The Forbes Real Estate Council, a by-invitation only group of real estate experts, came up with some tips for first time real estate investors. Here are several of those tips for you as the real estate agent, for you as the real estate investor and for your wannabe real estate investor clients.

  1. The reality of flipping houses is different than reality TV house flipping.
    1. House flipping takes time – there is a permit approval process, engineer drawings, inspections, insurance, financing definitions (how is the deal to be structured), etc.
    2. There is a 90-day flip rule – investors have to hold the property for a minimum of 90 days.
    3. Only buy flips when the all-in cost is no more than 68% of the fair market value.
  2. Spend time at the property before you buy and spend time (lots of it) with any potential partner before you partner up.
    1. Sit in your car near the property from 6 – 9AM and from 9PM – midnight to know what’s really going on at the property and in its immediate neighborhood.
    2. A real estate partnership is like a marriage. It takes 5-15 years to really get where you all as partners want to be. Know well your potential partner before becoming a real partner.
  3. Do not expect free advice from anyone…and DO NOT give away your advice for free.
    1. Either partner up with your client in a joint venture partnership or contract with your client to make you a part owner in the business for your contributions.
    2. Having your name and expertise in the game will motivate you to make the venture “work” and become profitable.
  4. Expect that EVERYTHING will be more difficult, more time consuming and more expensive than you think.
  5. Risk-adjust your returns…be aware of these risk categories…
    1. Sponsor risk – does the person in charge know what she’s doing?
    2. Economic risk – what needs to happen to make this venture work and what is the probability that the venture will work?
    3. Structure/seismic risk – this has to do with soft story retrofitting that may mitigate earthquakes, hurricanes, whatever kinds of natural disasters.
    4. Mechanical risk – this involves electrical and HVAC issues.
    5. Vintage risk – older properties have higher operational costs unless the property was just renovated…have such higher operational costs been priced into your budget model?
  6. As always, real estate investment is all about location.
    1. Look for “spill-over” areas, not already “hot” areas. Spill over areas are just outside hot markets that mirror but don’t yet have most of the winning characteristics of hot market areas.
    2. Follow artists, writers, musicians, creative and tastemakers. They typically move into more affordable areas and make them hot areas.
    3. Look for transit systems that are being built.
    4. Look for rents that are rising.

Look for businesses such as Starbucks, Trader Joe’s, Wal-Mart, Costco, etc. that are coming into the neighborhood. These businesses wouldn’t be moving into the neighborhood if they didn’t think that neighborhood was going to take off. Use their millions of dollars of due diligence.