You'll find that many people in real estate would like to start investing at some point. What's holding them back? For some, it's money. For some, it's time. For some, it's that they haven't developed a strategy to know when to jump in or how.
Here are some key considerations when thinking about investment properties.
1) What Is Your Buy Box?
To start, consider what you want to invest in. This can evolve over time, yet it's important to gain some clarity so you know when to jump in the pond.
What type's of properties are you interested in? It could be single-family homes, it could be duplexes, townhomes, condos, etc. Each of these come with different costs, potential maintenance issues, etc. that you'll want to think about. Who is going to mow the yard? Shovel the snow? Are you going to do it? Are you going to ask the tenant to do it? Are you going to hire it out? If your property is part of an association, chances are that some of these items are taken care of as a cost of the association. So you'll want to take a look at the time you're willing to invest & the cost investment of maintaining the property before you decide which types of properties will be a fit for you.
Where is the property located? If you're going to do the maintenance and primary repairs, you're not going to want to drive an hour away each time you have to go there. If you have a property management company, this is less important. For one of our rentals, I made the decision that it had to be not far off the route of when I drove home from work each day. That way I could stop by on my way home, work for a couple of hours, and I didn't lose extra time driving. It may not be as big of a deal on a single property, yet as you grow it can become more of an issue. So find a location that fits for you.
What price can you afford (based on your risk) that's going to give you the return you want? Each neighborhood is different and within each city you'll find different pockets of neighborhoods. Some will be great for you, some won't. Begin doing your research of home values, rents, etc to get a feel for the numbers you want to have. The return you're looking to get is going to be based on your long-term strategy (which we'll cover next), yet you need to start running some numbers so you get comfortable analyzing deals so you know when the right one comes along.
Knowing the answers to these questions will help you solidify your buy box. Having a clear buy box will help to take the emotion out of the process and will also help give you clarity and focus so that you're not running all over the place chasing after dozens of deals just to get something on the board. Find a sweet spot you're excited about. You can always increase your buy box later, yet start with something tight and focused that you feel comfortable with to give you the strongest likelihood of success.
2) What Is Going To Be Your Long-Term Strategy? Are you going to flip the house? Are you looking to rent for a year or two? Are you planning to rent it our long term as part of a buy & hold strategy? The answer to these questions determines how you proceed in the short term.
I was recently listening to the Bigger Pockets podcast - Episode 398. In it, investor Tarl Yarber discusses how he used to run a flip business. Originally his thinking was a short-term mindset - "Why would I hold a property to net $500-1000/mo on rent when I could flip it for $50k right now?" It would take 50 months, over 4 years, to net the same 50k holding it that he would flipping it. With that mindset, it made sense for him to flip everything.
Over time, he realized he was getting burnt out, his profits were dwindling, and he was ready to throw in the towel and get out of the business. He and his wife then decided to consider holding properties. They quickly realized, in addition to the $500-1000/mo they gained on rent, they also had tax savings, depreciation, principal reduction on their mortgage, and they had an asset that they could always sell in the future and get the original $50k back if they really needed to. Sometimes you have to go through these hard periods of learning to come up with a better way.
So they went from short-term thinking to long-term wealth building thinking. They still do flip some properties, yet they first ask themselves if it makes financial sense to hold it, and if not they can always flip it. Plus, they now have a portfolio of over 20 homes they are making money on each month. They also travel more, spend more time together, and still accomplish their financial goals.
So each person and each circumstance is different. Look at your short-term goals and your long-term goals to find the strategy that fits best for you and the life you're currently living, and the life you want in the future.
3) Is now the right time to take the risk? What is my exit strategy if things go sideways? While there are many success stories that come with investment properties, there are also learning moments. Give yourself grace on your first property because you're only going to get better. It's important to know the risks at play and ensure you have enough cushion to take that first risk.
You don't want a bad first deal to put you in a deep hole that will be tough to get out of. So make sure that first risk is a calculated risk and play out what your plans are for things that could go wrong. How much money could you lose and what's your plan to recover from that? Have that plan mapped out before diving in. While it's important to get started, make sure that you have enough of a financial runway to handle some bumps in the road.
4) What future reward am I giving up if I don't take the risk? If investments are where you want to go, at some point you have to make the leap. You're never going to learn how to do it (and get better at it) unless you start. Hone in your buybox and begin looking at deals that fit within that. Find your financing and understand what their limitations are so you know you have your financing secured when you're ready to get that first property.
Remember your "why"? If you're feeling a bit shy about making the leap, remind yourself where you want to go. The best investors all had to start with one property and you do too. The best success can happen just outside of your comfort zone.
There is so much more we can cover on these topics. This is meant to get us started and we'll cover much more in the months and years ahead.
Are you an investor and have a great story to share on the way towards financial freedom? We want to hear it! Email us at [email protected] to find out how you can be our next guest on REL Freedom Stories.