Iâ€™m often asked â€œwhat is the best method for getting started as a real estate investor?â€ Â Most often, as an investor in small residential properties. Â Since every potential investor has a unique educational background, skills, strengths, weaknesses and goals, there is no one-size-fits-all answer.Â There are almost as many ways to make money through real estate investment as there are different types of investors.Â Finding your most profitable â€“ and possibly enjoyable â€“ niche takes a little up-front self-examination and continued growth throughout your real estate journey.
Here are a few basic things to consider if youâ€™re thinking about entering this exciting and potentially rewarding line of business.
Active or Passive Real Estate Investing
Do you want to be an active or passive investor?Â Â Passive investorsÂ typically buy stocks or other financial instruments offered by real estate development companies, management companies, syndicates, trusts or holding companies.Â They donâ€™t participate in day-to-day management of their investment.Â Â Active investorsÂ typically buy specific properties and actively participate in the management or development of the property.Â There are many differences between the two, most notably the time commitment, level of product and market knowledge required, and tax treatment for profits and losses experienced by the investments.
If starting out as an investor in small residential properties â€“ homes, condos, or one to four unit multi-family â€“ you will most likely be an active investor.Â This could be true even if you hire a property manager to assist with operation of the business.Â You will probably form and operate your own real estate company â€“ even if you are the only employee.
If you plan on being a passive investor, you can do so by purchasing publically traded shares of real estate investment portfolios or by being a â€œsilent partnerâ€ in various real estate projects closer to home.Â Like all investments, itâ€™s a good idea to discuss your investments with a qualified financial advisor to make sure they are a proper fit within your overall financial plan.
Real Estate Investing and Real Estate Speculating
There are many ways to generate income through real estate investment.Â The two most common approaches areÂ investingÂ andÂ speculating.Â Â Investing typically produces a steady stream of cash flow to you in the form of net operating income.Â Speculating is profitable when a property is purchased and then sold for a higher price that is more than the total amount invested, thus producing a net capital gain.
If you prefer short term projects with a specific start and end, you will most likely be more comfortable speculating in real estate.Â Typical projects are site development (buying land and building on it) and â€œflippingâ€ rehabilitated properties.Â Many speculators buy land and merely hold it until market conditions improve and the value increases.Â The key to speculation is the basic investing strategy of buy low, sell high.
If you prefer to buy and manage rental properties for an undefined period of time, you are an investor.Â Your profits come from managing the business wisely, controlling expenses and maximizing revenue.Â The steady flow of net operating income is your return on investment.
Educational Preparation For Real Estate Investing
There are hundreds of books available that cover every aspect of active real estate investment, fromÂ Real Estate Investment For DummiesÂ toÂ Trump Strategies For Real Estate.Â BrowseÂ Amazon.comÂ and your local book store to find books that best fit your plans for real estate investing.
There are also hundreds of seminars available that offer training for every type of real estate strategy.Â Beware!Â Most workshops and seminars are marketing presentations designed to get you to sign up for expensive products or coaching that you probably donâ€™t need.
If you would like to take some general business foundation courses, here is a starter list of subjects you might want to consider:
College courses:Â Accounting 101, Finance 101, Marketing 101, Business Writing, Business Law, Architecture 101
Real estate courses: real estate principles, federal & state housing law, agency
Mentoring: see â€œBuild A Teamâ€ below
You can find these courses offered in the classroom and online from two or four year colleges and from real estate training schools.
Identify Real Estate Investment Resources
Investing is trading something of value for something else that should produce a profit for you.Â What do you have to trade?Â Cash is the most valuable commodity an investor can have.Â When starting out, you may not have enough cash to fully fund your own deals, so youâ€™ll need to bring in other investors or borrow against other assets you may own.Â You can bring resources other than cash to the deal, such as the work you put into finding the investment and a plan to make it profitable.Â Many real estate investors donâ€™t own a majority share of their first few investments.Â But they keep doing profitable deals and build their cash resources until they are able to finance deals on their own or become investors in deals put together by others.
Build A Real Estate Investment Team
New investors should do a self-evaluation to determine what they can do for themselves and what they should hire others to do for them.Â These decisions are not just based on the amount of time an investor has available to work with their investment, there also needs to be an honest appraisal of the investorâ€™s skills and abilities.Â Here are a few basic service categories that should be represented on your team.
Mentor:Â If you can find one or more experienced investors who are willing to share their experience, either individually or as part of an investment club or group, take advantage of their experience and meet with them regularly.
Financial planning:Â Whether you are investing your own funds or borrowing, check with a qualified financial planner first.Â Each investment should fit properly into your total family financial plan.
Lenders and Investors: If you are providing only part of the funds to be invested, cultivate additional funding sources â€“ either lenders or potential co-investors â€“ BEFORE you need the money.Â In most markets, good investment properties sell fast and you want cash or credit already available so that you can act quickly when you find one.Â Cash deals with short escrows and no loan or appraisal contingencies go to the top of the pile when sellers review offers.
Real estate attorney:Â Attorneys have a lot of good uses, from creating custom purchase contract clauses to evictions.Â Iâ€™ve found that many are also good negotiators or negotiating strategists and can help with that facet of acquisitions and sales.
Real estate broker:Â Some investors become licensed real estate brokers, many prefer to stick to investing and work with a broker who understands their business and can help evaluate markets and acquire, manage and sell their properties.Â Some brokers even participate in investments, accepting equity in lieu of a commission as long as there is an exit strategy for them (e.g. trading all or part of their commission for equity at time of purchase in return for getting their equity out when they sell it for you).
Tradesmen:Â These include everyone from the simple handyman to architects, plumbers, electricians, roofers, painters, carpenters, flooring specialists, pool cleaners, carpet cleaners, cleaning services, landscapers, lawn care providers, home inspectors, property managers, and pest control companies.Â Most investors are loyal to their team, but always keep the phone number of a back-up ready if needed.
Investment Scouts:Â Many investors build a network of real estate brokers or other investors who let them know when an investment is on the market (often called â€œbird doggingâ€).
I hope you found this information about getting started as a real estate investor helpful.Â If you have questions about any of the topics covered or real estate in general, drop me a line usingÂ Contact Us.
John A. Souerbry & AssociatesÂ Â Â Â Â (CalBRE 01370983)