is clearly not very motivated to move the property. However, if that same property has been on the market for a year and has had its price moved down considerably, the seller most likely wants to do whatever it takes to get the property off his or her hands. Of course, this raises the question of how to find motivated sellers. There are many approaches, and not all of these will work for you, depending on what property you want. But a few trusted methods include:

  • Attending open houses
  • Looking for vacant/unattractive properties that are for sale
  • Spreading the word about yourself and what properties you are looking for -- truly
  • Going the old-fashioned route and looking in the classifieds of your local paper

These are just a few ways to find sellers, but there are potentially dozens of other methods, depending on what type of property you're looking for.

7. Do -- know the difference between real estate investing and the business of real estate.

As an entrepreneur, you already have a business, and real estate investing is best used to support that business, not replace it -- unless that's your intention. In other words, don't get so caught up in executing transactions that your core business falters. If that happens, you'll be facing a bumpy road to get back to stability. Unless your business is itself real estate, or you're looking to get into the business full-time, always remember that pursuing these deals is a means to an end, not an end unto itself.

So, if you're interested in staying ahead of taxes and inflation while building security for the future, real estate investing may be for you. What are you waiting for?

Related: Detroit Is Beckoning to Tech Entrepreneurs

Steven Kaufman

Finance Enthusiast

Steven Kaufman, CPA, MsEDE, is a finance enthusiast and the founder and Chief Acceleration Officer of Zeus Trust Company, which operates a real estate crowdfunding platform under the brand ZeusCrowdFunding.com, and a long-term lending platform under the brand Zeus Mortgage Bank. Kaufman is frequently interviewed on current financial markets by local and national news organizations such as FOX, ABC, CBS, CNN and Bloomberg. He completed the Strategic Marketing Management Program at Harvard Business School and has a master's degree in economic development and entrepreneurship from the University of Houston.

 

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

The Remote Side Hustle a 43-Year-Old Musician Works on for 1 Hour a Day Earns Nearly $3,000 a Month: 'All From the Comfort of Home'

Sam Ziegler wanted to supplement his income as a professional drummer — then his tech skills and desire to help people came together.

Leadership

Former Interrogator Shares 5 Behaviors Liars Exhibit and How to Handle Them

Five deceptive behaviors to look for and how to respond to those behaviors when you encounter them.

Business News

AI Is Impacting Jobs. Here Are the Gigs Affected the Most, According to an Analysis of 5 Million Upwork Postings

The researcher said in the report that freelance jobs were analyzed first because that market will likely see AI's immediate impact.

Marketing

Ever Wonder Why Certain Websites Rank Higher Than Yours? This SEO Expert Reveals The Secret to Dominating Search Results

It's often the smart use of SEO, now supercharged with AI, particularly in keyword optimization.

Business Ideas

55 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.