All too often in real estate, there is a notion that to be a good investor you must find what are considered "the most lucrative markets" or investments with "the highest returns." While it’s essential to find a market that supports the property and produces a good return, none of that matters if you don’t have the time, knowledge, or capital to pursue it. Rather than chasing the "best," instead concentrate on finding what is best for you based on your investment goals, financial means, risk tolerance, and time availability. Let’s dive into the things that matter when determining the best place to invest.
How much time do you have?
Time is by far our most valuable resource. Even though we all have 24 hours in a day, some people have more time than others. With the never-ending demands of work, family, and friends, our time and attention are pulled in several directions. Before starting a new venture such as real estate investing, it’s important to assess your current schedule and determine how much time you can dedicate to this business. There is a big difference between having a few hours per week to review investment opportunities, company reports, or work with contractors, tenants, or managers, compared to just a few hours per month. Rather than pursuing an investment strategy because it’s the "best" right now, align the investment vehicle with the time you have available to spend.
If you are short on time and are looking for more passive investment opportunities, it may be best to start by investing in REITs, real estate exchange-traded funds (ETFs), or if you are an accredited investor, in real estate crowdfunding. These avenues of real estate investing are pooled investments in which your money is spread across a company that owns several different investments, or one larger investment. You don’t play an active role in the acquisition or management of the property, and these investments require less time than finding and managing your own real estate investment would. Passive investments can require just a few hours of your time each week in learning about the investment strategy, reviewing opportunities, or company dividends and yields.
Active investments such as buying and selling mortgage notes, investing in rental properties, flipping houses, or buying tax liens or tax deeds in which you have an ongoing role in finding, acquiring, and managing the investment, can require five hours or 40 hours a week depending on how you manage them and how many you have.
It ultimately boils down to the time you have available and what you want to accomplish with your investment properties. Investing in any avenue takes time, and you must have the time available to dedicate to it if you want the possibility of seeing success.
How much money do you have available to invest?
The funds you have available to invest will greatly determine the avenue of real estate investing you can pursue. While there are ways to actively invest in real estate with little to no money, most ventures will require money -- with some requiring more than others. If you’re tight on funds and don’t have a lot to invest, REITs or real estate ETFs are by far the best way to go. There is no minimum investment -- you simply purchase the desired number of shares for the ETF or REIT through a brokerage account according to the funds you have available to invest.
Actively investing in commercial real estate (CRE) is by far the most expensive method of real estate investing because properties range in value from a few hundred thousand dollars to millions of dollars. CRE can be retail, multifamily, industrial, mixed-use, or office space and in most cases produce cash flow from renting the space with a lease. If you want to find and manage your own CRE investment, you should be prepared to have 15%–25% of the purchase price as a down payment as loans for these types of properties could range from tens of thousands to hundreds of thousands of dollars.
Residential real estate does require funds in order to invest, but the amount of money needed can vary widely. It largely depends on what you are investing in. For example, there are ways to invest in tax liens or tax deeds with just a few thousand dollars, or you can purchase a residential rental property by putting tens of thousands of dollars down. The higher the property value, typically the higher the upfront investment will be. There are cheap ways to invest in real estate, but most will trade low upfront cost for time and effort, so these options need to be carefully weighed before deciding which investment avenue makes sense for you.
Do you have the knowledge needed in order to invest?
Robert G. Allen, the author, investment advisor, and real estate investor, said, "Without knowledge, and a workable plan, you are gambling, with little or no chance of success." If you want the opportunity to succeed, you have to learn the ropes. Immerse yourself in the real estate niche you decide to pursue and learn every possible thing about successfully investing in that venture. This will help you develop a plan of action and determine the time that will be needed to hopefully see success in your investment. You want to understand the common terms, where to find investment opportunities, how to analyze your return on investment and the quality of the investment, as well as the steps involved in buying or managing the investment before you commit yourself or your money. There are dozens of paid or free resources available to help you along your educational journey of real estate investing, like our posts here at Millionacres. Just remember, as you acquire the knowledge, don’t forget to take action on what you’ve learned.
What’s your risk tolerance?
Everyone has a different risk tolerance, and each avenue of investing has different levels of risk. It’s important to understand how each investment strategy mitigates risk and what you can do to try and reduce your risk exposure when investing. REITs and real estate ETFs carry slightly less risk than a crowdfunding opportunity or individual investment would because your money is spread across several different assets rather than one. If something changes in the market, such as decreased prices, lower rental demand, or a decline in economic growth, the losses will be spread across the portfolio of assets owned by the company you are invested in.
The same can be said for rental properties with one tenant compared to rental properties with multiple units and tenants. If the property stays vacant longer than expected or the tenant stops paying, you could be left without any income. When you have multiple tenants, the cash flow from the other units can help sustain you during tough times. Just remember, there is always a risk. It’s just a matter of identifying which investment strategies align best with your risk tolerance and knowing what risks are involved with that investment type.
What are you trying to accomplish with real estate?
For some people, real estate investing is an opportunity to diversify their portfolios and place their money in alternative assets other than the stock market or bonds. They want their money to continue to grow as passively as possible, helping to build their retirement funds or provide them with monthly cash flow. Others hope to pursue real estate investing as a business. They want to be landlords -- actively finding, acquiring and managing investments. Before identifying a profitable niche, determine what you want out of real estate.
If you’re looking for passive cash flow, consider pursuing REITs, ETFs, crowdfunding opportunities, or turnkey rentals. If you are willing to put in the time and effort to pursue other avenues of investing, determine what will help you reach your goals fastest. If you don’t have a lot of money upfront, you may want to start with wholesaling, or start small by investing in tax liens or tax deeds. Once you have some funds saved up, you can focus on investing in residential properties like fix-and-flips, mortgage notes, rentals, or eventually commercial real estate. Fix-and-flips and wholesaling will make money in real estate, but it will always be earned income. These are great strategies to help fuel your business with the cash needed to pursue cash-flow properties, but it will not create financial freedom.
What markets are best for your investment strategy?
Once you’ve determined how much money you have to invest, what you want to get out of your real estate investments, how much time you have to spend on real estate, and you’ve acquired the knowledge to help you succeed in that vehicle, you can then pursue and identify a target market. Every market throughout the world has different supply and demand, meaning one market can do well for one property type but poorly for another. Someone saying St. Louis or Indianapolis is a "top investment" area is useless if it’s not for your investment type. Targeting a market is typically done by finding areas that have:
- Economic and population growth -- jobs are available, and people want to move there to work and live.
- Affordable home prices -- meaning you can afford a down payment on a property there and the rent supports the property’s price.
- Demand in your property type -- meaning there is low supply and high demand. Keep planned developments in mind and evaluate how they will affect the supply and demand.
You can research these factors from several sources such as the U.S. census on housing vacancy rates, Rentometer’s rental income analysis, job and economic statistics by area, or learn about market performance by sector from compiled studies and statistical analysis like with PwC’s emerging trends in real estate report. Identify the markets that hold opportunity and that align with your investment goals and strategy -- they may not be the same places everyone else says are "hot."
There are many factors to consider before pursuing your first investment. Rather than following what others say is best, find what is best for you and invest in the opportunities and vehicles that support that. Think through each of these topics to determine what avenue of real estate investing is the best fit and continue to learn as much as possible about it.
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