New Investors

[Mike W.]

I wrote this a couple years ago for another audience and from some of the recent posts I have seen, I dug it up and figured I would share it here. The information is just as valid today as it was 2 yrs ago.

I recently dialoged with an investor friend about what new investors need most when learning to invest. I mentioned to him some thoughts I had on the subject and with some of the recent postings regarding new investors and the concern with the motivation of the members around here, I wanted to share some of the things we chatted about. It seems to me that real estate investors fall into one of the following catagories.

1 - Newbie - Has either just started or has studied extensively on the subject of REI. Has never purchased a property.

2 - New Investor - Has either just started or has studied extensively on the subject of REI. Has just purchased first property*.

[I]Note* - Please keep in mind, I do not consider flipping or wholesaling investing and this post has nothing to do with either flipping or wholesaling. I consider those a form of self employment, since the minute you stop, is the minute the money quits coming in. This post is about purchasing a property to rent for cash flow and long term growth.[/I]

3 - Hobby Investor - Has a good understanding of what he/she needs to know to have a small investment property portfolio. Plans to put systems in place, but they are a one man/woman show now.

4 - Active Investor - Has a portfolio that creates enough cash flow to cover living expenses. They have some systems in place to make managing the portfolio easier, but they are still actively involved in all decision making.

5 - Business Investor - has a large portfolio and employees and systems that take care of most everything. He/She may or may not be the point man to major decisions with the portfolio, the systems in place allow them to make the choice how much involvement they have in the portfolio management.

Now, how do you move between the ranks? The first thing to know is that there is not a magic formula. That means, that what worked for one person is not guaranteed to work for you no matter what they tell you.

The only thing I can do is discourage people from trying to become a real estate investor. Going through the ranks is not easy. Being a successful investor requires knowledge, luck and hard work. The less you have of one, the more you need of the other 2. That means, there are people out there that think they have some magic solution and investing is easy because they had a lot of luck. It can certainly become easy higher in the rankings, but when you are just starting out it is not easy at all.

Consider this. Approximately 1% of type 2 investors will get to type 4 investing. It is likely that < .1% of type 2 investors will ever get to type 5 investing. It is unknown and likely no way to identify the percentage of people that are type 1 to become type 2. The percentage is likely very very small possibly 1% or less. Many may buy a book or find an internet site and then never do anything. So, in reality type 1 is hard to help. My best help is don't become an investor.

With that said, sometimes ignorance is bliss when it comes to investing as long as it is done one property at a time. This means, don't get too caught up in needing to know everything before purchasing a property. Get your feet wet. Pay enough attention to the investment that it doesn't cost you money each month. Just knowing that you have not injected any money in your portfolio for any surprise repairs or vacancies is a testament to you heading int he right direction toward the next level of investing. Buy one property and try landlording or managing a property manager until you are comfortable enough to buy another(FYI, this does not happen in 1 month).

Learn as you go, get a "free" mentor in your area. Type 5 investors love helping people for free. It is best that you have had some experience with REI before meeting with a type 5 investor. They are probably not going to be interested in explaining what a mortgage is or what a vacancy is. Take them to coffee as often as possible. Learn what they do and have done. Identify if that fits your personality and traits or if you are willing to modify some of your behaviors to move to the next stage of investing. Don't feel bad if your personality, motivation or lifestyle doesn't fit the mold of an investor. You don't have to be an investor. You don't have to move to the next level of investing today or even tomorrow or even ever. What you choose to do, is the best decision for you. Money doesn't equal happiness in any way shape or form. Many people with the most money and the biggest ego put on a huge front, but are not satisfied with their lives. They have million dollar or billion dollar problems instead of 10 or 100 dollar problems.

Good Luck in making good decisions for your investing.