New to Real Estate Investing? Here are the Questions You Need to Ask
Ready to take the first steps towards becoming a real estate investor? Exciting stuff.
The best way to jump in is by gaining clarity on what type of real estate investing you’re most interested in—including property type, strategy, and target market—and where you might have distinct advantages.
By clarifying your goals and uncovering underlying motivations, you’ll be able to more strategically begin discussions with other brokers, other investors and potential partners. And if you have a significant other, it wouldn’t be a bad idea to align on these ideas with them, too!
Here are 12 questions to ask yourself if you want to get into real estate investing:
- Are you attracted to real estate investing because you think it’s the best investment vehicle for you based on your goals? If so, educate yourself on the historical returns real estate has produced. This will help you refine your expectations and plan accordingly.
- Are you interested in real estate investing because you think it would be an intellectually challenging and rewarding experience, or are you just interested in a passive approach with monetary benefits? If the former, there are opportunities for hands-on experience such as mentorships, joint venture partnerships, or even internships. The trade-off would be lowering material gains, but many find the experience to be worthwhile.
- Does a certain property type or investing strategy appeal to you? Why? Any response is fair-game here, just make sure you spend some time validating your assumptions. Once you’ve gone through all of the questions below (especially #6-10), come back to this one to see if you have additional thoughts or perspectives.
- Are you seeking immediate cash flow to supplement income, or are you prioritizing higher chances of long-term appreciation and favorable rent growth? Or do you want a mix of both? As a general rule, the greater the chances of appreciation (resulting from barriers to new supply and good economic fundamentals), the lower the going-in yield. Regardless of strategy, make sure you understand the basics of running and interpreting financial models and projections.
- Do you want to focus on projects that involve renovations or that are in good/excellent condition and require little or no work? A renovation project likely increases returns but will take more time, learning, and effort. It’s not uncommon for your first project to exceed 25-50% of your intended budget, so prepare for time and cost overruns. An investment that requires little or no renovations will likely produces a lower return.
- Have you weighed the pros and cons of possible property types and investment strategies against each market you are considering? The quality of a real estate investment is largely dependent on local market factors, and market considerations vary for each property type. A property type that is thriving in a given market can mean very little for other property types in the same market. Cyclical factors that are specific to the target property type, like the supply and demand of space and capital, should always be given the most weight.
- Do you understand where, in terms of the current real estate cycle, you’re getting in? Are you getting in towards the end of a growth cycle, when the “smart money” is selling, or are you getting in early in a recovery when prices are down and most investors are still concerned about a recent decline, recession or depression? Consider what that means as far as your position relative to other, often more experienced investors.
- What skills or advantages do you have at your disposal? As you learn more about possible investment strategies, take note of the overlap between your skills and those that are required to be successful. Regardless of strategy, consistent and repeatable success requires organization, communication skills, and at least some degree of comfort with risk.
- What non-monetary resources do you have at your disposal? Think about your network of family, friends, and mentors. They may be able to offer knowledge, capital, labor, or other types of support for a specific property type or strategy.
- What monetary resources can you bring to the table aside from what a lender in first position (banks, institutions, or hard money) will provide? If you find a deal that is too pricey to take down on your own, do you have friends or family who would join, either as debt, equity, or hybrid partners? Remember, if a great deal surfaces, you'll likely have little time to act, so the earlier you determine your available resources and form a plan of action, the better the chances of locking in a winner.
- Are you in a very high income tax bracket and want to invest in real estate to help decrease taxable income? Talk to a tax professional who is experienced with real estate matters. While the basics of write-offs and deductions are known by most CPAs/accountants, those that focus on real estate can provide insights that tap into another layer of benefits such as cost segregation, categorizing expenses as repairs vs. capital improvements, and much more.
- Will you self-manage or hire a third-party company? Having a good property manager, or becoming one, is absolutely critical for a properties success. If outsourcing property management duties, the process of interviewing, reference checking, and monitoring is one of the most important tasks on an investor’s list, and, of course, it adds a line item to the expense column that should be accounted for.
Getting clear on the list above will help lay the foundation for the early stages of a successful real estate investing career. Responses to these questions can be used to guide you to the right resources, like books, articles, and podcasts, to round out a base of knowledge from which to take action.
And here's the really good news: once you get in the game, you'll see that there are many similarities across property types. There are also significant differences, but if you can identify good deals, you can always engage third party professionals (attorneys, brokers, and advisors) when you need assistance. Consider this as allocating future profit to getting valuable guidance that can help you continue to expand your expertise.
And as a general rule: find good deals and a lot of problems seem to self-solve.