How Do You Know What to Invest?
What to expect:
Creating a real estate job for yourself vs. building a real estate business or investing in real estate.
Defining investment rules: expected return, timeframe, and effort required.
Outlining your investment strategy: long-term hold, short-term flip, turnkey, or value add.
Real estate investing strategies and how to identify the best deals
Everyone wants to get into real estate right now. I've never seen the meetups so packed with new people- it's the new hot thing to do! But what no one ever tells you is that there are three ways to get into real estate. The first, which is the mistake that most people make, is creating a real estate related job for yourself. The second, which not everyone really has the time or desire to do, is building a real estate business. And the third is investing in real estate.
Unfortunately, social media really convinces people to go with the first option, which is creating a real estate related job for yourself. Most people go down this route because people, investors, and social media tell them that they need to get their real estate license to get into real estate, and that they need to have at least 10 extra hours every week to spend building their real estate business studying for their real estate license. And that is just not the best way to start building wealth in real estate. The best way is to actually be involved in real estate through either building a real estate business, or investing in real estate. Now you can have a real estate brokerage firm, you can have a construction company, but these are all services that serve real estate investors.
So the third, investing in real estate, is really the place that you want to build up to, you may not be able to start there and that is A-Okay. But do not get stuck in either working in real estate or creating a business for someone else in real estate if you want to build true wealth through real estate investing. So how do you do this? How do you decide if you want to create a job for yourself, run a real estate business, or invest in real estate? Or at least what is right for you at this time in life?
Step 1: define your rules for investing
Ask yourself how much of a return are you expecting? In what timeframe? And how much active time do you want to put in? These three questions will help you define your rules for investing. For example, when I'm investing, I'd prefer to invest in a fund or syndication where I expect a 6% preferred return with a cumulative return of 120% in five to seven years. For this, I expect to put in four hours at the beginning to do my due diligence on the deal but the operators then put in maybe 30 minutes over the course of the next year looking at quarterly returns, and looking at the taxes and the key ones and documents that come in. So really all in all five to 10 hours of work per year per investment is what I'm looking for. But that's where I am not where you need to be. You need to decide how much of a return you're expecting because if you're expecting a 30% return, a funder syndication is not the best option for you. Right? Like what return are you expecting? How much time do you expect to put in if you have 20 or 40 hours a week available that allows you to do so much more than if you have maybe like two hours a week available? And you also want to know what your timeframe is? Are you looking for an investment that will give you your return in one year, two years, five years? 10 years? What is your investment timeframe? Make sure you have these three questions answered so that you can figure out what your rules for investing are.
Step 2: define your strategy
In order to define your strategy, you need to ask yourself, are you looking for a long term hold or short term flip? Are you looking for something that's turnkey or value add? And are you looking for active or passive income? In other words, are you looking for steady monthly or quarterly returns which usually happen in a long term hold? Are you looking to put in tons of work and pull out with one hefty payout like a short term flip? How much time and energy do you realistically want to put in every day or week or month or a year into creating income from this asset? Do you work a nine to five job so you have five to nine then to work on a side hustle for yourself? Are you working 60 to 80 hour weeks and traveling all the time so you really don't have that much time to be pulling up baseboards or unclogging toilets? And what skill set do you have? Are you really good at doing electrical work and putting up insulation? Or are you really good at running the numbers and finding out what's a good deal in the two hours you have? So figuring out your strategy is really important as your second step. So your first step is figuring out your rules for investing in the second step is figuring out your strategy.
Step 3: define your buy box
Your third step then is figuring out your “how”. Now if you're actively investing, your “how” is your asset class, and whether or not you're active or passive, your buy box. What type of deals are you interested in is what you need to identify. So your third step is to identify your buy box. To do this, you need to find assets or deals that align with your investing goals. You need to do the research on different asset classes on different types of deals that are out there. Is multifamily self storage, mobile home parks your thing, are you going to go all in on glamping or if you're on the passive side? Are you interested in equity, only funds and syndications? Are you interested in syndications that only focus on self storage? Are you interested in something with a diverse pool? Are you looking at development based investment opportunities? Are you looking at a renovation based opportunity or are you looking at something that's ready to go and cash flowing already?
Now yes, I know that is a lot of work. But if you want to be intentional about your real estate, investing and wealth creation, and not just create another job for yourself, you need to take the time now to first identify what you want, and what will get you to your goals. So to do that, the first thing you need to do is define your rules for investing. The second thing you need to do is define your strategy. And the third thing you need to do is figure out your buy box. Whether that's an active buy box or a passive buy box, that is up to you, you need to figure that out through your investing rules and strategy. So the third one can kind of split into two different groups, but it's all based on the first two.
What Next?
Now that you have your investing rules, your investing strategy and your buy box, how do you know what to invest in? The most important question you need to ask yourself before you invest in real estate, is how much time, money and risk do I want to put into my investment. Based on the time money risk ratio, you will lean towards either active or passive investing.
Active Investing
Active means you put more time and take on more risk into your investments. But you don't have to bring your own money because you can choose to use OPM or other people's money. Commonly you hear advice on tick tock to get a real estate license so that you can start earning money in real estate. But this is not an investment. This is a job you're creating for yourself. active investing is finding a duplex to house hack taking out a personal loan, putting in the time to learn how to fix up a house, pouring in sweat to make the house rentable finding a tenant who will pay rent on time and won't constantly ring your doorbell to have you fix things in their house including backed up toilets, and managing to make a few $100 per door. But you also get to take the depreciation and build equity which will help you buy another few doors in the next few years. In addition, you do take on the full risk of the loan being on your name.
Passive Investing
So active investing means you put in more time and you take on more risk but you do not need any money to get started. On the other hand, passive investing is when you use your own money, but you offload risk and time. Now passive investing is misnamed. It's not 100% passive. You have to vet the opportunity and monitor its finances quarterly. So it takes about five to 10 hours per year per investment. But what do you get from it? Let me put a disclaimer in here, every deal, every opportunity is different. So what I'm outlining here are different ways that passive investing can happen. Look into each of the deals that are in front of you very carefully, and comb through to figure out what type of deal this is. In some deals, you can get a percentage of the depreciation equivalent to your share in the investment, you can also get equity based on your share in the investment, you can also offload the risk of a personal loan. So whatever money you put into the investment is how much you're risking, you're not risking your name or your personal assets, you're not putting up a personal guarantee, the operator who's running the investment will have to deal with all of that, but you don't. That doesn't mean you can't lose what you put in. So if you're putting in $100,000, your risk is that you can lose that 100,000, but no one is going to come after you for an extra million and look into all of your other assets. So that's how you're offloading the risk. That doesn't mean there is no risk.
There are other opportunities that offer different types of returns. For example, you may get a certain cash flow percentage or a preferred return of some sort, but get no equity or depreciation in the deal. So use your investing rules and your investing strategy to help you figure out which of these passive deals are best for you as well. Again, I know a lot of this is hard work takes a lot of time and introspection to really figure out what it is that you want from your wealth building. But doing this preliminary work, making sure you know the answers to these questions before you put any money into a deal or before you take on the commitment of doing a deal will really make sure that you are building wealth in the fastest way possible because it's aligned with your end goals. And I want to see you succeed. If you found this episode useful, please leave us a review and I'll see you next week.