By: Kyle Spearin
Real Estate has created more wealth in America than any other asset. In fact, 90 percent of
millionaires in the United States invest in real estate.
There are many arguments that can be made in favor of real estate investing over other classes of wealth generation. Chances are, if you’re reading this article, you’ve already come to this realization. Rather than list reasons to invest, let’s imagine
that you know you want to become involved in real estate already.
In order to become a successful real estate investor, you need to come up with a vision and a plan for executing. A simple, but highly effective way to get started is to answer 5 questions. Your answers here will help guide your investing strategy and
showcase where to place your efforts.
Who are you as an investor?
Understanding who you are is crucial to developing a real estate investing strategy. This question will determine your trajectory for the remaining questions and shape future outcomes. Answering who you are will ultimately influence what strategy you
use and where you invest.
1. Cash Flow
Cash flow is essentially how much goes into your pocket after all expenses. This type of investing tends to be slow and steady. People who own rentals as well as buy and hold investors primarily employ these strategies because of the cashflow.
2. Lump Sums
While cash flow is slow, steady, and builds wealth gradually, investing for lump sums is all about getting as much money as possible sooner than later. Although it is a higher risk with a higher immediate reward, people such as Flippers and Developers
are attracted to lump sums. The idea is to leverage the cash gained in the short term to repeat the process.
Many investors consider appreciation the icing on the cake, rather than an investment strategy in itself. Appreciation is the gradual increase (hopefully) of property values over a long enough period of time. Certain places tend to appreciate more
rapidly than others, but this tends to be a long term play. Rental property and buy and hold investors tend to benefit more from this method of investing.
4. Hands off investing
When people talk about truly passive income, this is what they’re referring to. Although rental property owners tend to generate wealth more passively than flippers, there is another group of people who just invest without clocking hours. Note investors
and hard money lenders are examples of this.
Consider the various options for investing based on your personality and the returns involved.
What strategy are you using?
Now that you’ve decided who you are as an investor, you can begin to see which avenues work best with your goals. There are dozens of different strategies and combinations that people around the country use, but here are some ones that you need to
If you’ve ever watched an HGTV show, then you’re probably familiar with flipping houses.
The main premise is that you acquire a house that needs to be renovated for below market value. Then, you “flip” it for a profit.
2. Rental Properties
Rental properties come in all shapes and sizes. They can be single family or large apartment complexes. The commonality between these assets is the idea that a landlord (in an ideal situation) has tenants paying their mortgage while receiving positive cash flow on top.
Within this broad category is the Buy and Hold strategy. These are technically rentals as well, but the owner will hold them longer term as opposed to upgrading or selling every few years.
3. New Construction
Developers buy plots of land and build houses on the land. Most developers take a construction loan, build the house, and keep the difference after expenses.
4. Note Investing
A note is the promise to pay something, like a loan. Note investing is when an investor secures someone else’s debt, pays it, and charges interest to the debtor.
5. Other Creative Methods
In addition to the most conventional methods of investing, there are a variety of creative ways to invest in real estate.
BRRRR: this stands for buy, rehab, rent, refinance, repeat.
House Hacking: a strategy where your investment is also your primary residence. Using this method, you rent out rooms or other units in your home while living there.
Live in Flip: as the name implies, you live in the home while flipping it for a profit.
When are you going to start?
Some strategies require you to build up capital, while others allow you to take action right away. Once you know your strategy, you can then determine when you’re planning to invest. Create a timeline and work backwards to determine how to get
from point A to point B.
Where do you plan on investing?
Location, location, location. Think about the game Monopoly: each color property has inherent advantages and disadvantages. Some places are more affordable, but collect less rent. Others are more expensive, but demand higher rent among other things.
Determine where you want to invest based on what works best for you. That could mean a local market, or something across the country. This will also be influenced by the strategy you decide to go with as certain areas will lend themselves
to particular strategies more than others.
Why are you investing?
This is the final question because it’s the most important one. You can develop the best strategy in the world and get all your ducks in a row, but without your why it will be harder to persevere.
Are you investing because you want to create long term wealth? Do you want to quit your job and become financially free?
These are questions that only you can answer. Be sure to think long and hard about them because they will serve as your main motivation throughout the process.
Answering these 5 questions will give you a strong sense of direction as you begin your investing journey. Be sure to answer each one before you get started!