Now that we covered real estate cycles in part I, let’s discuss selecting a real estate strategy. As we previously discussed, regardless of where we are in the real estate cycle, there are always deals out there. Before you dive into finding deals, you should know what you want out of real estate. Develop an understanding of why you want to invest in real estate. This will help you select your real estate strategy and goals.
Your real estate strategy and goals
Your real estate strategy will guide you on your quest of finding a property. There are dozens of ways to make money in real estate. Some strategies may be more appealing than others. Likewise, other strategies may not work for every investor. Knowing your strengths and goals will help you select a strategy.
Most real estate strategies can be lumped into two categories – mostly active strategies and mostly passive strategies.
Mostly active strategies – include activities like wholesaling, fix-n-flip, live-n-flip, BRRR, arranging syndications, and being a real estate agent. All of these activities require meaningful time commitments. Active real estate strategies can yield great returns (or losses). After the transaction is done, the investor realizes a profit (or loss) and then they’re in search of the next deal. There is no residual income. Active strategies require the investor to exchange time for money.
Mostly passive strategies – include house hacking, buy and hold rental properties, participating in a syndicated deal, and private lending. All of these activities require some time and energy upfront. However, long-term, the time commitment is low compared to active strategies. The mostly passive strategies provide a residual source of income. This approach allows the investor to collect a reliable stream of income every month for little or no effort.
What strategy is right for you?
There is no right or wrong path in real estate. I’ve known investors to create prodigious wealth by flipping houses. Likewise, I’ve seen investors enjoy amazing cash flow generated from their rental property portfolios.
Take a moment and think about what your goals are in real estate investing.
Ask yourself the following:
Are you looking to accumulate capital for your time?
Are you looking to build wealth quickly?
Are willing to put in a lot of time and energy?
Are you willing to take more risk to reap larger profits in a shorter period of time?
If so, the mostly active strategies may be more appropriate.
Now ask yourself:
Are you looking for less of a time commitment?
Are you more comfortable taking less risk and willing to accept lower returns?
Are you looking for a steady and reliable income?
Are you looking to build wealth gradually over time?
If so, the mostly passive strategies may be more appropriate.
Some investors prefer mostly active strategies. This approach to real estate investing can be lucrative and provide a great way to build capital – especially when you are starting out, and have limited cash. The more active strategies provide a way to create a mountain of cash in a shorter period of time.
However, I find these activities more like a job. After a flip, wholesale transaction, or closing a deal as an agent you collect a fee (profit). Once this fee is collected, you are back to ground zero and do not have a residual income stream. You simply traded time for dollars. Some may be ok with this.
I prefer the mostly passive strategies (will touch on this in a moment).
Investors new to real estate investing should specialize in one aspect of real estate. Focusing your time and energy on one specialty will make you a better investor. Success becomes more obtainable with a singular focus. This approach allows an investor to improve and eventually master their craft. Mastering a craft yields better long-term results.
Alternatively, poor results are often the byproduct of attempting too many things at once. If an investor attempts to wholesale, fix-n-flip, and build a portfolio of long term buy and hold rental properties all at once – they run the risk of spreading themselves too thin. Their attention will be pulled in too many directions which may result in not getting deals done. Or worse yet, the investor will poorly execute their strategy.
My real estate strategy and goal
My real estate strategy is to buy and hold properties for cash flow. My goal is to generate enough cash flow from my rental property portfolio to cover my living expenses. More specifically, I prefer buying ugly properties that need a moderate amount of work. I’ve found the best value and returns in this space.
Additionally, I look for two types of properties:
First, I am interested in single family homes with at least three bedrooms and the potential to add another bedroom or two.
Second, I seek buildings with 2-4 units.
I love passive income provided by rental properties. I like investing for cash flow, buying and holding properties long-term, and collecting checks every month. Building a rental property portfolio of a couple properties has afforded me a full-time income for part-time efforts.
Last year, my rental property portfolio increased my net worth by over $50k. The best part? I can depend on my rental property portfolio to provide steady income year after year. Over time, my income will increase with inflation as well.
Occasionally, I will entertain a turnkey property. A turnkey property requires little or no work. As such, the investor may walk into instance cash flow at closing. In some instances, the investor may need to find tenants but all the units are ready to be occupied. Turnkey properties provide lower investment returns compared to renovating the property yourself. However, turnkey properties require less time and energy – so there is a trade-off.
What do you want to achieve by real estate investing? What are your real estate goals? Do you prefer to spend more time actively working on projects like flips and wholesaling? Or would you rather focus on more passive activities like rental properties?
Next post, we will explore creating your search criteria and finding deals.