Investor Education

Before You Invest In Real Estate

Any real estate a person or entity purchases is a real estate investment, but what kind? Understanding the goals, constraints, market conditions, risk tolerance, and a host of other items help us clarify what investments make sense, and how likely they are to perform against an objective.

This is a brief guide for new or smaller investors, so let’s create a framework that allows us to understand one another.

Types of investors:

  1. The majority of home owners in America fall into the first category – live in, and then sell. This is a basic form of flipping, but we won’t call it that since the duration is typically about 5 years. Nonetheless, this is the most significant form of wealth building employed by Americans to my knowledge. Recent information shows that the average net worth of a home owner is 35 times that of a renter, and the numbers are rising significantly. If home ownership isn’t a part of your financial portfolio today, it almost certainly should be.
    1. Primary concerns include:
      1. Purchase Price
      2. Cash for closing
      3. Timing
      4. Immediate / short term repair costs
  2. The flip. This has been made widely popular through a number of semi-reality TV shows. Here, the intent is typically to purchase a property, make a budgeted set of repairs or improvements, and then sell the property. The timing is typically as quickly as possible. In particular if outside funding is required, timing is critical.
    1. Primary concerns include:
      1. Purchase Price
      2. Improvement Costs
      3. Cost of funds
      4. Carry costs
      5. Speed of repairs / improvement
      6. Speed of sale (In most cases 3 months from purchase is the goal, 6 months is long)
    2. Secondary concerns:
      1. Will the property cash flow as a rental if it doesn’t sell
      2. Ability to tolerate the risk or market behavior variance from expectation
  3. Rental Properties come in a variety of forms.
    1. Accidental Landlords: The vast majority of new landlords in the last decade were what I would call accidental landlords. They owned a property they needed to move out of, but the market was not supporting a price at which they could or were willing to sell. Consequently, they moved to a new property and turned their existing home into a rental. Depending on their experience, they have decided to get out of or to expand this trend as the market prices have appreciated.
    2. Intentional, but slow and steady. This type of investor is almost always building their rental portfolio through purchasing primary residences they live in initially, then turn into rental properties as they purchase their next home. I have a unique model for this process that takes advantage of both the tax breaks and mortgage constraints of the current conventional market. For specifics on this plan, please reach out to me directly.
    3. Moderate with significant risk tolerance. In my experience, this person is willing to risk substantially funds to try and leverage and get a head in the market. They will typically own more than 4 rental properties at a given time, and will likely have a structured approach to what properties are held or sold over an expected depreciation period – not ignoring market forces. Many flippers became landlords in this model as prices began to heat up. This created various financial options to maximize return on investment.
    4. Professional investors. To be a professional investor and live or be able to live off of the income your investments produce is rare, and requires a number of components – including substantial cash, lines of credit, a network of repair and maintenance workers, a strong knowledge of how homes and home maintenance items work in general, and a capacity for dealing with tenants – a lot of them.
      1. Primary concerns for Landlords:
        1. Cash flow – is it positive, and am I building a reserve
        2. Repair costs – keeping them under control while being pro-active
        3. Turnover costs – what does it take to find new tenants
        4. Vacancy rate – how many units are vacant and for how long
        5. Depreciation and market value together will typically inform the best time to sell.

To begin to invest in real estate, you need to clearly define your goals. Even if you are just looking for the perfect home to live in, there are additional considerations. Once there is clarity around the objective, it can begin to inform the search definition, the financial instruments that make sense, the exit strategies, and educated models for performance against the goal(s).

If you are in one of the markets Richard or one of his teams serves, reach out to discuss your specific goals. Others, please subscribe to the investment news feed here for the latest information: