How do you grow your real estate investments 10X? Through quality training, experience and understanding the rules of real estate investing.
In today's market, it is very difficult to become a real estate investor on a shoestring. Further, based on the recent recession, mortgage financing is harder to come by. One of the outcomes of the recession is that fewer people will be homeowners in the future with more real estate assets concentrated in the hands of fewer people.
Real estate ownership is a very fragmented marketplace. There are many active mega owners, hedge funds and real estate investment trust that own assets directly. As a real estate investor, one of your first decisions is to determine if you will be an active investor or passive investor. In brief, active presumes some role in day-to-day operations while passive means your primary role is in management selection and report review.
How do you get from $100,000 to $1 million in real estate assets?
As a passive investor spring-boarding your real estate investments is a very difficult task as primary decision-making responsibilities are in the hands of others.
Becoming an "active" real estate investor requires having a quality team, understanding available financing, including the capital stack, and having local market knowledge. As an active investor in real estate, here are some points to ponder in the pursuit of growing your real estate portfolio 10 X. Following is a brief discussion of real estate investment strategy alternatives.
1. Buy-and-hold. Buy and hold is the longest and best-known real estate investment strategy the world has ever known. Torto Wheaton has tracked single-family home values in Denmark from the 1600's to present day (some still owned by the same family).
There is nothing wrong with a buy-and-hold strategy. Just recognize that it is a long-term strategy. It also requires you to be ultra selective in your acquisitions. Many an investor in the 1940s and 1950s paid cash for a building and held it for a lifetime passing it on to the next generation. To these investors, valuations on any given day or month were irrelevant. Today, less than 500 persons own more than half the land in Scotland. These are examples of buy-and-hold investors.
2. Buy and sell. Opportunistic buy-and-sell strategy requires the use of market timing and purchasing at a discount to current market value. This is a very steely game requiring the investor to be right almost all the time. Market timing and exceptional expertise are required. The deeper the discount to current value, the less risk as the investor has a greater margin for error.
3. Trade up. The best method for trading up in real estate assets is to stay within the same asset class. Said another way; stay in your lane. Whether its farm land, apartments or medical office; select your asset class and remain firmly therein. This allows you (the investor) to build on your asset class knowledge making investment decisions based on your experience and market knowledge.
4. Co-mingled funds. Adding partners, or creating partnerships are difficult, but they can work. What makes for a good partnership is when each individual brings a different skill set for the benefit of everyone within the partnership. The downfall of many partnerships is decision-making by committee. At the end of the day, someone has to be in charge.
5. Moon shot. Too often, a moon shot fails to measure risk-reward accurately as the risk often outweighs potential reward. This is not investing; this is gambling. In this scenario, you should never invest more than you are willing to lose with the presumption that a total loss of youir investment is possible. This type of investing represents very high risk; therefore, it should represent the smallest portion of your real estate allocation.
Where the wheels fall off for so many real estate investors is in trying to deploy more than one of these strategies at the same time without a short-term strategy for addressing operations and a long-term strategy for ownership. The full-time professional considers this, for the part-timer, being all-over-the-map is a common recipe for disaster.
Granted, many of these strategies can combine very well; like buy-sell while trading up or buy-and-hold with co-mingled funds. The issue is deciding on an initial strategy and staying on track thereafter.
Each of these alternatives has no guaranteed outcomes. What they do represent however, is a structured methodology and a targeted type of activity in a single-cylinder strategy to invest in real estate.
In this discussion, we have not addressed asset class, age of assets, financing, property condition or competitive forces. Yet without touching any of these topics my hope is that you can clearly see a framework for making investment decisions within the real estate space that will guide your strategy at a high level. These strategy decisions are the building blocks to your personal road map for becoming a successful real estate investor.
Mr. Wilhoit is the author of three books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 & 2 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets. Multifamily Insight Vol 2 — just out!
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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing operational and financial management of multifamily assets to their highest level of efficiency. This article is intended to be informational only and does not provide legal, financial or accounting advice. Visit: multifamilyinsight.com
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