Step 1: Defining Your Investment Strategy
You’ve decided to take the plunge into real estate investing and you’re probably wondering “what now?” The first thing you need to determine is your end goal. Ask yourself what you ultimately want to get out of your investments? Do you want to generate enough passive income to retire early and travel the world? Have you always dreamed of entrepreneurship and being your own boss? Maybe you just want a cash-flowing investment property to supplement your income and build wealth. Point being, the more compelling your goal motivating your investment is, the stronger likelihood you’ll have of turning it into reality. Write it down to refer back to when things get tough. With a clear purpose defined, you can now begin building a road map outlining how you’ll go about achieving your ambitions.
Based on your goal, you're either an active or passive investor
Active investor strategy
- Usually, these investors are "flippers" who take a hands-on approach to real estate investing
- Properties are purchased at a discount and the investor takes on the responsibility of renovating to add value
- Generally, these investments are short-term, riskier and return higher yields
Passive investor strategy
- These investors usually buy and hold properties
- The property is typically purchased in decent condition and renovations are not required before tenanting and cash-flowing
- Generally, these investments are long-term, lower risk and although they return lower yields, offer steady passive income with potentially better performance than traditional investment types like CDs or stocks
Establish your buying standards
- What kind of investment property do you want to buy?
- Multi or single-family, commercial, condo, mobile home or other
- What Return on Investment (ROI) are you expecting?
- Conservative assumptions are always best when analyzing a potential deal
Location and tenants
- Objectively consider locations based on rental market metrics
- Many investors choose to buy near their own home out of regional familiarity or for peace of mind, but that is not always the right strategy
- Evaluate the market based on jobs, industries fueling the economy, population growth and rental vacancy
- See Step 3: Searching for Properties and Market Analysis for more metrics detail
- Decide if you want to consider Section 8 renters or other governmentally subsidized tenants
- Backed by the U.S. Department of Housing and Urban Development (HUD), Section 8 subsidizes a large portion of the resident’s rent and ensures timely payments
- Alternately, because Section 8 tenants are drawing government assistance, some investors raise concerns over potential delinquency of the unsubsidized rent portion
- You should also note that Section 8 and other subsidized properties must meet specific qualifications, such as routine inspections, rent control and other requirements
Additional tools and resources
- While information is readily available online, you may also find the following useful:
- A mentor
- A real estate agent
- Local real estate investor associations
By taking time to consider each of these sections, you will be able to clearly define your investment strategy. Click here for the second article of the series – How to Finance Your Real Estate Investments.