Six-Steps Approach to Getting Started in Real Estate| LinkedIn| By Alina Trigub|
Part I. Taking Personal Inventory to Discover Your Niche
You’ve been listening to Bigger Pockets podcasts for a while, reading blog posts and secretly trolling Zillow for hours at a time: your head is spinning with the possibilities afforded by modern real estate. But too many options may also be keeping you from taking action. A classic case of paralysis by analysis.
Creating the time and space to identify your true goals and super powers is a crucial first step to weed out decision overwhelm and craft a personalized real estate strategy that aligns with your purpose and season of life. This article will walk you through a series of questions aimed at uncovering your goals and articulating them in a way that generates the confidence you need to take action.
Step 1. Connecting to your larger values
What are you passionate about and how can real estate bolster those values? Are you looking to diversify investments, support a growing family, empower others to build wealth, express your creativity, make an impact on a community, improve the environment, or something else entirely? The possibilities are endless.
When Krista decided to do a house hack in Brooklyn, NY, her goals were to stop throwing away rent money and instead to divert it into an appreciating asset. She also wanted to create a respite from city life where her family and friends could recharge and have space to launch their creative careers from the front porch. While her investment produces a negative cash flow (Welcome to life in NY!), it fulfills her larger long-term goals.
Step 2. Your bandwidth
Be honest about how much time you want to -- and more importantly – are able to commit to this venture. Are you looking for a completely passive investment, a part-time hustle, or a full-time career? Do you envision spending more time now and ramping down your involvement in the future? Keep in mind that buying and managing properties yourself is a business that requires a lot of attention (at least in the first few years of owning the property). Hence it is absolutely critical to have the time and desire to work on this business and be able to devote it at least 20 hours a week (if not more).
Step 3. Your relevant skills
What skills do you have now that apply to the real estate industry? Perhaps you are a spreadsheet wiz, or construction savvy, or digitally well-connected. Perhaps you just love the hustle. All of these qualities will give you a leg up, so take note of them. While evaluating your skill set, be honest with yourself and determine what expertise is not your forte. Be sure then to either hire the necessary team players with such skills or partner up with someone that possesses them.
Step 4. Your financial resources
What assets do you have to get started? Cash is king, but equity in a home, or money in a 401K (or Thrift Savings Plan if you work for the government), or other sources can extend the reach of your first purchase. It is also helpful to determine how much money a lender will let you borrow, so make a few investigative phone calls early in your search. You might be surprised what doors will open once you understand the numbers.
Step 5. Your financial goals
Separate from your values, what are your financial goals for investing in real estate? Are you planning for retirement, wanting immediate cash flow, looking to build a long-term real estate legacy or a combination of these? Ideally you should start with long term goals and then break them down into smaller (more achievable) chunks to determine your targets for the next 3, 6, 9 and so forth months ahead.
Step 6. Identify your Niche
Once you have clarity on the items above, you can apply these to the scenarios below to find the best fit.
Part II. Real Estate Investment Niches
Active Investment Scenarios
For those who want to keep their day job, but also want to get their hands dirty
A house hack is where the property owner rents a portion of their house to a tenant. This can be accomplished by purchasing a small multi-family, living in one unit, and renting the rest. This can also be done by renting rooms in a single-family residence. Be sure to check your local zoning regulations before committing to a house hack scenario. The financial benefits depend on the deal – they can range from covering a portion of the mortgage to substantial monthly cash flow and appreciation of property.
Buy and Hold
Buy and hold is a classic landlord scenario. It can be done with single and multi-family houses, vacation homes, mobile homes, condos and many other property types. Properties can be purchased in move-in condition or you have the option to buy distressed and increase their value through renovation. See the BRRR Method (Buy, Rehab, Rent, Refinance, Repeat) on BiggerPockets site for more information on this process. The biggest challenge for buy and hold investors is finding good tenants and maintaining the property. Financial benefits are typically a monthly cash flow with possible appreciation over time.
Sourcing deals and selling them to real estate investors for a profit. This is a great strategy for a hustler who enjoys the hunt and creates an immediate influx of cash when successful. Also good for a newbie as it is low risk and does not require s lot of cash up front.
Fix & Flip
Buying distressed properties at low cost, renovating them, and selling them for a profit. This is a great option for a construction savvy or creative individual but demands a lot of time and has higher risk. The biggest challenge to flip a property is finding a seller at the right price point and timing. If a renovation takes longer than expected or the property does not sell quickly, holding the mortgage for those extra months can reduce or eliminate the profitability of the venture.
Also, a classic landlord scenario but for larger (5+) multi-family and commercial tenants. While you would think that more doors is more work, it also gives you a greater leverage of resources. Think of hiring attorneys, lender, insurance broker, inspector and so forth. If you’re buying a six-unit property, you’re still only paying once for these professionals. While the price tag maybe higher than for a single-family house, it is still more economical than buying six individual family houses and having six closings.
(Relatively) Passive investment niches
For those with less than 5 hours a week to dedicate to real estate.
Similar to the Buy and Hold strategy, this is purchasing a property that has already been renovated and is ready for tenants. You will pay a premium to obtain the property, but in return there should be far fewer maintenance concerns. Typically, a turn key provider will offer property management services for you as well. While such strategy may seem easy on the surface, you need to do your own research to weigh in all pros and cons of it.
Real estate syndication is a group effort where a pool of investors combines their capital to invest in a large commercial real estate purchased through a partnership. In such partnership limited partners are the passive investors and general partners are the operators that are responsible for all the work in a syndication. Investing via syndication in most cases requires investors to be accredited and is regulated by SEC. This type of investment is suitable for busy business owners and professionals that do not have the interest or bandwidth to manage the investments themselves. They agree to rely on others to do the work in return for residual income and tax benefits.
Real estate notes are issued along with a mortgage and document the amount of the debt. Investors purchase notes secured by an asset as a collateral. If a borrower defaults on a note, then the asset is turned over to the lender. This is of course a high-level overview of the strategy. One needs to spend a bit of time to fully understand its pros and cons.
Keep in mind, the above list is not all inclusive and only includes the more common real estate paths; there are plenty of other options and variations on these general themes. Focused research and analysis will help you determine what suits your long terms goals and interests the best.
After reviewing this article, re-evaluate where you are and take a stab at writing some long and short-term goals. Then identify which of the niches above aligns with your current goals and resources. Spend additional time researching and evaluating it in greater detail. Your focus will change over time, so remember today’s goal is only to determine what investment strategy makes the most sense for your current stage of life and then to take action.
Note: this article was written in collaboration with Krista Kennedy.