Insider Secrets for Starting a Successful Business

Starting a Real Estate Investing Business

Matthew Sorensen, author of The Creative Real Estate System, reveals his tips about how to get started in real estate investing. He walks us step-by-step through many different profitable real estate investment techniques and shows us which properties to buy (and which ones to avoid), and how to profit. [28 min.]

Tell us a little bit about yourself and how you got started in real estate investing.

It’s kind of funny how I started in this. I’ve always had an entrepreneurial type of mindset; I’ve always wanted to do more. But I ended up getting somewhat of an education in an industry and started working for a company that was a startup — that, personally, would have been my dream job before I got it, and then after I got that, I realized, you know what? I’m not going to be able to do this kind of thing the rest of my life, I’ve got to do something else. I lived in a one-bedroom apartment and had two kids. I don’t even know how my wife stayed with me, I mean, we were in there for like a year and a half, it was pretty crazy looking back at it. I had a brother-in-law that wanted to get involved in the same things, and got interested in real estate and got some training, and we started working together and started working with him to learn the ropes of the business. It made the most sense — it’s one of those things that’s not going away, there are so many different options with it, everything’s already there to work with, and most people, that’s how they made their money, people that had a lot of wealth. I started doing that and I did it part-time until I got comfortable and started really bringing in money, and then I left and kind of started doing that—I wouldn’t say fulltime—but I did that instead of working at a job and I haven’t looked back. That’s how I got into the business, and I’ve had a lot of experience along the way with other investors and other people that have gone through trainings, too, so I’ve seen both sides of the picture now.

How do you go about making money in this business? Walk me through what you would do to find a property, evaluate it, and decide if it’s worth buying. How does the whole process work?

There’s lots of ways to find good properties, especially now. Real estate is cyclical, it always has been. We’ll have a flux of motivated sellers and then we’ll have a flux of motivated buyers, and we just work the business differently based on what’s happening. A lot of the strategies really do depend on being in an appreciating market to make money, and that’s why a lot of people have lost their shorts, because they were essentially speculating, not investing, not making calculated business decisions like they should be doing in the first place. So when we go through and we’re looking for properties, it depends on what kind of strategy you’re looking at doing. Some of the best strategies for flat and soft markets, like we’re in, are things such as wholesaling or flipping contracts or you can also do things with lease options and seller financing, subject to financing. Of course, there are a lot of cash flow opportunities, especially now, we’re starting to see those again, where even buying and holding works, too. It kind of depends on the strategy you want to focus on, and then you just crunch the numbers and make sure they work before you actually go through with the transaction. As long as you get in right, it makes all the difference.

What kind of person should think about getting into real estate investing?

It’s not for everyone, but like I said, there is a reason that the majority of wealthy people do invest in real estate. First of all, do you have an entrepreneurial spirit — you want to take control of your time, your finances, write your own paycheck — because it does take some motivation to get out and do anything when you’re starting a business, it doesn’t matter what it is. What are you interested in, quicker profits, cash flow or long-term stability, those are some of the advantages of real estate. No matter where you’re at, there’s a way to be able to come in and start doing it. If you enjoy helping people, you take the mindset of just helping people, and it makes it a lot more rewarding. You don’t have to worry about trying to swindle anybody or trying to negotiate something that isn’t good for somebody. We’re looking to create win-win situations. There are a lot of people that need help — especially now — and there’s a lot of things we can do to help. Lastly, you do have to have some of the basics. If you’re living in a box underneath the bridge, yeah, technically you can still do real estate, but you do want to have at least some Internet access and phone will make a huge difference, and some transportation. Those things are a given with any business. But bottom line is motivation. If you’ve got motivation, then you can do it.

Is this something that you can start out part-time and keep your regular job, or is it going to demand 80 or 100 hours a week in order to find the good deals and profit?

I don’t invest full-time. I don’t need to to make what I need to make. And actually, starting out, that’s what I did. Yes, there are people that just kind of jump out there, but it’s a numbers game. So however much you start working out there to start building, and a lot of this is through networking, so we’re doing a lot smarter things, not some of the more nitty-gritty things that take up more time. Working smarter, not harder. You know, really, full-time, as an investor, it doesn’t need to be more than 15 hours a week. When you are starting out, and depending on what your goals are, you will want to spend more time in a lot of cases, especially starting out and establishing yourself, but again, when you are working at a job and you have some flexibility, then obviously you can spend a lot less time, too. I look at how much time I’d spend in comparison to what I was working, hours, you can’t even compare the two. When you look and you get a deal that factor in, by the time I spent, probably 11 or 12 hours on this, and made $80,000 dollars, how does that compare to a job? And a lot of people do kind of have that mindset. I’ve worked with people that were so concerned about keeping their occupation, that they weren’t just spending a few hours just to move things. Part of it came down to motivation, but if you have it, it’s just the best place to move quickly.

It seems like most of the wealthy people in the world, from the Donald Trump’s on down to the neighbors that are millionaires in your own town, it seems like they are all real estate investors to some degree or another. What makes real estate investing such a great wealth builder?

First off, it’s not going away. Everybody needs a place to live. It’s also one of the easiest ways to obtain funds for leveraging. A lot easier than any kind of traditional business. Because of the nature of the business, there are a lot of creative things you can do, and there are a lot of people that don’t know how to do that. Also, the product is already there, so you don’t need to create anything, you don’t have any learning curves to have to try and develop something and market it. It’s already a need that’s out there, you just need to learn how to profit from it. The other thing is there are so many different strategies that you can take advantage of at most any stage. If you’re starting out, you’re going to do be doing more quick cash, no money down types of strategies. And of course, you can do cash flow strategies. There’s lots of ways to do that, too, with little money or no money out of pocket, and then of course long term growth, because of the tax incentives with it. So you’ll see a lot of people, wealthy people, that continue to diversify and do more because it’s a great way to do that. Buy and hold strategies aren’t always the best especially when you have things that happen, where the market is corrected a lot, which it should have with the kind of appreciation we had, but there are so many different ways to make money within real estate, especially for quick cash and cash flowing and doing these creative things, particularly now.

I’ve heard terms like flipping and wholesale real estate, lease options, assignments, certainly watched shows on TV about flipping houses. Looks like easy money but I’m sure there’s a lot more to it. Talk about the different types of real estate investing strategies people are using and what you recommend.

You know, it’s funny, there’s a lot of people that talk about a lot of the different strategies. There are different terms for flipping, like Flip That House, where you see these people that would buy these houses, and they would be trashed and they’re fixing them up, basically renovating them and turning around and quickly selling them, and people term that as flipping, and it can be. We usually refer to that as rehabbing, because you’re rehabbing a property, and there is more risk involved in that, particularly if you’re in a market, and you need to make sure you do your research right, where you’re buying and holding, even for a short period of time. If you’re in a market that’s depreciating or is flat, you need to know how to factor that in. It’s not difficult, but you just need to do that. One of the things that we recommend is more flipping contracts or wholesaling where instead of actually buying properties, and this is a no-money-down type of a strategy, getting properties under contract, and assign it to another end buyer or another investor that’s going to want to have that property to rehab it or cash flow it. Working with other investors, there’s a lot of investors that are looking for cash flow properties. That’s what they know how to do. It’s a traditional mindset, so there’s a lot of advantages to being able to do that, because it’s good for you. You make money at closing or finder’s fees sometimes upfront, and they make money because they’ve got this property with equity that they can cash flow. There’s also lease options which is another strategy that’s a lot smarter in a lot of cases than renting, for getting more cash flow and being able to get better renters and buyers in the homes and being able to sell them for more, too. That’s a good strategy for this type of market, especially for properties that you already have. And there are also ways to do that on properties that you don’t have, which is called “sandwich lease options.” Also, subject to and seller financing, these are some other strategies as well that you can use. Instead of going to a bank, you can finance with the seller that you’re buying from, so that they’re able to make a little bit of a cash flow, you’re able to get out of the property if you need to, and then you’re able to turn around and do different things with the property without having to risk your own money and having to go qualify with the bank. Those are more of the strategies that we focus on, because they’re better for a market that’s flat or depreciating.

Real estate investors always seem to be looking for motivated sellers and motivated buyers. What makes people motivated to sell or buy? How do you find those motivated buyers and sellers?

Three or four years ago, that was the big question and still a lot of people push that. How to find motivated sellers. Well, that was the issue a few years ago because people weren’t motivated to sell because real estate was going through the roof and why would they want to sell? The fact of the matter is, no matter what cycle or climate the market is in, really it comes down to people’s problems. It could be divorce, moving, job transfer, losing a job, now we’re finding that we don’t have an issue finding a motivated seller, we’re working on finding better buyers and then we only go after the best deals and we let the okay deals go because we can get better deals for a lot better price than we could a few years ago, so we just kind of adjust to what the market is doing. And there are a lot of ways to find motivated sellers and buyers. Now there are so many online tools that we can use. Of course there are the traditional things like classified ads and MLS listings and things like that, but we do a lot of things with networking property management companies, title companies, going to more productive areas. City code enforcement, inspections, insurance companies, targeting landlords, going through those in default, of course. There’s the foreclosure auctions and REOs, and estate owners, a lot of different avenues for networking with other investors and things of that nature. Of course, Internet forums — you really want to focus on four or five that are most effective for you and outsource other ones. Part of it is being creative and the other part is using what’s going to make the most sense with where you’re at.

Talk about your secrets for structuring real estate deals correctly. What are some important things to keep in mind?

One of the biggest problems that people have is they didn’t get into their deal right, or they got into it for the wrong reason, based on speculation and anticipating appreciation, things that are out of their control. Investors that have got hurt badly were anticipating appreciation, they’re all looking at the market climate and things like that, and other people were affected too, but there are a lot of things to do to curb that, especially now, when you understand and we show you how to look at the market and what it’s doing so that you can anticipate what you pay for properties. Number one rule of thumb is you’ve got to make sure the numbers work for what you’re planning on doing, and you have got to make sure you have a way out, have escape clauses, so if the deal wasn’t what you expected of it, you did your research, you have a way to walk away from it. One of the big things, as far as structuring goes, is looking at actual values and not appraised values. This is a problem that I see a lot of people run into. They’ll find a property and the person will be like, yeah, this property is appraised for $300,000 but they’re willing to sell it for $180,000 so then they go and buy it, and they find out that after they bought it, that even though it was appraised for that much, houses in the area are selling for $170,000 so now they’ve got this property that they just didn’t do their due diligence, so when we’re looking at properties, we will compare apples to apples. We will go through, not comparables to what’s listed but what’s sold. So we want to go off actually what properties sold for that are similar to the ones we are looking at. That’s a number one factor. We also look at, are there repairs or other things that need to be taken care of for it to be at the value that we can sell it for. We can still buy properties in a depreciation market, we just need to make sure we factor that into our offer. For soft markets, we don’t like to pay more than 65% of what the actual value of the property is, and that includes repairs. So for example, just for simple math, let’s say you had a property that was worth $100,000. You look up the comps for other properties, you did your research, and ones like it are selling for $100,000, we don’t want to pick that up for more than 65 cents on the dollar, so $65,000. We’ll also want to factor in any repairs that might be needed, and depending on the market, we’ll want to factor in the time in the market if we are actually going to be holding it. By doing that, it gives you a lot more flexibility with being able to turn that to other investors, because that’s what most of our money lenders require as well, so it’s just a way to make sure you have a majority of the options to your advantage. Some people that aren’t familiar with real estate might say, oh it’s hard to find properties for that low value, but I’m not getting that as much anymore, because as of late, we can get properties for less than 50 cents on the dollar and more so, in some cases. So the nice thing is is we have a lot of room to get properties at great deals, and some of these, you’ll pick them up and it makes more sense for you to keep them in cash flow then to turn them around and turn them onto another investor, but the important thing is getting in right so that you have the option to get out and have the most exits at your disposal.

You talked about several different types of real estate investing strategies. How do you know which one should apply to the deal you’re planning to do?

Part of it has to do with what your goal is. If you’re starting out and you’re looking for just generating some quick cash, then we’ll probably look at doing something like flipping it to another investor or assigning a contract. On the other hand, if you’re looking at developing some long-term cash flow, then doing something like seller financing or a lease option or even a sandwich lease option is a good way to go, too. Some of it also depends on the person that you’re working with. If you’re working with a person and they’re looking to move, they’re upside down, of course, negotiating, doing a short sale, depending on the circumstances, and someone that maybe not be in a bad position but they’ve got a loan that’s already in place, they need to move, you can do seller financing with fees, and also, when you build your buyers list, people that you’re going to be working with, which is something that will naturally happen as you get into doing this, you’ll find people that are looking for certain kinds of properties. So when you find a property that fits what somebody is looking for, then you’ve already got your game plan in place, you can turn around to them and it’s a real smooth process, most of the time, and we cover bases to make sure it is. So it kind of depends on the circumstances and what your goals are, what you’re looking to do. And the other factor is the person’s circumstance, what’s going to be best for them, and does it make sense for both of you, because it does need to be a win-win for everybody involved, bottom line.

So you found a great property that you want to purchase, but what if you can’t get the money to buy it? Are you out of luck, or what are some ways to finance the property if your local bank turns you down? Do you have options like seller financing and FHA loans and that sort of thing?

For a majority of people, that’s what they’ll do. They’ll go to the bank and they’ll try to get a loan. And there’s nothing wrong with that, per se, other than you are very limited. A few years ago, you could get away with doing 20/80s when they had real liberal lending, but with banks now, they’re not doing that. You’re going to have to have a down payment, you’re going to have to qualify, show proof of income and they’re tightening up like they should have been doing all along, so you do want to look at more creative options. And the fact is, is that even if you do have money to work with, you’re better off using somebody else’s, because if you’re working with banks, you’re eventually going to run out. The way a loan shows on investment properties is, each property loan unless you’re getting a substantial cash flow out of it, will start working against your debt to income ratio. So there are different stipulations with that. So you’re better off, even if you’ve got money to work with, you know, being creative or selling a contract, for example, it doesn’t cost anything to get the property under contract, then you’re able to assign it to another person that will pick that up and they’ll take that. Their goal may be to cash flow that, turn around and sell it. They’ll probably make more profit, but you’ll get that assignment fee, and you don’t have the risk. With some of the things with seller financing, being able to arrange with sellers, you have the ability to renegotiate whatever terms are going to work for both of you. You’ve also got private lenders, there are also some of these options like subject to financing, seller financing, mortgage brokers even still have connections for being able to do things as well. Equity as collateral, former businesses, IRAs, 401ks, bartering, trading services, and a combination of some of these strategies work as well. So if you’re looking at actually buying a property and holding it, then you’ll be looking at some of these other options as opposed to a bank, but again, you also have the strategies that you’re not actually taking ownership of the property, you don’t have to worry about getting a loan or having to come up with the money or the down payment to do that, so it’s a matter of just being a little more creative, but there are a lot of options, any way you do it.

Everyone in real estate says, make sure you do your due diligence. What is due diligence and what does it involve when it comes to real estate investing?

Basically, just doing your homework on the property before you buy it. A normal standard real estate contract, that’s what you’re supposed to do, your due diligence, meaning just your homework. Make sure there’s not anything’s you don’t know about the property that could be issues. You’d hate to get a property under contract that seems like a great deal, and then buy it and then find out its filled with rats and termites and you’re stuck with it. And here’s something to kind of keep in mind, too. We’ll do quick research, and once you start doing this, you’ll get an idea pretty quickly of what values are in your area, so you can move pretty quickly on things and you know right away. It’s important to understand that, yeah, there are deals out there, and you think, if nobody’s taken it yet, if it’s a good deal, it will go quickly, right? That’s usually the case. But one of the things that we do with our contracts is making sure that we make risk-free offers. We’ll get a property under contract, then do our due diligence. Then take the extra time it takes to make sure it’s exactly what we think it is, and if we go to inspect the property and we find out it has other issues, then we go back to the seller and say, well, you hadn’t disclosed these issues. These are things that we need to factor in and go back and negotiate, otherwise, don’t do the deal if it doesn’t work. So it’s kind of the attitude of take it and then do your due diligence. And what we do, we just make sure we put clauses in our agreements to make sure we have our outs, so in case the deal isn’t what we thought it was, we have a way out. We’re not bound and having to follow through with that deal. It’s just good business to make sure you’re not jumping into anything that’s not smart. And that’s standard with real estate. It’s just doing your research, doing your homework, making sure that it’s the deal you thought it was initially, before you actually purchase it.

Are there good websites or other online resources such as forums or trade associations that people getting into real estate investing would find useful or maybe software or other types of things that people could use to research properties or determine cash flow and that sort of thing?

Yeah, sure! Some of the things that are probably good, even in initial research, Zillow.com is a great site. We don’t go off comparables off of Zillow in and of itself, but the resources that they have are great there, and they have all the resources with how they have it set up. It’s a really good tool for investors to be able to use. We also use a lot of different sites for comparables. There’s a lot of ways to do that with different services as an investor. Some websites are good for that. There’s a free one for sold comparables which is called RealEstateABC.com and they will give you some initial sold comparables, so when you’re researching properties, those are some good tools to start with. Also, being able to network with local investors is particularly important. Finding some local clubs. There’s a good site called National Real Estate Investors Association, and it’s a non-profit for finding local real estate clubs and associations. And you’ll want to network with people locally and other investors. It’s important to understand that a lot of the best people you work with are investors, they understand the business, and a lot of these people are doing traditional methods. And so it’s great when you come in and you start to do some of the wholesaling and things because it’s good for everybody involved. Another site I like is Mortgage News Daily, and that’s a news source that kind of gives a nice overall thermostat of the national market statistics and things kind of happening in the banking industry. There’s a good forum that I found helpful which is BiggerPockets.com, and it’s a good forum for real estate investors, too. Those are some things that should hopefully be helpful for people.

When you buy a property, how do you know whether you should rent it out or turn around and sell it?

The main thing I’ll look at is just deciding if it’s worth it for me to hold onto it, or if it’s better for me to actually turn it around and sell it for a quick profit. Part of the factors will be in the demand. If I can make more cash flow by keeping it as a rental or lease option, than turning it around quickly, then I’ll do that. And you’ll just kind of do your research to see what comparable rents are. If you can rent the property for more than you’re making in monthly cash flow, then it makes sense. Also if you get it at such a good steal, it makes more sense to hold onto it and cash flow it and keep it and have that equity there. Those are the two factors that I look at. And I don’t normally do just traditional rentals, I do more lease options, just because with the lease options, it’s a way to get somebody in the home that’s a renter but they have a vested interest in actually being able to purchase the home. They’re leasing it with an option to buy. And so we can charge more for monthly rent, and we can also have them do a down payment as kind of a security deposit to secure their option to buy, and they’re in the house not only with a vested interest but they’re a lot better than renters, and we can offer incentives for that too, having part of the monthly rent go towards the purchase price. So that’s normally what I’ll do as opposed to just renting. But the two factors I look at with renting are, okay, can I make more cash flow, and do I have a lot more equity in it where I’d rather hold onto it than turn around and sell it. Or if I’d rather not go that route and just turn around and I already have a buyer in place that wants to buy the property, then I’ll turn around and get an assignment fee that way. Most of the time it just depends on what numbers make more sense. But a lot of time, turning around a property quickly and then get the cash without having to actually buy and hold, it’s a nice strategy to do because of quick cash and you also have the ability to then cash flow and do other things with it.

It seems like there’s a dozen real estate gurus on late night infomercials telling people how easy it is to make a buck in real estate investing. How are you supposed to compete with all the other people out there trying to basically strike it rich in real estate?

Well, it’s actually funny that you say that. After having quite a bit of success in the business, and I’ve been through some different training and things like that, so I know that side. I actually did work with these large organizations and some of their training and seminars and things. I didn’t actually spend a lot of time, only about eight months, but one of the things that I found which was frustrating is that you would have people that would come up and they’d spent thousands of dollars on training and they were asking the same questions on how to do things. They weren’t really getting what they needed. Probably the information was there, but it wasn’t put in a way where they were able to use it. And this is something that I found over the last few years particularly is yeah, there’s a lot of companies out there doing different things, but especially the bigger companies, they’re still teaching strategies that are kind of outdated. Unfortunately, it’s kind of like the dinosaur mentality. The bigger organizations take a lot longer to move, and they’ll still be selling material that’s kind of outdated, and when you’ve got a market changing like it has over the last year, there are changes and they’re actually giving people materials that are from literally fifteen years ago, twenty years ago, and they haven’t updated it. So there are a lot of people, even if they get the training from one of those organizations, a lot of the stuff, quite frankly, is outdated. Some of the principles apply, but there are things that have changed. And you need to account for that. You need to make sure that there are certain things that you’re putting in your contract to protect yourself now, especially now, with the mortgage meltdown. There are a lot of people still trying the old strategies.

When people get started with real estate investing, what are some of the biggest mistakes you see them making?

Well, the first one, we kind of talked about, is not getting into the deal right. You know, overpaying and they don’t do enough due diligence or homework. You want to give yourself the most flexibility to get into the deal, so that once you have it, you’re not stuck with it. A lot of people will kind of jump the gun, they’ll do their research before they actually get the property under contract, and then they won’t really do as much after, and by that time, it’s too late. Once you’ve already purchased the property, you’re kind of stuck with what you got in at. So we just make sure that we get in at the right price, and if it doesn’t work for us in the beginning, we don’t take it. The market now, with the re-stabilizing and things, we don’t have to worry about letting okay deals go. There are a lot of good deals. So we only have to take the ones that really work and just let the other ones go. So number one is just getting into the deal right, and then of course, finding your exit, knowing why you’re getting in and then work for whatever you actually plan on doing. And if you get in at the right price, and you can do many exits, it’s just a matter of making sure you’re getting in right. One of the problems that investors face is they try to use the wrong strategy in the wrong market. And some of that does come if you’re using principles that applied in a depreciating market, you’re not going to get the results that you need. This is actually a bigger problem for people is they’re following things that don’t work for the market they’re in. So if you’re only focusing on one single strategy, that strategy won’t work unless the market that you’re in supports it. One of the strategies we discussed was wholesaling which requires more equity, requires being able to get in at a lot of a discount so you can also sell it to another investor, and if you’re searching for wholesale properties where homes are less than five years old, there’s not going to be much equity in these. You’re better off being able to go to places where there is more equity already built in and you can just jump on them quicker. So the fundamentals need to be there, and if the area you’re working in doesn’t meet those, your results are not going to be good. And number three is just trying to do everything yourself. And I’m guilty, too. There’s things that I think I’ve spent too much time trying to do on my own, and then afterwards realize wow, that was a waste of time. And I mean, it’s a mentality with us, we do that. A lot of people make the mistake of trying to do it alone, and unfortunately, if you’re doing it alone with whatever industry it is, it’s always statistically proven that you’re going to fail. So we’ve got to work smarter, not harder. And the only way to do that is to use the resources of the people around us. One of the things that we do is build a power team which is basically experts around us: a real estate agent, mortgage brokers, attorney, and rehab crew, depending on what we’re doing, someone to train us, a mentor, trainers. Getting these professionals around us that are going to help us do it. Why figure it out on our own when we don’t have to? And every profession, whether it’s an agent, attorney, appraiser, I mean, they make their money through different methods but their fees are really minimal for what we make as investors, and so use people around you, use the resources around you, don’t try and do it on your own. And if you don’t, you’re just going to burn yourself out. And lastly, I would say just motivation, which I talked about in the beginning. What is your motivation behind doing it? What’s your ultimate goal? What’s your objective or your dreams? What’s driving you to do this? We don’t become involved in real estate just because we like to buy or sell houses. It’s just a vehicle. So whatever it is, whether it’s to free up your time, further aspirations, travel, it could be charities, you need to have some type of bigger drive other than money that’s going to motivate you. And that applies for anything. It doesn’t just apply to real estate. Any business, you’ve got to have that kind of focus. Because once you come up on roadblocks, you want to make sure that your motivation is bigger than that so that it doesn’t discourage you and you get up and keep going. And that’s probably one of the biggest keys for people, just doing that. And if you can do that and take action, you know, get out and start doing it. Of course you want to have the right systems, know what you’re doing and things are in place and you know what the next steps are to take, but when you have the motivation, it makes it all work.

Matt Sorenson is the author of The Creative Real Estate System: Proven Tools to Profit from Today’s Real Estate.