As counterpoint to my last entry, which focused more on high-level aspects of real estate investing, here are some immediate actions you can take to start learning by doing:

Know the difference between your credit report and credit score.

A credit report typically comes from one of the three large reporting agencies and lists out the various accounts you have now or have had in the past. The report also records how well you’ve kept up on your commitments to paying your debt.

On the other hand, a credit score is a proprietary score calculated by FairIsaac. Also known as a FICO score, this score is a number that is calculated for each or your credit reports and it represents your risk of non-payment. A subtle distinction that I’ll make here is that it does not represent your ability to repay a loan. The banks use your credit score, income, and existing debt service(the amount of money you are committed to paying each month) to determine the size of the loan they are willing to give you.

Banks use your FICO scores to determine your risk of non-payment, which allows them to determine your interest rate. The higher your FICO score, the lower your risk, and therefore, the lower the return the bank is willing to take on your loan. So, a higher FICO score translates into a lower interest rate for a given type of loan.

If your credit score is not yet above 700, take steps to get it there.

Find a lender

Like most people, I don’t have rich friends and relatives looking to deploy their cash into personal loans, so I try to always use a direct lender or correspondent lender. These lenders typically have the best rates and the lowest closing costs. Check quoted mortgage rates against a site like BankRate to see if you are getting a good deal.

Call some friends that own real estate and have them give you the name and number of the lender they used(assuming they had a good experience). Call a major bank in the area and speak with them about getting a mortgage. If you can, find a specific person at a local firm who you can always call directly. Ask whomever you call at smaller firms if they are a direct or correspondent lender. You’ll get some weird answers but search for the “yes, we are a correspondent lender with BankX” or “yes, we are a direct lender”.

Your lender representative is a key team member, so make sure you have someone you like and who is honest and direct. Keep in mind that you won’t really know if you like them until after your closing. A good lender representative pays attention to their clients through closing, and makes sure the deal happens. Be open and honest with your lender, you don’t want surprises three days before closing. Triple check everything your lender sends you.

Begin developing a relationship with a Realtor

Real estate is a local business, and Realtor’s are the eyes and ears of investors who aren’t investing full-time, so it is important to establish a strong relationship with a Realtor in an area where you believe you will be investing. Specifically, you want to develop a relationship with a Buyer’s Agent. Most regions have buyer’s agency these days, and although some may not, if a Realtor tells you that their state doesn’t have buyer’s agency, check on that by calling other agencies and asking them. Buyer’s agency is a wonderfully positive trend that has taken root over the past 10 years, so some agents may not be familiar with it. You usually don’t want to work with anyone unless they are working for you, so you want a Buyer’s Agent.

I don’t recommend signing any type of buyer’s agency contract, and in my opinion a good buyer’s agent won’t ask you to.

Your agent is a very important member of your investment team, so make sure they are both competent and that you like them. Check out their firm’s website, read about their background, and chat with them on the phone. Select a few Realtors to meet in person next week sometime, and chat with them about what you are looking for.

Find a Lawyer

You’ll need to have a good real estate lawyer selected to handle the closing. Referrals are a good way to go here. Again, you won’t really know if they are good until you’ve done a closing with them, but definitely visit their office before you select them.

Now get going!

Phew! We’re just hitting the tip of the iceberg here, but you’ve got plenty to do. Here are two things that you can do now that will take you less than an hour:

• Order your credit report (howto)
• Call three lenders and ask them about their rates.
• Let one lender prequalify you and tell you your credit score.

So, you want to join the ranks of the landed gentry?

That’s great! Real estate can be one of the most rewarding investments that you can make. You’ll often hear people spewing forth stories of returns in the hundreds and sometimes thousands of percent! With returns like that why doesn’t everyone invest in real estate? Good question.

There are many types of real estate investments, but the most accessible to folks just starting out is a “buy, hold/rent, and sell” type of investment. To explain why everyone is not rushing out and investing in real estate, here are some of the realities:

1. Starting to invest in real estate takes time

Real estate mechanics(what it takes to buy, hold, and sell a property) are much more involved than the mechanics of other investments like stocks and bonds. To be successful, you should really spend a lot of time learning. Modern Real Estate Practice is a nice, thick 300 page book that real estate professionals read before taking their licensing exams. I recommend that every real estate investor read it. It will save you money.

2. Real estate is a very local business

Successful investment in real estate takes local market research. Just as you should research a company before buying its stock, you should research a locality at all levels(state, city, county, sub-division, street, house) before buying real property.

3. It’s hard to make serious money without serious leverage

The power of real estate is in leverage. Leverage in real estate is just like trading stocks on margin. You get a loan and you secure it with a mortgage on the property you are buying. This loan increases the risk of your investment because you have to make monthly loan payments. At the same time the loan dramatically increases the return or loss of your investment because you have a lot less cash in the deal and therefore appreciation or depreciation have a more dramatic effect on your ROI. Understand mortgages and the mortgage system, and you will be way ahead of many other investors.

4. Real estate can be very illiquid

Real estate has real transaction costs. Where you can spend about $20.00 to buy and sell a stock. You will typically spend 3% of the loan amount to buy a residential property and up to 6% to sell one. In normal markets where real estate is not appreciating at 20% per year, it takes time to earn back these transaction costs. A rule of thumb is 3-5 years.

5. Real estate can be real time consuming

Unlike a stock, where you buy it and read about the company in the news while sipping your morning coffee, successful real estate investment takes time. The time spent doing relatively mundane tasks like finding tenants, fixing leaks, paying bills, etc., adds up. Don’t get into real estate investing without planning to spend that time.

6. Your are in control

When you invest in a stock, you are betting that the company, and sometimes more importantly, the company’s CEO and management team, is working to grow your investment. When you invest in real estate, you are hiring yourself as CEO. The responsibility is yours to make sure things like keeping a property occupied gets done. This control is what allows you to be better than all those other investors and is one reason why high returns are possible.

To sum things up, real estate is a great investment with significant
potential for high returns, it’s a great way to build wealth without
having any to start with, and it’s a a pain in the ass compared to stocks.

Real estate is a great investment for some and a horrible investment for others. If you think it might be for you, or if you don’t know which category you fall into, continue down the rabbit hole and follow your gut. Perhaps even cut your teeth on a small project or team up with friends so you all can learn without too much risk.

Lots of theory, little action. Here are some things you can do now to get started:

• Go to a local real estate website or Realtor.com and do some quick searches to determine the price range of the type of property you’d like to buy. Don’t obsess about small details, just get a feel for the different types of properties out there(2 vs. 3 bedroom), sqft, etc. From this, pick something interesting. You probably aren’t going to buy what you pick, but it will give you something real to talk about when you are speaking with vendors.
• Call a friend and schedule a date and time to drive around areas that you think might be interesting. Note down the addresses of properties that look interesting.