- Get a Macro View of Where You Are
- Determine Your Why
- Decide How Hands-on You Want to Be
- Assess Your Risk Tolerance
- Determine How Much You Want to Invest
- Decide Which Types of Real Estate Investments to Pursue
- Recap and Takeaways
Step 1: Get a Macro View of Where You AreBefore deciding where to invest, you need to take a step back to assess where you are in life and your financial journey and what you hope to achieve through investing in real estate. Are you just graduating from college, mid-career, retired, or somewhere in between? How much money do you have to invest? What are you hoping to get out of investing? Are you looking for a one-time payoff or smaller ongoing payoffs? How much would it take for you to become financially free? Getting a good high-level picture of where you are will help you assess how much risk you’re willing to take on, how aggressive your real estate investing strategy should be, how much money you can comfortably invest, the types of returns you’re looking for, and the timeframe you’re aiming for. All these elements will come in handy as you decide how and when to start real estate investing.
Step 2: Determine Your WhyBecause there are so many different opportunities in real estate, from investing in notes to corporate housing, from house hacking to investing in syndications, and everything in between, it’s easy to fall prey to shiny object syndrome. One day you’re set on buying a fancy downtown condo for Airbnb; the next day, you’re looking into mobile home parks. Trust me; I’ve been there. In most real estate investment opportunities, there’s a good chance you’ll make some money. That’s why it’s hard to say no when you come across an opportunity. Someone will tell you a jaw-dropping story about how they are making boatloads of money investing in X, and suddenly, you think, hey, I could do that too! Then, hopefully, before you get too far down the path, you realize that it would take too long, or it’s not long enough, or it’s too hands-on, or it’s too passive, or it’s just not the type of investment that’s right for you.
Therefore, it’s so important to determine your why.What’s the reason you want to invest in real estate? Why did you seek out this article? Are you hoping to create passive streams of income so you can quit your job and spend more time with your family? Are you hoping to go into house flipping full time? Are you in it for the tax benefits? Perhaps you’ve heard about house hacking and want to give it a go? Whatever your reasoning, make sure to take some time to step back and gain clarity around what you hope to get out of real estate investing that you’re not getting out of your current financial vehicles (stocks, bonds, CDs, savings accounts, etc.). This will better prepare you to resist the temptation when shiny object syndrome strikes.
Step 3: Decide How Hands-on You Want to BeI’m sure you’ve seen all those house flipping shows on HGTV, where they do the whole shabam, from dilapidated junker through gorgeous showstopper, complete with a champagne-laden open house. They go into the house with sledgehammers, masks, and protective eye gear. They crawl through moldy spaces. They come across unexpected critters. Sometimes there’s yelling, sometimes there’s drama. But in the end, they get that incredible sense of achievement from having turned an eyesore into a work of art. If the previous paragraph excites you, fantastic. Then perhaps you want to be more of an active, hands-on real estate investor. More power to you. I’ve been there, and I know it to be incredibly gratifying, yet often very difficult, work. If, on the other hand, that description made you cringe and almost close this article, don’t fret! The world of real estate investing has options aplenty for you too. Perhaps you want to be more of a passive, hands-off investor. You put in the money, leverage other people’s expertise, sweat equity, and reap the rewards. Of course, they will take a piece of your returns for all their work, but it’s a small price to pay not to have to deal with cockroaches and dirty toilets. The decision of whether to be more of an active or passive investor is an important one, so take some time to step back and feel out where on the spectrum you’d like to be, given your current life situation and goals.
Step 4: Assess Your Risk ToleranceEvery real estate investment, just like every stock, every mutual fund, every dental procedure, heck, even walking out your front door, comes with a level of risk. As with any investment, there’s a correlation between risk and reward in real estate. The greater the risk, the greater the potential reward. The lower the risk, the lower the reward. For example, new build development in a transitioning neighborhood might come with a higher level of risk. In contrast, an existing apartment building, whose current as-is rents would cover the mortgage and expenses, might come with lower risk. In real estate, because there are physical assets and paying tenants, there are often ways to mitigate risk. However, there’s always that tiny chance that you could lose it all. If the thought of losing money makes you fidget in your seat and your palms start to sweat, take that as a sign to start slowly and with smaller amounts of money. This will help you learn the ropes on a smaller scale. Your cash returns might not be as big, but your educational returns will more than makeup for it.
Step 5: Determine How Much You Want to InvestNow that you’ve got a clear picture of where you are, why you’re investing, how hands-on you want to be, and how much risk/reward you’re willing to take on, it’s time to think about the size of your investment. Obviously, you don’t want to put your entire life savings into real estate, and especially not into a single investment. If you’re starting out, choose a modest amount you would be comfortable losing, or at least living without for a few years. Unless you’re doing a short-term project, you should be prepared to have your money invested in the asset for a few to several years, so make sure you’re not investing so much that you don’t have enough to pay for your groceries next month. When choosing an investment, make sure to take exit strategies into account as well, just in case you need to get your money out sooner than you’d expected.
Step 6: Decide Which Types of Real Estate Investments to PursueNow comes the fun part. You’ve taken time to reflect on where you are, where you want to be, and how real estate investing can get you there. With that information in mind, you can begin to narrow down the types of real estate investments into those that best fit your situation and goals. Most likely, you fall into one of these categories:
- The Lots of Money / Little Time / Hands-off Investor
- The Little Money / Little Time / Hands-off Investor
- The Little Money / Lots of Time / Hands-on Investor
- The Lots of money / Lots of time / Hands-on Investor
The Lots of Money / Little Time / Hands-off InvestorLet’s start with those of you who may have some money saved up. Perhaps you’ve invested in the stock market; maybe you have a decent amount in your savings account. You’ve heard about the many benefits of real estate investing, the tax breaks, the passive income, and the impact your money can have on families and communities. But, given that you’re a very busy person, you simply have no time to put in all the research it takes to feel comfortable investing in something, and you don’t have the time to renovate or manage a property actively. There seem to be a bazillion real estate listings out there…how would you ever have time to research neighborhoods and markets, never mind tour properties with agents and sign all that paperwork? Just thinking about it makes you exhausted.
Recommendation: Become a Passive InvestorIf this is you, one of the best options to get started in real estate investing is through passive real estate investments, either through turnkey rental properties or through commercial real estate syndications.
Turnkey Rental PropertiesOn a smaller scale, you could get into turnkey rental properties. Turnkey is exactly what it sounds like; you buy it, and it’s ready to go, with minimal involvement or work needed. However, you would need to hire a Property Manager, manage them as needed, manage the accounting, and make sure you are financially set for when maintenance issues hit, the tenant moves out, or the tenant stops paying rent.
Commercial Real Estate SyndicationsIf you want to go bigger, you can get into commercial real estate syndications, perhaps one of my favorite ways to invest. What is a syndication? Quite simply, a real estate syndication pools together money from different investors. Let’s say I’m a syndicator. I’ve spent tons of time researching markets, analyzing properties, and meeting with brokers, contractors, and property managers. I find an apartment building that I think would be a homerun investment. This apartment building costs $4 million, which requires a $1 million down payment. I have $100,000 to put in, which leaves me with a $900,000 deficit. I need to find investors to fill in the rest. As an investor in my syndication, you rely on my time and expertise. I take care of all the day-to-day operations, renovations, accounting, etc. You just put in your money, and every quarter, I send you a check with your percentage of the returns. You would also get a portion of the profits when the apartment building is sold. Your money goes toward revitalizing and improving an apartment community, and you see great returns. Win-win.
Overview of These Types of Real Estate InvestmentsWhat you put in Your money What you leverage Other people’s time and expertise What you get Ongoing passive income, confidence knowing your money is being put to good use by an experienced team. ______
The Little Money / Little Time / Hands-off InvestorNext, let’s say that you don’t have very much money or very much time or interest in real estate. You just know that it’s a good investment, but you have different passions and goals in life. That’s okay. There’s a place for you too, in the world of real estate investing. For you, one of the best and easiest ways to get involved in real estate investing is through real estate crowdfunding sites.
Recommendation: Invest through a real estate crowdfunding siteThat’s right, just as Kickstarter crowdfunds new products, real estate crowdfunding sites crowdfund commercial real estate projects. However, unlike Kickstarter, these investments come with cash returns rather than rewards in the form of t-shirts and sneak peeks of beta releases. Real estate crowdfunding sites are available to the public, often have very low barriers to entry (as low as $500 minimums), and serve both accredited and non-accredited investors (what the heck is an accredited investor again? Find out here). These conditions make commercial real estate much more accessible to the general public than it once was. It used to be that you needed to know someone directly involved in a real estate syndication in order to invest in one. And while this is still true in many cases, new SEC regulations have opened up a channel to allow certain types of syndications to be advertised to the public, which has led to the birth of many, many real estate crowdfunding sites. So, if you’re strapped for both time and cash, but you still want to try out real estate investing, crowdfunding is a great place to start.
Overview of These Types of Real Estate InvestmentsWhat you put in Your money (in small amounts) What you leverage Crowdfunding platforms, experienced deal sponsors, strength in numbers (i.e., lots of people all putting in small amounts of money) What you get Tons of choices on crowdfunding platforms and real estate projects, ability to invest with very little capital, various types of projects, and project lengths to suit your investment goals. _____
The Little Money / Lots of Time / Hands-on InvestorIf you’ve been bitten by the real estate bug and want to start investing but don’t have much capital at the ready, yet you are not afraid to roll up your sleeves and get dirty, you might fall into this category. Even though you might not have saved up as much as you would have liked, you are interested in learning more about real estate investing and are willing to put in some time and effort (aka sweat equity). In my opinion, this is perhaps one of the most fun positions to be in. Count yourself fortunate that you have a passion for real estate, as many people get headaches just thinking about the analyses, paperwork, and potential rehab nightmares. There are many ways to get into real estate investing with little or no money if you’re willing to hustle and be creative.
Your Strengths, Interests, and GoalsTake stock of which aspects of real estate investing interest you the most. Is it the thrill of the hunt for those fantastic deals? Planning and executing renovations? Running the numbers? Analyzing neighborhood trends and markets? Figuring out what you’re most passionate about, as well as where your strengths lie, will help you hone in on how to start your real estate investing journey. Moreover, what are you in it for? Are you looking to create short-term capital or long-term equity? Passive income or a quick buck?
Recommended Real Estate Investment StrategiesBelow is a quick rundown of some of the most common ways people with little money and lots of time and interest can get started in real estate investing.
- Fix and Flips
- The BRRRR Strategy
- House Hacking
- Real Estate Crowdfunding Sites