By: Charlie N. Jones
Today, many people I know are at a crossroads regarding whether to quit their nine to five jobs or stay put because of the perceived job security it offers them. A huge percentage of this population are African Americans who wish to attain financial freedom by making the jump into real estate investing. Why? Because 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. Admittedly, it’s harder for African Americans to make a move into full time self- employment. Perhaps it just comes down to fear and insecurity of the unknown 2Despite the doubt, there’s many African American success stories of people who made the leap. Even me! (ahem).
So, If I, being a part of the minority and underprivileged African American community, could do it, so can you! Besides, wouldn’t you want to stop living from paycheck to paycheck and be financially free? That’s the life that real estate investing can give you! 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 with real estate, you have to really love doing it! Just because you’re ditching the nine to five pay check 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. There is absolutely no way you will attain financial freedom if you are stuck with huge debts for instance. The goal is to always be debt-free.
Debt will only hold you back from accumulating wealth faster. This is because you’re using income earned to pay debt instead of invest. This is money that you would have otherwise channeled into real estate investments. So, the faster you can pay debt off the more money you will have to invest. Here’s what to look at before you start pursuing real estate.
1) Credit Cards
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. This kind of debt stops you from building wealth and engaging in real estate investments. Make it a point to pay off more than the minimum amount of your credit card each month. And that’s not enough! You need to pay the credit card debt on time to build a good credit rating and save you from high interest fees.
If you’re dealing with a large credit card balance, leverage the consolidation strategy. Here, you can transfer balances to a credit card that offers a promotional 0 percent Annual Percentage Rate (APR). This will effectively buy you time to pay off the balance interest-free.
So, 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.
2) Other Debt: Mortgage and Student Loans
Apart from credit card debt, mortgage loans and student loans can also hamper your efforts of acquiring financial freedom. Though you don’t necessarily need to pay these off before beginning your real estate investment career, 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.
Dealing with Debt
Additionally, the personal finance experts advise very strongly against adding more debt onto existing debt. They also say to go slow on accumulating credit cards debt. In fact, do not apply for new loans or new credit cards! Instead, use a debit card for your purchases so that you only spend the money you have in the bank.
Another strategy I can recommend to you my fellow African American people is putting a lot of focus on paying off a single account at a time. The debt with the highest interest rate should be handled first. If you manage to pay this debt faster, you will pay fewer interest charges. You will then have more money to offset your remaining debts.
Have you ever heard of the snowball technique in paying off debt? It requires that you select the debt with the highest interest rate and paying it off first, while making the minimum required payments on other debts. When you finally pay it off, you can pay off another debt with money saved from paying the first debt and so on. The virtuous cycle will help you to continuously free up more money to make bigger monthly payments to the bigger debts. As a result, your debts will be paid off quicker than if you didn’t use this strategy.
To pay off the debts faster, you can consider cutting down on some luxuries until you are debt free. Some of these habits may seem hard to drop especially to us as African Americans. Yes, cutting down on your cable TV subscriptions and other subscriptions may not be too much fun. However, for every sacrifice there is a reward which is the living debt free! I too had to cut down on many ‘luxuries’ like eating out because the thought of being financially free was much more alluring.
Build Your Emergency Funds
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? Emergency funds will allow you to cover all the unexpected expenses without relying on high-interest credit cards or a loan.(no more debt, remember?)
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. One best practice you can rely on here is to create a high-yield savings account, exclusively for your emergency fund. Keeping the money in this savings account will not only offer you quick access but also pay a competitive yield.
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.
So, what are some more factors to consider that can help you navigate this dilemma more easily?
Is Having Flexible Work Hours Important to You?
Working at a typical 9 to 5 job means you have very little time to do anything else. However, as I have experienced first-hand, real estate investing will give you much-needed flexibility. You can work your back off during the peak season and then take a nice, relaxing vacation afterward with your family and loved ones. Think about all your kids’ birthdays that you will no longer miss, all the anniversaries that you will get to spend with your spouse, all because of more flexible work hours.
Do You Desire Income Stability?
If you require income stability, then your job represents the better alternative. It does not matter whether you are paid weekly or monthly, the fact is you know with all certainty that you will get paid. With a real estate investing gig, however, sales are not guaranteed. Many defining factors determine whether a sale is closed or not. Your client may opt not to purchase the properties you had talked about. They may also fail to get approved with a mortgage and thus make the deal go south. In addition, there is a low season, where business moves slow. If you are willing to weather the highs and lows that come with real estate investing, make the jump! However, if a stable and assured income is your preferred alternative, do not quit your day job, just yet.
Do You Love Real Estate?
Full-time real estate investors is 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.
Before immersing yourself in the world of real estate investing, there is value in knowing a thing or two about this field. The basics will help you to get started on the right foot by:
- Demystifying Real Estate Investing and Lessening Your Fear
Learning more about real estate investing will help you feel less intimidated about entering into and conquering the world of real estate investing.
- Knowing that ordinary people can succeed in this field too
You will know that you don’t need to possess any special talent or large amounts of cash to succeed in real estate investing.
- You can identify experts that can assist you in your investment strategy
You will get the enviable opportunity to assemble a team of experts who have expert knowledge and experience in real estate investing. If you are interested in investing in duplexes, you can learn from experts.
So, Where Do You Obtain All This Education?
You can start by reading books, newspapers, magazines, and online articles on real estate investing. One example of a good resource is the book called Loopholes of Real Estate by Garrett Sutton. It will give you insight into the legal and tax strategies you can use to acquire real estate investments and benefit from them. It also highlights some of the loopholes you can leverage to maximize your income and protect your real estate investments.
Real Estate Investing Strategies
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 is the process 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.
- 1) Fast entry
Getting started in real estate investing by wholesaling is generally easier than starting with other investing strategies. The wholesale process does not require a license, a college degree or learning how to fix up or remodel properties. It also involves fewer expenses and working parts. For these reasons, you are able to hit the ground running.
- 2) Simple to learn
With little research, you can easily learn the basics of wholesaling real estate including what to consider in deals and what to avoid. And, with proper guidance and knowledge, you can learn how to scale to closing multiple wholesale deals per month.
- 3) Quick results and returns
Wholesaling real estate provides the advantage of being paid faster. Holding land or engaging in new construction can take years before it pays off. Holding rentals offers cash flow every month while waiting to sell the property for larger returns. Although these are decent ways to venture into real estate investing, they don’t compare to wholesaling. That’s because wholesaling pays in days, sometimes even hours.
- 4) Location independent
You can literally wholesale real estate deals from anywhere in the world. In most situations, all you need is a laptop and phone to get a wholesale deal completed!
- 5) Volume potential
There is no limit to the number of properties that you can wholesale. Some wholesalers turn more than ten properties per month. Others wholesale several properties in a week. That’s more than most rehabbers handle.
- 6) No repairs involved
Wholesalers do not incur the cost of repairing properties because they sell houses that need repair to investors that take the risks and costs of rehabilitating properties and resell them at higher prices.
- 1) There are high chances of failing to get a buyer
Here, a wholesaler gets a property under contract which includes a date when the wholesaler should be able to find a buyer to close the deal. A buyer has to purchase the contract from the wholesaler for the wholesaler to get compensation. If the wholesaler gets the property under contract for a price that is considerably too high or seems greedy, buyers will be unwilling or even unable to make a deal.
- 2) The income from wholesaling can be unpredictable
Wholesaling is not a 9-to-5 job! There is no guaranteed check or salary as is the case in a traditional job. There are other months when you will have zero income coming in.
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, some of the most important considerations to make before jumping in head-first to your career as a full-time investor include:
- 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 properties?
- 1) You can make a quick profit
When done correctly, a real estate flip can offer you attractive profits which you can get in a very short period of time.
2) You can get to learn more about construction
House flipping gives you to different aspects of construction such as repairing, renovating or remodeling a property. In addition, you will get better insight into the costs of materials, plumbing and electrical repairs. Last but not least, you get the invaluable opportunity to know how to budget better for unexpected costs arising from activities like:
- Building permits
- Delays in delivery of materials
- Contractor disputes
- 3) Understand the local market
You get a good idea of what people are looking for in the area. A modern design may be popular in one part of the country, while a traditional design is a winner in another. This is why you must always do your research and target your renovation to your local market.
- 4) Increase your network
House flipping allows you to create many new contacts in the industry, including:
- Building inspectors
- Insurance brokers and other investors
- 1) Big Risk of Loss
The main problem with flipping a house or property is when a flip becomes a flop and you lose money. There are many factors that can contribute to money. These include including:
- Unanticipated Expenses: These includes costs from building permits and contractor delays to renovations and materials you had not budgeted for. These expenses quickly add up and eat into any potential profit.
- Tax Increases: Once you have completed renovations on the property, the city may increase your property taxes. This will affect you if you have difficulty finding a buyer and have to pay the taxes yourself.
- Holding Costs
- The longer you own the property, the more money you lose.
- 2) Stressful Work
Being a house flipper comes with its challenges. The main ones are:
- Finding the right property
- The costs involved
- Dealing with contractors
- Trying to meet your deadlines
- Finding a potential buyer
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.
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.
- 1) Ongoing Income
Owning rental property provides you with regular income, no matter where you are or what you are doing. What’s more, buying and holding real estate is a known recipe for amassing great wealth. A lot of “old money” in the U.S. and abroad was accumulated through land ownership. Despite periods of decreasing prices, land values have almost always rebounded in the long run because there is a limited supply of land.
- 2) Increase in Property Values
The longer you hold your investment property, the more likely you are to benefit from inflation. That will boost the property’s value while the amount you borrowed for the mortgage goes down as you pay it off. Suppose you were able to purchase during a buyer’s market and sell during a seller’s market. Then, there’s also real potential for a significant return on your investment.
- 3) Tax advantages
Owning a rental property has tax advantages not available to flippers. Rental property is taxed as investment income, with lower tax rates. You can also write off expenses, including repairs, maintenance or upkeep, paying a property manager, and driving to or from your property. Furthermore, you’ll pay taxes at the long-term capital gains rate should you decide to sell after owning the property for more than a year.
- 1) Vacancy Costs
Being unable to find tenants is one of the risks of owning rental property. That is true whether you do it yourself or hire a management company to do it for you. If your property sits empty for months or years, you are responsible for covering the mortgage during that period. Before investing in a buy-and-hold property, you’ll want to make sure your budget will cover one to three months of vacancy per year.
- 2) Management and Legal Issues
Long-term real estate ownership is a management-intensive endeavor that is outside the skill set of many investors. Some investors, especially first-time rental property owners, are ill-prepared or ill-equipped to deal with the responsibilities and legal issues that come with being a landlord. The process of finding quality tenants and meeting their needs can be a stressful and time-intensive undertaking. However, successful property management is necessary to ensure ongoing cash flows from one’s investment.
How to Start A Real Estate Business
- 1. 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:
- The purpose and the model for your business?
- How to raise capital for operations and acquisitions?
- Who is your target end-user is and what do they want? Where do they live?
- How do you find prospective deals and convert them to purchases?
- What is a good deal? What objective deal criteria will I stick to?
Too many beginners look for answers before they even ask the right questions. Look at the major cornerstones of a business plan as questions. This will naturally lead you to try to answer them which will build the plan of the business. When you lack good answers, go back to your educational resources or local professionals.
2. Think About Your Finances, Too
If you’re ditching your job for real estate, you’ll need to plan how you will meet your living expenses with your finances. 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.
3. Have Money Sources
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 a long time of “slow dances” with potential lenders before one or more will commit their money.
You also want to partner with someone you trust, with long-term goals that align with yours. Long-term partnerships are essential to real estate investing.
4. Build Your Team and Network
Identifying and recruiting excellent team members is key to the success of your real estate investment strategy. 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.
These individuals include:
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 contractor:
- Competency: Your contractor must be skilled in the world of construction and have expert knowledge in establishing the costs and best practices for all of the trades you will be hiring e.g. plumbers, electricians, etc. They also need to have all of the proper licenses and liability insurance
- Organizational skills: Can this person handle many moving parts without dropping the ball? Maybe they’re old school with a planner and paper or digital. Whatever the case, look for contractor who has a strong system of working and being able to balance everything they have to do.
- Honesty: Can you trust them? Do you pick up on dishonesty, even in small things? Keep a look out for these kinds of things and don’t be afraid to change your contractor until you find an honest one.
- Low overhead: With a contractor you’ll not be paying for big trucks, extra office space, or fancy staff to feed your contractor’s ego. You want lean, cut-to-the-bone overhead, so hire a reasonably priced contractor.
- 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 the 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
- Consulting on design, layout, paint colors, finishes, and other rehab
- 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 that you can have the ability to sell real estate.
There’s too many legal paper work that goes into the transaction of a home to not have this very crucial team member. Though team members can fill expertise gaps, the business of real estate transactions can be a minefield of legal problems that you don’t want to get stuck in. So hire a trusted legal counsel.
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 on 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 having a bookkeeper, eventually. Smaller investors can often get by using a program like QuickBooks to further organize accounting activities.
5. How to Know Is 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 How much do I want to make on each deal?
- 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
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 process because 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 all the said numbers.
First of all, be careful with the rehab costs and consult with your professional
contractor. This is why pre-purchase inspections are always money well-spent.
Second, be careful with the assumptions behind your After-Repair Value (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
6. 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
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.
Final Take Away
We’ve seen that real estate is an industry where everyone can be successful. If you follow the right steps and have a little courage, there’s nothing stopping you from achieving your dreams as long as it starts with believing in yourself. You are capable of anything!