- January 22, 2021
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
A common question people ask when they step into the world of real estate investing is, “What’s the best way to get started in real estate?” I asked this same question back in 2012, shortly after my son was born, and I started thinking about how we could build a stronger financial future for our family.
The good news is that there are many ways to get started, and you are not alone if you’ve been interested but haven’t entirely made the jump yet. Believe it or not, there are more people out there than not, standing on the sideline because they feel intimidated and overwhelmed just thinking about this question. However, just like anything massive you want to conquer in life, you must take it one step at a time, do something every day that will move the ball in the direction of your goal, and you will get there.
You’re off to a great start if you’re reading this guide! Here’s what you can expect in Part I of this two-part guide. I will ask you a few key questions to help you figure out where you are and what you hope to achieve through real estate investing. Based on your answers to these questions, we will dive into some options based on the category you fall under. This will be covered in Part II of this guide.
The following is an overview of what we’ll cover in Part I:
- Get a 10,000-Foot-View of Where You Are
- Determine Your Why
- Decide How Involved You Want to Be
- Assess Your Risk Tolerance
- Figure Out How Much You Want to Invest
- Decide Which Type of Real Estate Investments Fit with Your Lifestyle
Real Estate Investing Roadmap
Download this one-page guide to help you organize and record your thoughts for each step below.
Step 1: Get a 10,000-Foot View of Where You Are
The first step before throwing any amount of money into an investment, you must have a clear view of where you are in life currently, personally and financially, and the outcome you are after. It is an excellent time, to be honest with yourself.
Maybe you’ve just graduated from college, in mid-career, soon-to-retire, or somewhere in between. Do you know how much you have to invest? What types of returns are you hoping to get? How you’d prefer to receive your returns, a large, one-time payout, or maybe a smaller, ongoing interest income? While you’re at it, why not take it one step further and figure out what it would take for you to become financially free? This means, how much passive income would you need to cover all your living expenses each month?
Getting a 10,000-foot view of your current situation and answering these potentially tough questions about yourself will help you assess several things. These include the amount of risk you’re willing to face, how aggressive your investment strategy should be, how much you can comfortably invest, the returns you’d like to get, and the timeframe in which you need to see returns. These are essential questions to help you decide how and when to get started in real estate investing.
Step 2: Determine Your Why
While having many choices and ways to invest in real estate is incredible, it also makes it very easy to get the shiny object syndrome. That’s why this beginning stage is so critical. You need to figure out what speaks to you and to determine your why first. Otherwise, you may find yourself frantically leaping from one opportunity to the next, only to discover that this one takes too long, that one is too hands-on, and the one before that was too passive. What’s the reason you want to invest in real estate? Take some time to truly understand your personal and financial goals and identify what you want out of investing.
Do you want to create passive income so you can quit your job and be present with your kids? Are you interested in becoming a landlord and managing property full time? Are the tax benefits of real estate most attractive to you? Is there something you are hoping to get out of real estate that you are not getting out of your current investments in stocks, bonds, CDs, savings accounts, etc.)? What do you really want?
Becoming firm in your reasoning and goals before investing will help you avoid shiny object syndrome and the stress it causes down the road.
Step 3: Decide How Hands-on You Want to Be
It’s hard to believe if you tell me you haven’t seen those HGTV shows where they take a dilapidated junk house with mold and critters and turn it into a champagne-worthy gotta-have-it piece of real estate with significant curb appeal.
If you’re vying to be the one busting drywall and exploring the crawl spaces, you are perhaps a more hands-on investor. It’s physically challenging yet gratifying work. If you have a family and work a full-time job, be sure to consider how being this hands-on could impact other aspects of your life. It certainly can be done, but there will be sacrifices involved. Also, to make things a little easier, be sure the property you are fixing up on the side is within a reasonable driving distance from you.
If meeting unexpected critters and wearing goggles while removing old dirty toilets makes you cringe, the world of real estate investing has passive, hands-off investment options for you. Passive investing allows you to put your hard-earned money into a real estate investment and let the professionals deal with the renovations, tenants, and any problems that arise. Your biggest job here is figuring out which investment opportunity, in what market, and which operator you want to work with. The operator will provide you with monthly updates and financials to let you know what’s happening with the property, how it’s performing, how the renovations are coming along, etc. You will also receive quarterly distributions once the team has sufficient time to implement the business plan, usually between 6-9 months. You’d also get to participate on any upside, such as a cash-out-refinance and any profit proceeds upon selling the property. Now, that is truly passive real estate investing!
This step is a pivotal decision in the process, so take your time and determine just how hands-on or hands-off you prefer to be when it comes to your real estate investments. Be sure to consider your current situation, your why, the time you have on hand, and your financial goals.
Step 4: Assess Your Risk Tolerance
All investments – stocks, mutual funds, real estate, and even gold – come with risk. Along these same lines, every bit of risk correlates with the potential reward. High-risk investments come with higher potential payouts, and low-risk investments tend to have a lower profit opportunity.
For example, a new construction high rise in a transitioning area may be riskier, while an existing apartment building with current tenants might present a lower risk. Real estate investment components always include physical assets and tenants, along with many other moving parts, but the good news is that there are ways to mitigate risks. It is a good question to ask the sponsorship team how they are mitigating risks on a particular project as every property and team is different. Be sure you’re comfortable with their answers and don’t be afraid to ask for more detail. As a limited partner, do know that your liability in the investment is, limited. The most you could lose is the amount of your investment, the bank can not come after your personal asset.
If the idea of potential losses makes you wince, you should consider beginning with smaller amounts of money so you can learn the ropes and gain confidence. Your returns will come in the form of experience and education at first, and with time, as you grow your capital, the financial returns will come around.
Step 5: Determine Your Investment Amount
Now that you clearly understand your current life situation, financial and time-commitment goals, and the risks you’re willing to take, you can begin to think about the amount of money you’re ready to invest.
As you probably know, you shouldn’t throw your entire life savings at any investment opportunity. Nonetheless, I will let you know you should begin with a modest amount you’re comfortable not being able to access for about five years. Your finances should be set up so that all your current living expenses are entirely covered, you have separate savings for emergencies, and that you have additional plans for income and expenses for at least six months into the future.
When you begin to review investment deals, you’ll also consider the investment’s exit strategies, just in case you need to get your money out sooner than expected.
Step 6: Decide Which Type of Real Estate Investor You Are
Finally, here’s the fun part. At this point, you’ve evaluated where you are, how hands-on you want to be, how risky you want to play, and how much money you’re willing to invest. With this information, you can narrow the types of investments that best fit your lifestyle and goals.
Most likely, you fit into one of these groups:
The Lots of Money / Little Time / Hands-off Investor
The Little Money / Little Time / Hands-off Investor
The Little Money / Plenty of Time / Hands-on Investor
The Lots of Money / Plenty of Time / Hands-on Investor
Within each of these groups, you will want to pick a few opportunities that will allow you to best use the assets at your disposal – your time and your money. In Part II of this beginner’s guide, we’ll take a more in-depth look at what kind of real estate investments would fit within each of these scenarios. Stay tuned…