Real estate is one of the largest asset classes and is typically associated with names like Rockefeller and Warren Buffett. Overall, real estate can be an incredible investment opportunity (which carries certain risks) that allows entrepreneurs to leverage more money via a mortgage, add a lot of value as an owner and potentially have stable passive income. This is why many billionaires have active real estate investment holdings.
While real estate can be a great area to invest in, there are a number of things beginners should be aware of to avoid simple mistakes and hedge potential risks. I recently spoke with Zamir Kazi, who grew less than $50,000 into a real estate portfolio of over 400 properties in 3 years. During his rapid growth as a real estate entrepreneur, he made many mistakes and learned a plethora of lessons. These are the top tips he has for any entrepreneur looking to get into real estate.
1. Markets perform differently in different places.
Investing in Boston will be different from investing in Detroit. Everywhere you go, the real estate market has a unique selection of buyers, so you need to make sure you fully understand a market before entering it.
First, trust your background and invest in markets you already understand, such as your hometown. This means you already have the socioeconomic information to evaluate properties.
Second, look at how different cities are changing over time. San Francisco, New York and Los Angeles have seen consistent growth in prices, while Dallas and Las Vegas typically see mean-reverting prices. These differences are due to the rate of construction and change in socioeconomic factors.
2. Pay attention to key metrics.
Some of the most important metrics to keep an eye on are the vacancy rate and construction rate for your market. Typically, when prices go up, there is more construction since it is profitable. However, if these houses do not sell and the vacancy rate for the market goes up, then the prices will likely drop. If they do not, the market may be in bubble territory, indicating there's a crash ahead.
The vacancy rate and construction rate, among other metrics, were clear signs of the 2008 housing crisis. They were red flags indicating it was not smart to keep investments in real estate. Other red flags to look for are the average income and average debt of markets. With the rise of high-paying tech and finance jobs and a generation of buyers with above-average student debt, ability to afford house prices can be a strong predictor of whether price growth is justifiable.
3. Learn what things cost.
Real estate investment is mostly about the value added to the house during the project, but this value has a cost. Great real estate investors can look at a property and tell you how much it needs in repairs and which of those repairs will lead to a positive return on investment. Over time, Kazi realized that he'd overpaid his first few contractors and their work was not up to snuff.
4. Build a killer team.
You should immediately find a mentor to help guide you through the specific type of real estate investing you want to do in the market you have chosen. People in real estate are usually friendly and willing to help those starting out, so just reach out to active real estate investors in your area. Once you have a mentor, you will need to find a strong realtor and broker. These people will help you find quality properties and enable you to execute deals promptly.
Finally, you will need to find a construction crew that is competent, versatile, quick and fairly priced. These are inherently subjective traits, so you need to take the time to learn about what makes a good construction crew and ask around for recommendations in your area. When you find a crew, ask for referrals to past clients and look at some of their previous jobs. This will save you a fortune and will help speed up your investments.
People will always need houses and offices. For that reason, real estate will always be an incredible opportunity to make money. Even with a small amount of cash up front, a mortgage can help you start investing in property and growing your real estate portfolio.