Malcolm Gladwell states that it takes 10,000 hours of practice to become an expert at something. That means it would take nearly five years to become an expert at a discipline if you practice every weekday for eight hours. Yet when it comes to real estate, some people think that watching a few hours of house-flipping shows on HGTV is enough experience to get started and be successful.
Bernard Klein, founder of real estate brokerage Blooming Sky, encourages new investors to start slowly and not rush into big investments. He says, “It’s very tempting to look around and see seemingly everyone making money in real estate and feel like you should be doing the same, but you need to proceed with caution. The fact that many real estate investments involve mortgages and large loans means that you could end up owing a lot of money you don’t have if your investment doesn’t pan out.”
Real estate investments come in all shapes and sizes. Whether you’ve considered looking for an investment in an urban metropolis like New York City or a fix and flip opportunity in Austin, Texas, there is something out there for everybody. However, before embarking on a wild goose chase for the “best” investment, it’s important that you first understand what your investment objectives are. Just in the same way that one wouldn’t begin investing in the stock market without first considering the objectives of the investment, the same wisdom holds true for real estate.
Determine Your Investment Horizon: Long-Term vs. Short-Term Hold
The first thing you’ll want to ask yourself is whether this investment is intended to be a long-term vs. short-term hold. Do you want to get in and out, make your money and move on? Or are you looking for something that you’re going to proudly hold in your growing portfolio over many years to come? Once you have the answer to this question, you’ll be positioned to meet your desired investment duration with the appropriate property acquisition strategies that will meet your timeframe.
Evaluate Real Estate Investment Strategies
Let’s begin exploring some of the different real estate investment opportunities that exist and how they may fit into your overall investment plan.
If you’ve been budgeting, maximizing your income and keeping lifestyle creep at bay, you may be sitting on a mountain of cash, or you have spent much of your life investing in other asset classes like stocks and bonds. Perhaps you have much of your wealth tied up in a specific currency and are seeking to de-risk. Owning real estate can be an important part of the asset mix for diversified investors.
Whether you’re looking to buy into housing stock in an up-and-coming market or looking to park your cash in a multi-million dollar condominium, you’ll have plenty of options to get diversified. If you are looking for liquidity, consider an urban market with high demand and increasing property prices.
The Quick Flip
You’ve probably seen plenty of shows like Property Brothers and Love It or List It, where people add some tender love and care to a beat down house and turn it into gold. Sounds simple, right?
Fixing and flipping properties is an exciting proposition, and in the right market, with the right pricing, you too can pursue this dream. Fixing and flipping is a short-term strategy, as your goal will be to acquire the property, put in the work and resell at a higher price as quickly as possible.
The longer you carry the property, the more it costs you and the lower your margins. Flipping and making a consistent profit takes experience, as there are always surprises that creep up. If you’re looking to get started for the first time, find somebody with experience (meaning several successful flips in different market cycles) and see what you can learn. Pick a market that you can manage and is close by, as you’ll need to be hands on.
You Can Also Focus On Rental Income
If you’re looking to collect rental income every month, then you want to find a property where your monthly fees (mortgage, maintenance, and taxes) are lower than your monthly rental income. Also, you’ll want to consider markets that have appreciating rents, which means that over time your property will continue to become more valuable.
Using a solid retirement calculator can help you determine your cash flow needs as you plan for retirement.
You may want to consider markets close to yours so you can keep a tighter grip on your income property, or you may consider totally different markets all together and hire a management company to take care of the day to day management. Once you start buying properties with rental income, you may find yourself down a path of acquiring more and more, getting to that point where one day you have a passive income stream. Just remember, there’s still work involved like managing tenants, property maintenance and so forth.
You may even decide to rely on Airbnb or other on-demand rental platforms instead of finding traditional tenants. The choice is yours.
Long-Term Hold For The Long Term
When it comes to real estate investing, you don’t necessarily need to get fancy with your investment hypothesis. Simply buying and holding real estate is a builder of wealth. Whether you’re looking for a pure investment play, one that you rent out or looking to move into it as your primary residence, buying into real estate for the long-term is an excellent investment strategy.
Building equity and watching prices appreciate over the long run will build wealth and also doesn’t take much effort. No timing the market or rushing to pay back lenders for a short-term construction loan, buying a property and watching prices go upwards over the long-run is a noble strategy. The key is to not get spooked by short-term fluctuations, which are a normal part of how economic cycles function.
One way to score big in a property investment is to consider new construction. The key is to buy in early into the sales cycle. This means that you’ll want to be one of the first to sign a contract to purchase, even if the closings are a year or two out. This will guarantee that you will buy into the lowest price that the developer will likely ever offer on any of the properties. The closer to closings the developer gets, the more expensive the respective units will be. This means that if you’ve bought in early, it’s a chance to already be in the money when you close on the property.
Buying new also carries additional risk because it can be hard to determine how sought-after the property will be in the future. On paper, a new development will always look stunning, but beautiful renderings are not necessarily congruous with high returns.
Crowd Funded Investment Opportunities
The rise of crowdfunding real estate platforms like DiversyFund and a host of competitors make it possible to passively invest in larger real estate projects. These investments allow investors to allocate some of their portfolio to real estate without having to worry about actively managing the properties or selecting the right investments. This, however, does not mean that the risks are any lower.
There are plenty of real estate investment strategies. Understanding your objectives and duration are key to understanding which strategy is worth pursuing. You may even find yourself torn between several of these. That’s okay! Do your research, talk to people, see what feels right. It’s a big decision with a significant sum of money involved, so it’s essential to take your time and do your homework.
Most importantly, make sure you have a healthy financial foundation with an emergency fund in place and can withstand poor investment returns if your real estate doesn’t perform as well as you thought it would. Your short term memory may trick you into thinking that real estate always appreciates, but the last thing you want is to be fooled by randomness or recency bias.