# The Insider's Edge to Real Estate Investing by James P. Nelson with Rachel Hartman - Blinkist

What’s in it for me? Get started – and move up – in real estate investing.

Since you’re here, you’ve probably thought about buying property. But maybe something’s been holding you back – like, Is the risk worth it? And where do you even start?

The answer to the first question is simple: the risk is probably worth it if you put in the time to learn the ins and outs of the market and grow. If you play smart, real estate is possibly the most secure form of investment there is. 

The answer to where to start is even simpler: right here. This Blink to The Insider's Edge to Real Estate Investing provides an overview of what it takes to jump into the real estate investment game. We’ll go over how to choose the right property and the right team, what to look for when examining a property, how to do your due diligence when negotiating, the steps to closing a deal, and how to enjoy your rewards at the end.

That said, you’ll likely find that the process is both simpler and infinitely more complex than you thought. If you’re new to the game, take as much as you can from this Blink – but know that completing these steps in their entirety can take months, or even years. So just keep in mind that real estate investing is more of a marathon than a sprint.

Ready to start laying the groundwork and building up steam?

Choose the right property – and the right people

Sam was the son of immigrants. He didn’t have an affluent childhood. He didn’t have a privileged educational background. He didn’t start out with a trust fund or seed money. He was just a hardworking guy. 

In college, he and his friend managed some apartment units. Later, Sam began purchasing and flipping homes. And it was this hard work and experience that laid the groundwork for what he did next: invest in mobile home parks in the 1990s. 

This was a time when virtually no one was interested in that type of property. But Sam kept his focus, buying up real estate at low costs, and it paid off as mobile home parks increased in popularity. In 2016, Sam’s investment firm made $869 million.

It’s easy to look around and feel overwhelmed by the real estate investment market. But the key is to do your homework – and start small.

Before scooping up a property, consider the implications of the asset class you’re buying into. In real estate, there are four main asset classes.

First, there are multi-family units. These properties are a solid start to a real estate investment portfolio. They’re likely already bringing some income in, and the cost of making any upgrades should be manageable. Additionally, with multiple tenants, you spread out your risk – if you lose one, you still have others, which gives you time to replace the one that left.

Next up? Retail. This describes anything from small buildings for mom-and-pop shops to large-scale malls. Your tenants will be businesspeople. The thing you have to consider with retail is the potential for unpredictability. For instance, COVID-19 shut a lot of businesses down.

Third is office space. To invest in office assets, you need to be well-funded and have a lot of resources. The initial expense is high, and any renovations and upkeep can be costly. Here, you also have to consider the effects of phenomena like the pandemic, and gather insights into where the world is headed; office space may not always be easy to rent out.

Finally, there’s land. This is the highest cost asset you can invest in. It requires a lot of teamwork from other investors and developers to go from initial investment to finally seeing returns.

If you’re just starting out, look for something that will shorten the time between your investment and your return – unless you’re full of capital, in which case you can go for the long game with the biggest payoff.

Besides knowing your property types, it’s also important to start building a team. At first, it may just be you and a partner flipping houses like Sam and his friend. But as your capital grows and you begin to make bigger investments, you’re going to want to build up a team. Not even the top investors can make it alone in this industry. 

Let’s look at a few of the most common players.

First, sponsors are the ones spotting opportunities and guiding the project to the greatest return possible; they tend to be involved every step of the way. Limited partners, on the other hand, are investors who generally stay out of the daily decision-making. Becoming a limited partner is a good option if you want to invest while observing from the sidelines. 

Then there are brokers – these people know the marketplace well and normally have access to insider deals. Once you decide to buy, title agents and specialized attorneys are the ones who make sure everything is paid off and legal. Here, you’ll also need the support of specialized real estate accountants; your regular CPA probably isn’t equipped to handle accounting of this magnitude. 

If you’re getting into development investing, don’t forget to have architects and contractors on hand – they’re the ones who’ll tell you what’s feasible in terms of construction. Finally, once the purchase is done, it’s useful to work with a property manager so you don’t have to do the hands-on work of taking care of the estate.Once you’ve established the property type you want to buy and built your team, it’s time to zero in on an opportunity.

Keep your eyes open

Jamie had a hard time getting her foot in the door. So when her buddy, Matt, invited her to help with an investment, she jumped at the opportunity. They found a mixed-purpose property in New York that had retail space on the bottom floor and apartments above. The contract for the property had a great price – but they needed more investment money in order to transform the building into condos, so they brought in two other investors.

Although the building project took two years to complete, it immediately paid off once it was ready to go: they were able to collect $5 million in profit from the condos and an additional $4.4 million profit from the retail space. Twenty years later, Jamie is still reaping financial rewards from that investment.

What Jamie learned from her experience is that to succeed in real estate, you need to understand the competitive nature of the environment – and know what a good opportunity looks like.

To spot a good deal, it’s important to keep your eyes open. Stay in touch with your broker network, and check on any deals that may be in the works. But also look for off-market opportunities. For example, if you see on the news that a subway station is being built in an old neighborhood, you may want to start checking out the properties in the area.

Other key factors to look for include a motivated seller, properties that lack marketing finesse but are otherwise good investments, and properties with great rent potential.

Once you’ve found a place, take your team on a walkthrough. The more eyes, the better – you’re looking for both red flags and hidden opportunities. Red flags include structural problems or neighborhood issues that may push the cost of turnaround beyond the scope of your project. On the other hand, someone may spot an opportunity for repositioning the property that could massively inflate your profits. That’s why it’s good to have all hands on deck.

The last tip before moving on to the main event? Try to find a win-win deal for both you and the seller. Genuinely get to know them, and find out what they want, why they’re selling, and whether there’s a way you can both come out on top.

What is underwriting?

In 1680, Edward Lloyd moved his family to London and was taken aback by all the coffee shops – they were everywhere. But Lloyd soon realized they were more than just coffee shops; they were where things happened. What’s more, each coffee shop seemed to cater to a particular crowd.

So Lloyd set up his own coffee shop and centered it around the business he knew best: shipping. He put up shipping documents on the walls of his café, and investors started to come in to talk about the game of financing ships. They’d assess the risks of each ship on the walls, and then write their names under the ships they intended to back, along with the amount.

In return, the ship owners would pay premiums to these backers. If nothing happened to the ship, the backer made money. But if something did happen, the backer paid for the repairs, up to the amount written on the wall.

The literal writing of names under ships is where we get the term underwriting. Today, this means doing your due diligence to assess the risk of an investment before going all in.

Once you’ve found the property you want to invest in and have your team, the real work begins. This is the part where you find out that “passive” income doesn’t mean you’ll get showered with money while you lie on the beach. Creating passive income requires a lot of upfront and ongoing work.

The first thing you need to do is look through financial statements. If you’re really interested in a property, you may need to sign a confidentiality agreement to get the offering memorandum, which contains all the details of the property from floor plans to history to current tenant leases.

If everything looks good, it’s time to do some math. Look for the capitalization (cap) rate, or the rate of return you get before you start having to repay loans. Do this by dividing your net operating income by the purchase price. To determine whether your cap rate is good, just make sure it’s lower than your interest rate.

You’ll also need to calculate your total return on investment as best you can. To do this, divide your net operating income by the sum of your purchase price, cost of updates, lease-related expenses, and capital expenditures.

These calculations are, of course, not guarantees; they’re expected projections based on hours and hours of research and due diligence. Because there’s so much involved in this process, now’s a good time to get one of those real estate accountants we mentioned earlier.

Once you’ve done all the underwriting and determined that the risk versus reward is good, it’s time to raise capital. Raising capital is a complicated process that requires – you guessed it – even more due diligence! You’ll need to know your own financial situation, including any skills you bring to the table, and the timeline before reaching out to other investors.

Creating partnerships with other investors requires legal documents, and it’s wise to bring in an attorney at this point. Come to negotiations with a complete outline of all the debt and equity in the deal.

Above all, make sure you have a good sponsor who can provide insights into the present and future of the situation, a solid business plan, and a great piece of property lined up.

Closing the deal

In December of 2009, a storm raged through New York City. MaryAnne Gilmartin, protégée of renowned investor Bruce Ratner, was on the precipice of what could either be a great success or a catastrophic failure. Over the past six years, she and her team had been working to break ground on a development project that would become Pacific Park.

The team had already sunk $500 million into the project and hadn’t even erected a building yet. They’d obtained an $86 million line of credit to continue the project – but until they showed proof to the government, the project couldn’t go on.

They had less than 24 hours to produce the document, which was now sitting in a locked UPS facility because storms had waylaid deliveries. MaryAnne reached out to some contacts and secured access to the UPS facility. She and a team went over and sorted through all the mail and packages until, at 3:00 a.m., they finally found it.

The next morning, they closed the deal.

Now, not every closing is this dramatic. But they all carry a certain amount of tension that isn’t for the faint of heart. 

The first step to closing is making the initial offer. You’ll want to include things like the price, the proposed closing date, and the due diligence period – which is when you’ll carry out the inspections and investigations to make sure you have all the information you need about funding and risk. You’ll look over the property title and ask the seller to share every document they have on the place. You’ll also analyze the neighborhood; remember, location is a crucial aspect in valuing property.

Once you’ve done your due diligence and negotiated a contract, it’s time to secure financing. You can expect lenders to be extremely detailed and rigorous. If you’ve worked with the lender before and are on good terms, this process will be easier. But if you’re just getting started, expect to have to prove the security of the investment ad nauseam.

Finally, you’ve made it to closing day. Things can still go wrong at this point – as we saw in MaryAnne’s story – but for the most part, all the hard work is done! It’s a time to enjoy your victory and celebrate.

Reaping the rewards

One of the author’s first investments seemed like a sure thing. Everything looked good on paper, so he dove in headfirst. But soon there was one problem … and then another … and on and on. Tenants began refusing to pay rent – and the author began losing money. The amount of cleanup he had to do ultimately negated any financial gain. That experience taught him some important lessons about due diligence.

When investing, you have to look beyond the numbers. Property involves people and communities and cities. So bring your vision to the table. Instead of looking at what’s there, look at what could be there.

Repositioning a property might take a bit of capital, but it can lead to high returns. Seek out value-add properties that you can renovate or reconstruct, like the apartment building that Jamie renovated into condominiums. You can also look for opportunities to revamp neighborhoods through your investments.

And keep in mind that all your best laid plans can come crashing down if you don’t correctly manage your tenants. The key here is to lay good groundwork. Make sure your leases are detailed and comprehensive. Do your due diligence on tenant credit checks. And keep your properties in better condition than your competitors to show your tenants you value them.

Finally, reaping the rewards isn’t as passive as you might think. You may have periods where you can kick back, but there’s always something to consider. For instance, it may be advantageous to refinance at some point. Or maybe you want to sell. Just keep your team close, make sound decisions together, and you’ll find yourself in one of the most secure investment fields in existence.

Final summary

Real estate investment is really for anyone, but it takes some preparation and commitment to the process. Instead of diving into the deep end, start simple. You could work as a property manager to get insights into the industry. Or become a limited partner on a bigger project to earn some income and observe the industry – without having to take a lead position on anything.

Once you’ve found a property you’re interested in, that’s when the real work begins: you’ll need to do your due diligence, put together a solid team, stay on top of all the inspections and reports, and finalize the contract. But then you’ll experience the gratification of knowing you’ve earned yourself a steady stream of income you can build on for the future.