The "Law of the First Deal" is a real estate term that is used to describe the importance of getting your first deal done and allowing the momentum to grow from there. The first deal can be the hardest and most intimidating but the learning experiences, team building, and mental breakthrough of taking action can be a game changer, allowing you to exponentially grow your real estate portfolio from there. The big question is how to get started with that first deal.
I talk to people almost every day that are working toward their first deal by trying to utilize a more advanced and/or technical strategy. While most of these strategies are valid ways to invest in real estate and are being done successfully by seasoned investors, my advice is to Keep It Simple Stupid (K.I.S.S) for your first investment and learn from there. Build experience, grow your team, network with others, and grow into these other strategies. So many people are taking courses and listening to "gurus" that tell them to be successful you need to employ the latest "secret" or "buy with none of your own money". For example, I constantly talk to people that have never purchased, managed, or sold an investment property, yet they tell me that they are working toward syndicating 100+ apartment complexes with none of their own money. Don't get me wrong, I think syndication can be a great strategy for experienced investors that know what they are doing. But honestly, who wants to invest their money with someone that has zero experience, what broker is going to take a multi-million dollar offer from a total newbie very seriously, what bank is going to loan to someone with none of their own money or experience. I'm not saying it can't be done but you are going to need a substantial network of people that trust you and partners that can supply the experience and net worth required to pull off a large syndication.
Here's a better idea (in my opinion) - For your first investment, utilize a strategy that can get you in the game quicker and build momentum from there. A few of the easiest, albeit not sexiest ways to get started include:
We all see the headlines every day reminding us about crazy the current real estate markets are. With few exceptions, prices and rents are appreciating at record rates, homes are getting scooped up as soon as they are listed, and buyers are bidding up prices far exceeding asking prices. How long can this last? When do we hit an affordability ceiling? What happens next - do we freefall back to 2008 prices? Every real estate guru is telling us something different but the truth is that they have no idea either. No one wants to buy at the top and immediately see their equity plummet due to a sharp decline in values, but I prefer to think about my investments over a longer time horizon that will ride out the highs and lows to provide me with long term wealth. Every day I talk to someone that tells me they are "waiting on the sidelines" to jump in and purchase all of the great deals that are going to come when the market crashes. Maybe they will get it right and be able to say "I told you so", but here is one perspective on the cost of getting it wrong that uses pretty basic math.
For this simplified example, let's say that I am looking at purchasing a single family home in the Denver market. Denver has seen crazy appreciation, averaging about 1.5% per month recently. I don't expect that to be sustainable but do think that it is possible to continue seeing around 1% per month for another year before things drift back to a more normalized 3%-4% annually. The other elephant in the room is interest rates. Rates don't really have anywhere to go but up. We don't know when or how much they will go up but most analysts believe that we will be back in the 4s by this time next year. With those basic numbers, let's look at the difference between purchasing now and waiting for the "crash".
Purchase price - $500,000
Down payment (20%) - $100,000
Loan amount - $400,000
Interest rate - 3.0%
Monthly Principal and Interest payment = $1686.42
Buy in 12 months:
Purchase price (1% per month appreciation) - $560,000
Down payment (20%) - $112,000
Loan amount - $448,000
Interest rate (assuming a rise of 1%) - 4.0%
Monthly Principal and Interest payment = $2138.32
As you can see waiting 12 months for a market correction that never comes means that you will need to come up with an additional $12,000 for the down payment and an extra $451.90/month. Over the term of a 30 year mortgage, this adds $162,684 to the cost. Since rents typically increase slower than prices, this will really cut into your cash flow.
Let's say you actually get it right and real estate prices do see a 10% decline prompting you to jump in and scoop up a "deal". For those of you thinking that the market will decline by way more than 10%, I just don't see it. Even during the 2008 meltdown, statistics show that the Denver metro area declined by 7%-13% before stablizing.
Buy in 12 months with 10% market correction:
Purchase price (appreciated price less 10% correction) - $504,000
Down payment (20%) - $100,800
Loan amount - $403,200
Interest rate (assuming a rise of 1%) - 4.0%
Monthly Principal and Interest payment = $1924.24
As you can see the effect of rising interest rates and strong appreciation cancels out a decline in market prices for this example. You would still see a monthly payment increase of $237.82 per month equating to $85,615 over the course of a 30 year loan.
Of course, there are many different scenarios that could play out and the actual numbers will depend on what really happens with interest rates, appreciation rates, and timing of all factors. My point is more about looking at the numbers from all perspectives and aligning your strategies with your goals and time horizons. Don't just make your buy/sell decisions based on what the media and real estate gurus are pumping out in the headlines to attract attention.