IRVINE, CA—Educating yourself, using mentors to guide you and doing property due diligence are the keys to success in real estate investment, say Robert Friedman, chairman and founder, and Rick Sharga, EVP, of Auction.com. The two participated in a webinar yesterday via Rich Dad World, a coaching program that helps people achieve their goals, and discussed smart investment moves for novice and not-so-novice investors.
Friedman spoke about the mentors who helped shaped him in his young pre-career days—mostly real estate executives who guided him and taught him the basics of real estate investment, enough that he purchased his own home at age 19. Both Friedman and Sharga distinguished the different types of distressed auctions, emphasizing that there’s no substitute for walking through a property with a contractor to assess its value and value-add costs before making a bid.
“In a short-sale auction, you have 30 days before the auction to go out and look at the property,” said Sharga. “Take advantage of that. Find out the fundamentals of what you’re seeing and what properties are renting for. You may find a lot of value in secondary and tertiary markets.”
Sharga added that there are three typical mistakes new investors make when bidding on a property: getting too excited about the process and overbidding, underestimating their cost to fix up a property to make it rentable. “A lot of people guess wrong on the rental rate. You need to do research on all of those things, and if you get all those right, you’re in a good position.”
Friedman stressed that real estate investment is not rocket science, but a matter of common sense and working through the process. “The beauty of that is that everything is factual and simple. If you do your homework, real estate investment is truly a nuts-and-bolts method of making money.”
The two discussed the importance of technology in how real estate transactions are done, from the advent of Auction.com to mobile apps. “I think we’re in the middle innings of a cycle where the Internet is going to change the complexion of real estate forever. Last year, according to the National Association of Realtors, 96% of buyers included the Internet in their real estate search. Auction.com is that crossing-the-threshold website. Fundamentally, the next generation of homebuyers coming up will have grown up buying real estate online. When we do this correctly, everybody can win.”
When approaching a new property, Friedman said the first thing he asks himself is what will it stay rented for? “You want to get a positive cash flow, cover your mortgage and have cash flow to pay taxes, plus put a little in your pocket. How can I clean up the property and ultimately pay the mortgage? As properties start to appreciate, they can take capital and go buy another property—daisy-chain these properties. Then, they may start culling out properties.”
Whether your model is buy and hold (Friedman’s model) or buy, fix up and rent, both ways can yield profits. It just depends on your goals and how quickly you need to achieve them. Also, different markets work for different types of investors. “There’s a market for everybody, and you just have to find that market,” said Friedman.
Some of the best places to invest for the best upside potential, Sharga and Friedman said, are secondary and tertiary markets like the Midwest, particularly the area surrounding Detroit, Chicagoland and Indianapolis; the Southeast, including Atlanta, North and Central Florida and the Carolinas; Arizona; and the Central Valley of California, from Stockton and Modesto down to Riverside and San Bernardino. “You’re going to find a very good value, but know the locale,” said Sharga.
Mostly, the two emphasized doing your due diligence by studying the property and the market well, getting title reports, looking at lots of properties before settling on one and asking your mentors and experts (contractors, attorneys) the right questions about a property. Don’t make emotional decisions, and take your time, but be ready to act when the given the opportunity.
Sharga added that now is a good time for real estate investment. “Some people think we may be on the cusp of another big wave of foreclosures, but nothing could be further from the truth. Of the loans issued in the last three years, less than half a percent of those are in foreclosure. It’s harder to get a loan these days, but that’s because lenders are much more careful about it than they were before the financial crisis.”
Also, pay attention to economic reports, but know which ones are the most important—the local market reports. Macro trends can be determined from national reports, but what applies to one market does not necessarily apply to the one you’re considering; know the difference.