You’ll almost certainly change you real estate investing business plan over time but you must have one before making your first investment. I strongly suggest the first part of your plan be to educate yourself about the many ways you can invest in real estate. Then pick one method and stick with it for at least one investment. Failing to learn the various investing strategies often leads wanna-be investors to jump from one shiny object to the next every time a new strategy comes along instead of picking one and making a first move towards financial independence.
What to Consider When Picking an Investment Strategy
There are two broad strategies to begin with. First, you need to decide how long you want to hold the property. Long term as a landlord or short term to flip it to an end buyer. As a short term investor, you look for properties that have a strong potential to increase the value quickly. These you need to purchase at least 20% below the future value. They must have unrealized potential. You make a few changes to increase the value and sell to another buyer.
If you want to get into the landlord business, you need to understand the capitalization rate. The capitalization rate is the net operating income (rent minus operating expenses before debt service) divided by the purchase price. You’re looking for a capitalization rate of at least 10% (higher is better). This is the cash-on-cash rate of return you would earn if you owned the property free and clear.
A third strategy is complete speculation and not recommended. Unfortunately, seeking fast market-wide appreciation is the most common investment strategy. This is when the investor buys at near fair market value with the anticipation that the entire market is about to go up in value. This had a major influence on the recent market collapse. This strategy is based more on luck than having a dependable investment strategy.
Other Elements of Your Investment Strategy
One of the most important elements to real estate investing is how much cash you have available to invest. Buying foreclosures on the courthouse steps requires all cash, making it very expensive. If you only have a little cash, you can buy tax liens instead. Of course, there are ‘no money down’ methods such as buying ‘subject to existing financing’. However, these deals are few and far between.
Also consider your aptitudes. If your going to flip houses, you might not need to have great mechanical skills but you do need to know what needs to be repaired or remodeled and have a reliable way of estimating costs before making a purchase offer. If you’re going to be a landlord, you’ll need to have decent people skills. Both to judge the character of applicants and to get along with tenants. If you want to own multi-unit buildings, it’s a good idea to have skills managing employees.
Also consider ethics. If you go with what most of the current real estate investment gurus are teaching, you’ll be unethical in your deals, in my opinion. These strategies require you to be a sophisticated investor looking to take advantage of unsophisticated sellers in financial distress. I understand the concept that these people are offering help when no one else will. However, the business model generally encourages you to beat these distressed people down as low as you can.
This is far from an all inclusive list of what you need to consider before becoming a real estate investor. However, it should give you food for thought to get started. For more about investing strategies, check out this informative article: http://realtybiznews.com/real-estate-investing-fundamentals-strategies-for-2014-part-one/98723351
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.