What type of real estate investor are you? Hands on?
If you are starting out in investing, chances are you want to invest hands on. You probably want to either invest full time, or simply add to the family finances with a deal or two a year. Deciding the type of investing that works for you, and how much time and money you should invest, are important decisions.
Choosing a direction and focusing will make a big difference in how successful you are. One thing you should consider is the skill set needed for various niches in the investing world.
If you are an experienced investor, you know more about what you are doing and how much time and financial resources you should allocate to real estate.
But if you are just starting out, make sure you are not cashing in your kid's college fund the first week. Allocate a portion of your capital to real estate investing to stay diversified. As you become more experienced and you have invested in a few successful deals, then you can increase the allocation to real estate.
If you prefer hands-on investing, then consider what niche you prefer. Here are a few examples:
Buy and hold Multi-family investing:
Requires some cash for a downpayment, and thick skin. Buy some books to learn about calculating cashflow BEFORE you start looking at properties. Learn some property management skills BEFORE you buy your first multi. It's amazing how many people buy a multi without having any real understanding of how the numbers will play out, or what a landlord should and shouldn't do. For example, in Massachusetts a landlord can hold first months rent, last months rent, and a one month security deposit. But in New Hampshire, the max is first months rent and a one month security deposit. No pet deposits, either. You need to know these things or they can trip you up.
Wholesaling:
Requires the ability to keep going no matter how many times you hear "no". You must contact a boatload of homeowners to find one who will sell you their house at a price low enough for profit. Finding sellers is a numbers game. Requires no cash except what you spend for marketing to homeowners. If you can find good deals, you'll have no trouble selling them to your local real estate investors who want to rehab. Spend some money on a marketing course, and attend your local REIA's to build your buyer's list.
Rehabbing:
Make sure you can either do the work yourself (properly) or you are good at managing contractors. Paying retail for contracting will kill your profit, or you'll be bidding so low on a property that lots of people will outbid you. Rehabbing requires the ability to find deals, the ability to evaluate how much you should pay, the ability to manage the rehab, the ability to market the house for sale and evaluate the price you should be listing at. The last two can be handled by a real estate agent, but you must know the end value before you can make your offer. If you don't have the funds to buy cash, you'll need hard money or a money partner, because banks won't lend on properties in serious disrepair.
I'm getting a little long here, so I'll discuss hands-off investing tomorrow.
Comments (8)
Sorry to take so long to answer, everyone. Somehow, I am not receiving emails that I have comments, even though my settings say I am. :-( Jon, we do have wholesalers, and some do it full time, but not a lot of them, it's true. It's harder to get started than people realize. The auction pro's that buy at auction and flip the contract (not the property, but the P&S) for 3K - those guys are doing well, because they have a list of rehabbers that can deliver. 3K doesn't sound like much, but if you do one a week, you make a decent living. With no liability. And the reason everyone thinks wholesaling is the way to get started is that they are told that, because you can do it without your own cash. Not because it's easy to do.
Ann Bellamy, almost 14 years ago
I can tell you that we have had investors come to us and use our company for the by & hold strategy as a way to get started and have some help. The funny thing is, these same investors had been going to REIA meetings for years and simply acted as wall flowers for fear of not knowing where to start. Once they bought their first deals, it was like an awakening and suddenly they were making offers on local properties to wholesale and getting involved with a voice at the REIA. Some investors just need a little help to get started and actually "feel" like an investor.
Chris Clothier, almost 14 years ago
Jeffrey, why do you think it is common belief, even here on BP, that wholesaling is the way to get started? Ann, do you see successful wholesalers in your market?
, about 14 years ago
I don't think wholesalers should buy a class. I think they should read on BP and find out that there are only about 2-3 people here that actually make a living doing it. There is one member who has been at it for 3 years and still has not done a deal. The easiest way to start out is being a landlord. Even if it is not for you in the long run, it will teach you about people, property value, and how the systems of a house work and what it takes to keep them working/replace them.
Jeffrey K., about 14 years ago
I don't think that a buy and hold strategy is for everyone. Understanding what is involved with each strategy can help though in deciding on an investment strategy.
Account Closed, about 14 years ago
Buy and Hold can be the most lucrative because you can make the returns infinite, but you are right, it is so easy to get burned out by property management, or underestimating operating expenses. I see that for both single family and multi-family.
Kevin Kaczmarek, about 14 years ago
Another group would be developers. Each of these has different tax consequences as well.
Account Closed, about 14 years ago
For Buy and Hold Investing, I think the biggest mistake investors make is underestimating the operating expenses and that ends up killing any opportunity to buy multiple properties. It is very important to be conservative with estimating OE.
Sharad M., about 14 years ago