The Right Way To Start Investing In Real Estate (Part 1 of 2)

What is the first question a cab driver asks you when you get in the car?

Ok, after they ask how your day was. I’m sure you all don’t get into a deep engaging conversation as the driver pulls off aimlessly. Before the driver pulls off, maybe before you even get in the car, the driver will ask “where are you going?”

How about when you sit down at a restaurant. Have you ever sat down and had a waiter immediately bring you out desert and coffee? Probably not. Before the waiter serves you an item on the menu they ask “what do you want?”

Every day in life we are faced with these situations that make it clear the importance of having a goal before you execute if you want success. The driver cannot help you achieve your goal of getting to a destination if you don’t even know the destination. The chef can’t cook the right meal, nor the waiter bring you the right meal without the end goal of what you want to eat. Without a goal we end up no-where or somewhere we do not want to be.

That is why the first and most important thing you should do before taking on any venture, including real estate investing, is to clarify and set your goals.

Two Reasons Why You Should Set Goals

Goals provide direction – Just as we saw with the taxi driver, you literally don’t know where to go or where you are going until you have a clear goal. The driver could drive all day and the chef cook all evening without you getting to a place or meal that fit your needs.

Goals keep you focused so you can manage your energy – When you have a goal it is easier to say no to things that are not aligned with your goal and you will be able to move more quickly to take action on the items that are aligned to your goal. When your goals are clearly known, you won’t waste time chasing things that don’t help push you towards your goals. This leaves you with more time and energy to focus on those things that will help you achieve your end desire. Imagine you spent a whole day driving around the city when really all you wanted to do was visit a friend down the street? You would be pretty frustrated I bet, not just at missing your goal but also the loss of time and energy.

Identifying Your Goals

Don’t know how to identify your goals? Here are a few questions you can ask yourself to identify what your real estate goals are:

1. Why are you investing in real estate? People do not invest in real estate just to invest in real estate. The great thing about real estate is that it can be used as a vehicle to achieve your end goals. If you are already clear on those end goals (or even have a slight idea) then this is the beginning of knowing what your real estate investing goal should be.

2. What is your financial status and needs? Knowing where you are financially can help inform you of where you want to go. If you are about to retire then your needs and resources will look a lot different than a recent college grad that hasn’t yet landed a job.

3. What type of return are you comfortable with? This question is like asking “would you want to invest in a government bond or a new tech company stock with promising future?” Some people are OK with low returns that are more stable and reliable in contrast others prefer higher returns that carry more risk. Are you risk averse or are you able to stomach a bit of risk? Additionally you may not think a deal is good if it does not provide you a certain return. Consider this: if the investment is providing you less than what you receive on your savings account would you invest?

4. How quickly and frequently do you want to receive pay outs? Some people live completely off the cash flow from their investments. This is their only source of income. Others have a steady job and their cash flow is just icing on the cake. Some people have financial commitments in the near future while others are saving for retirement and don’t need to see their money any time soon. Depending on which category you fall into this will impact your goal.

5. How much time do you want to spend? Real estate investing can be a full time job or it can be a hobby on the side. You can spend 10 hours a day or 10 hours a month. The amount of free time that you have and time that you want to spend investing will greatly influence which goals you should have and the strategies used to fulfill those goals.

Once you know the answers to these questions you will know what type of investment strategy you should pursue. You can pick the strategy that most aligns with your goals. If you have multiple goals, short term and long term goals, you can pick multiple strategies and asset classes or change your strategy and asset classes over time to align with your changing goals. So what are the main types of investment strategies in real estate?

3 Main Real Estate Investing Strategies:

1. Distressed – Distressed properties are in poor shape and highly undervalued. Investors that take on these properties usually are OK with high risk as they expect a high reward from restoring this property. This potential investment strategy does not provide high ongoing cash flow but can create a big payday once the project is done. Those that invest in distressed properties typically look for appreciation and don’t mind waiting for their payday.

2. Turnkey - Turnkey investments are more stable and low risk. They require little additional work and provide a reliable ongoing cash flow. Investors in these property types usually are looking for cash flow instead of appreciation.

3. Value Add – Value add investors look for a mix of the previous. Average risk and average rewards. This strategy allows for the investor to gain some appreciation while still getting a decent ongoing cash flow – the best of both worlds!

Based on your goals that you set, which one of these strategies are a best fit? Which strategy or strategies would put you in the best position to achieve your goals?

Having your goals and strategies are only 2 parts of the 3-part recipe that will help you fully understand how you want to approach your real estate investing. In our next article we will cover the two main types of real estate investors.

Read part 2 of this article here.

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