Investing in a Real Estate Portfolio
Over the many years that we’ve been serving real estate investors, one of the most asked questions on our site, OnPointeRealEstate.com, has been, “How do I get started in real estate investing?”
People from all over the world have been coming to On Pointe Real Estate to find the answer to that question. While some may lead you to believe that there is a simple answer that works for everyone, that simply isn’t the case.
Where do “I” begin???
Your Real Estate Investing Education
- Before you start investing in real estate, it is imperative that you get educated in the important concepts.
- There are dozens of ways to learn and build your knowledge base.
Books—As the old saying goes, “Those who lead, read.” Books are fundamental in gaining an education in real estate and may be the most widespread learning method for investors. Real estate books are produced each year by the thousands, and every major bookstore in the world contains an entire section on real estate investing. Chances are, if there is a way to make money from real estate, there has been a book written about it. On Pointe Real Estate Publishing has an entire catalogue of books by a host of expert authors, covering topics from personal finance to beginner-friendly and advanced real estate investing strategies. If reading books, however, is not within your arsenal of skills, you are in luck. Today, we live in a world where nearly every new book is also available as an audiobook.
Blogs—Blogs can be an amazing source of information. There are fantastic ones written on every topic you can imagine. There are many great blogs written by people living in the trenches of real estate that are worth checking out and learning from.
Mentors—Perhaps the most powerful way to gain a good education in any field of study is through a mentor, and the same holds true in real estate. While there are dozens of professional real estate mentors who charge for their services, there are also millions of mentors all over the world who will charge you as little as a cup of coffee—these are your local investors. People enjoy sharing what they know, and seasoned real estate investors are no different. By introducing yourself to a successful local real estate investor whose career you’d like to emulate, you’ll gain the opportunity to learn from someone in the field who knows your market and may ultimately become a partner as you gain success.
Podcasts—One of the more recent innovations in the world of real estate investor education is the podcast. A number of great podcasts have emerged in the past few years. In fact, with just a smartphone, you can listen to hundreds of hour-long shows covering a wide variety of real estate topics whenever you’d like—whether in the car, jogging, or lying in bed—for free
Choose Your Real Estate Niche and Strategies
- There are a number of different strategies and angles from which to approach the business of real estate investing. The more you focus on one specific thing, the better and more knowledgeable you become at it.
- A Box of Chocolates:
Have you ever received a box of chocolates as a gift over the holidays? There are always so many choices, and sometimes, you need to take a little bite of each one to figure out exactly what’s inside. In a way, learning how to invest in real estate is like that same box of chocolates. There are dozens (if not hundreds) of different ways to make money as a real estate investor, and it’s up to you to choose the niche you want to get into.
You may absolutely love some niches and strategies, while others may make you shudder. You don’t need to choose them all. Learning how to successfully invest in real estate is about choosing one niche and becoming a master. This chapter will open up that box of chocolates for you to sample, pulling back the curtain of the most common real estate niches.
Remember: Once you identify the niche you want to get started with, you will be able to narrow down your focus, become an expert, network within that niche, and begin building wealth by executing a plan of action.
Choosing Your Real Estate Investment Niche
The following list includes the most common property types that real estate investors deal with. Each has
many subsets as well, but remember, you don’t need to know about them all. This is merely a list to help you understand what options are available, from a 40,000-foot view.
Raw Land
Raw land is nothing more than basic earth. Land, on its own, may be improved (adding value), and it may be leased or rented to create cash flow. Land can also be subdivided and sold for profit. Some investors choose o buy raw land with hopes (or plans) to someday sell it to be used in external developments like the construction of a freeway or a housing development.
Single-Family Houses
Perhaps the most common investment for most first-time investors is the single-family home. Single-family homes are relatively easy to rent, sell, and finance. That said, in certain areas, the rents derived from single-family rentals (SFRs) won’t be enough to provide positive cash flow.
Multifamily Houses: Duplexes, Triplexes, and Quads
Small multifamily properties (2–4 units) combine the financing and easy-purchasing benefits of a single-family home. Bought properly, these can produce a good amount of cash flow, and there is often less competition than you’d run across bidding on single-family homes. Best of all, these properties can serve both as a solid investment and a personal residence for the smart investor. By buying a small multifamily property, you’ll be taking advantage of the economies of scale, because only one loan is needed to secure multiple units. One of the things that makes these investments so appealing is that most banks evaluate small multifamily properties (fewer than five units) with the same guidelines as a single-family house, which can make it easier to qualify for the loan.
Small Apartments
Small apartment buildings are generally made up of between five and fifty units, although the line between small and large apartments is not set in stone. Properties with more than fifty units can be more difficult to finance than single-family homes or those with two to four units, because they rely on commercial lending standards rather than residential ones. However, these properties often provide significant cash flow for an investor who can deal with the more management-intense nature of these properties. Additionally, there is generally less competition for this property type, because they are too small for big professional Real Estate Investment Trusts (REITs) to invest in more on this below), but too large for most novice real estate investors.
Instead of being priced based on comparable properties (often referred to as “comps”), the value of these properties is evaluated based on the income they bring in. This creates an enormous opportunity to add value by increasing rent, decreasing expenses, and managing the property effectively. These properties
are a great place to utilize on-site managers who manage and perform maintenance in exchange for free or decreased rent.
Create Your Real Estate Business Plan
- As the ancient proverb goes, “a house built on sand is subject to collapse.” By creating a strong foundation foryour real estate investing endeavors to stand upon, you will create a sustainable business that can ultimately weather the storms you may face.
What’s YOUR Plan
If you were to get in your car and take a road trip across the country to somewhere you had never been, would you just trust your gut and start traveling in the general direction of your destination? Most likely, you’d bring a road map of sorts.
The reason we use maps and GPS is because oftentimes, the road is unpredictable, and the right road may seem to lead to the wrong place. Other times, the wrong road might seem to point directly toward your destination. Road maps are created to identify the easiest route, pitfalls you want to avoid, and special things to see along the way.
The same principle applies for your journey into real estate investing. This section will discuss building the road map that you’ll follow on your real estate journey. In business, we call it a business plan.
Mission Statement—When people ask you what you do, what do you tell them? Your mission statement should clearly define your purpose, and it should include the benefits your business provides. Do your re- search and come up with a solid mission statement. This is the purpose of your road trip.
Goals—Where do you want to go? What do you want real estate to help you to achieve? If your goal is to make $5,000 per month in passive income, write that down. If your goal is to flip four houses per month, write that down. These goals may change over time, affecting the rest of your business plan—and that’s okay. Make sure to put down both short- and long-term goals. By setting smaller, more achievable goals, you’ll give yourself something to consistently look forward to accomplishing, which will help you stay motivated.
Strategy—There are hundreds of ways to make money in real estate—but you don’t need that many. You simply need to choose one strategy and become a master of it. That strategy (vehicle), if dependable, will carry you through to your destination (your goals). If you choose to flip houses to generate cash in order to save up enough money to quit your job, write that down. If you want to build passive income for your retirement by buying up small multifamily properties, write that down. Don’t worry if you don’t understand (or know) how you’re going to accomplish everything in the plan. Remember, your business plan can, and will, change in time. As you learn, you’ll fill out your plan with additional details.
Timeline—What is your desired timeline to reach your goals? Be realistic, but don’t be afraid to reach, either. Do you want to retire in ten years? Are you planning to quit your job next month? Document your timeline here. Do this in accordance with your goals.
Market—Define your market. What kind of properties will you look for? Low-income? High-income? Commercial buildings? As a beginner, choose an area you feel most comfortable with. As a new investor, plan on investing in a property that is within short driving distance of your home (unless your local market makes it im- possible). Doing this will help you to become an expert in your locale, which will help you analyze nearby deals and opportunities. It will also help you identify and get to know the players in your area, which will ultimately help you find partners—and, again, more opportunities.
Criteria—Before you go out and start looking for deals, you need to establish a strict criteria for them to adhere to. You’ll want to define your loan to value, cash-flow requirements, max purchase price, max rehab budget, and max timeline, to name a few. One of the most important lessons you can possibly learn is to stick to your criteria and walk away from any deal that does not meet that criteria. Too many new investors get ex- cited and buy the first deal that comes their way. By having clearly defined criteria, you are able to easily reject the 99 percent of properties that won’t end up being a good deal.
Flexibility—If you don’t find enough deals to cherry pick from, change your market and/or strategy. You’ll learn more about this in Chapter 5. Flexibility within your criteria is one of the most important concepts to understand and clearly define.
Marketing Plan—How are you going to create a marketing system that brings in motivated sellers? How will you find the best deals that are listed? Will you use the MLS, agents, online searches, direct mail to lists, or other means of finding deals? At On Pointe, we can help with this part.
Financing Deals—How do you plan to acquire deals? Are you using conventional loans, hard money, private money, equity partners, seller financing, lease options, or some other creative method? Finding financing is of- ten a challenge in today’s market, and private money provides a tremendous solution. Learn to attract private money, so you’ve always got a steady flow of financing when deals present themselves.
How You Do Your Deals—How are you going to turn a property purchase into a profit? Clearly define the steps. Make sure to carefully document your income and expenses, and prepare for the unexpected. You should prepare several exit strategies in case the first one doesn’t work out as planned.
How Do I not Lose All My Resources
Live by the 2% Rule:
What Is the 2% Rule?
The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To implement the 2% rule, the investor first must calculate what 2% of their available trading capital is: this is referred to as the capital at risk (CaR). Brokerage fees for buying and selling shares should be factored into the calculation in order to determine the maximum permissible amount of capital to risk. The maximum permissible risk is then divided by the stop-loss amount to determine the number of shares that can be purchased.
KEY TAKEAWAYS
- The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade.
- To apply the 2% rule, an investor must first determine their available capital, taking into account any future fees or commissions that may arise from trading.
- Stop-loss orders can be implemented to maintain the 2% rule risk threshold as market conditions change.
How the 2% Rule Works
The 2% rule is a restriction that investors impose on their trading activities in order to stay within specified risk management parameters. For example, an investor who uses the 2% rule and has a $100,000 trading account, risks no more than $2,000–or 2% of the value of the account–on a particular investment. By knowing what percentage of investment capital may be risked, the investor can work backward to determine the total number of shares to purchase. The investor can also use stop-loss orders to limit downside risk.
In the event that market conditions change, an investor may implement a stop order to limit their downside exposure to a loss that only represents 2% of their total trading capital. Even if a trader experiences ten consecutive losses, using this investment strategy, they will only draw their account down by 20%. The 2% rule can be used in combination with other risk management strategies to help preserve a trader’s capital. For instance, an investor may stop trading for the month if the maximum permissible amount of capital they are willing to risk has been met.
We hope this information has been helpful to you. Please reach out to an On Pointe Real Estate professional for an in depth conversation centered around your specific needs.