In this article, I will explain the basics of exactly what's needed in preparing and investing in real estate. Just for some clarification, and when I mean investing in real estate, I'm not talking about wholesaling or property flipping.
I'm talking about actually owning a property as an investment, where you then get a tenant -- who pays your mortgage down -- in it while hopefully still providing a little profit on top of that long-term. 15-30 years from now, you will end up owning that property outright. You will own it free and clear. With that, you can start making a lot of rental income, and you can pretty much just chill and do whatever you want with your money.
Step 1: BUILD YOUR CREDIT
You need a good credit score because lenders look at that anytime they determine what sort of loan they will give you and in what interest. The higher the score, the lower the interest rate you pay, which means you get more money in your pocket every month.
Step 2: SAVE YOUR MONEY
The reality is that you can't invest in real estate with no money down, no income, no credit…it just doesn't happen. Those are unicorn anomaly deals that I have never seen firsthand in 2 years of doing real estate. And probably 999 out of a thousand deals out there, you will need to put down anywhere between 5% and 20% of the purchase price, have the income to get the loan, and have the credit score to get the loan at a reasonable interest rate.
So this means that to save money, not only will you be required to live somewhat frugally so you don't spend everything you make, but you will need to make money off it. I know this sounds like common sense, but trust me, I get messages every day from people asking how they can invest in real estate with no money down, no credit, or no job and how they can go about it. But my everyday answer to them is that it doesn't exist! You will need to go and make money to then invest.
In terms of making money, it's really up to you to decide how you want to go about that. Maybe you want to take the steady 9-5 job and then get the guaranteed paycheck every other week, just so you could be able to qualify for a loan. There's absolutely nothing wrong with that. You can also choose to start your own business and then make a little more money to speed up the process. The choice is really up to you as long as you can save money.
Step 3: SHOW YOUR INCOME ON A TAX RETURN
You can't just have one great month on Shopify and expect to use that income as a down payment and then invest in real estate just a few months later. Lenders want to see a consistent, stable long-term source of income before they end up giving you a loan. This prevents people from getting a loan based on just a few phenomenal months that are unlikely to happen and avoid high-risk borrowers that might not make the payments after a few months and then default after the first year.
Hence, you will need to show proof of income on the last 1-2 years of your tax returns. For me, because I'm self-employed, they look at my previous 2 years of tax returns, they take the average of the income between those two years and base my loan on it.
Now for salary employees, banks will often look at the last year of your tax returns and often the last 6 months of your bank statements and then base your loan off that. And most importantly, when you're showing income on a tax return, do not go too heavy with tax write-offs because lenders often look at your net income after all of your expenses.
Step 4: GET PRE-QUALIFIED
This is such an important step, and this step will save you from a lot of disappointment. Here's what happens to people who don't get pre-qualified: when they finally find the perfect spot, they fall in love with it, but it's slightly outside what they can afford. Then everything else they see after that, they compare it to that one deal that's more expensive and of a higher price point that they couldn't afford.
Every deal in comparison to that just looks like crap, so save yourself the headache, the frustration, and wasted time by just speaking to a lender first. It's as easy as going to a few different banks, having them run your credit, giving them your tax returns, bank statements, and everything else they need…and they will pre-approve you for a loan based on that information. You can then take that rate sheet and shop it around in other banks, getting them to match or beat those terms.
Step 5: DO YOUR RESEARCH ABOUT EVERYTHING ON THE MARKET IN THE AREA YOU WANT TO BUY IN
Find out which areas you feel are undervalued and where you think people will be moving to. Drive around on weekends through every street and neighbourhood. Check out every open house on a Saturday and Sunday within your price range, plus maybe a few hundred grand, so you know what's out there. The more you see, the better you'll be able to recognize a good deal when it comes up.
Step 6: MAKE OFFERS
Make offers on places you think are a good deal (after thorough research). Know your price, know your worth and most importantly, have patience. It's more reasonable to get the right property at a fair price than wait years trying to find the unicorn of a deal.
Step 7: DO YOUR INSPECTIONS
Once your offer is accepted, the next step is to do as many inspections as you can just to know what you're getting into and the property's condition. I usually tell all my clients to do all checks they can, and usually, it'll be a break-even when you re-negotiate a credit with the seller.
I also take it a step further by bringing one to two contractors through the unit to give me actual bids of what it will cost me to bring the property up to date and how much things would cost to repair. Now combining the inspections with the contractors, I know everything that's 'wrong with the property from both a cosmetic and functionality standpoint.
With that, I could then negotiate the price with the seller accordingly depending on what's 'wrong with it, what needs to be upgraded, and what I didn't anticipate. This should be done, especially if you plan to buy the property and remodel it. It's so important you get these estimates out of the way early on, so you know exactly what the property will cost, what your ROI is, and what the property is going to be worth when you're done with it.
Step 8: CLOSE ON THE PROPERTY
During the process of doing your inspections and everything, chances are that you will be speaking with your lender and giving them information that they request from your tax returns, bank statements, credit scores, and all that stuff I mentioned earlier. At the same time, they will do an appraisal on the property to show the bank that they're lending on a property that's worth what you're paying.
The closing process usually takes 20 to 45 days, depending on the property type, how involved it is with the bank, and how much work you did. Once it closes, this is where the real fun begins!
Step 9: DO MINOR RENOVATIONS
This is where you end up making instant equity because not only are you buying an undervalued property in an area that's poised to go up in price, but you're also buying a property that needs some work. That's the trifecta of making money in real estate right there. Now at this point, most people ask me – Habeeb, where do you find your contractors? My simple answer to this is in two ways:
1). Word of mouth – If I see someone that remodelled their property recently, I simply ask – Hey, who ended up doing this remodelling? Who is the contractor? Do you mind if I get their contact information? Most people are pleased to give a good contractor more work because it looks good on them, and it helps the contractor out. Often, the contractor will provide the first person lower prices because, in the future, they know they're going to bring in more business. That's for the first. Just simply ask around.
2). Jiji – Whenever I want to look up a different contractor, I simply type in the trade I need, look on Jiji, and then look for people who have excellent reviews and call them up. You get a few bids and few estimates from a few different people and pick who you feel will be the best fit. For those not familiar with Jiji, it's an online marketplace where services are traded. More like a buy and sell platform.
This is honestly how I found my best contractors so far; it's the word of mouth and Jiji. It's that easy. People also ask me – how do I know how much something should cost? And the best answer is simply by getting multiple bids from multiple contractors. Getting one offer from one contractor doesn't tell you anything; if you're inexperienced, you have no idea how much something costs. That's not going to help. You need to get multiple bids, and you'll be able to see the price differences, and more people come in about the same.
Step 10: RENT IT OUT
The final step is to find a tenant. My favourite way to find a tenant is through Jiji and Nigeria Property Centre. Whenever I post my ad there for a rental property, I get many people making inquiries about the property. It's accessible and user-friendly. Believe it or not, the majority of my tenants came from these platforms.
Having read this article, you're now equipped with the knowledge of how real estate works. Congratulations on your way to becoming a super-rich real estate investor.