BiggerPockets

I wrote this a couple years ago for another audience and from some of the recent posts I have seen, I dug it up and figured I would share it here. The information is just as valid today as it was 2 yrs ago.

I recently dialoged with an investor friend about what new investors need most when learning to invest. I mentioned to him some thoughts I had on the subject and with some of the recent postings regarding new investors and the concern with the motivation of the members around here, I wanted to share some of the things we chatted about. It seems to me that real estate investors fall into one of the following catagories.

1 - Newbie - Has either just started or has studied extensively on the subject of REI. Has never purchased a property.

2 - New Investor - Has either just started or has studied extensively on the subject of REI. Has just purchased first property*.

[I]Note* - Please keep in mind, I do not consider flipping or wholesaling investing and this post has nothing to do with either flipping or wholesaling. I consider those a form of self employment, since the minute you stop, is the minute the money quits coming in. This post is about purchasing a property to rent for cash flow and long term growth.[/I]

3 - Hobby Investor - Has a good understanding of what he/she needs to know to have a small investment property portfolio. Plans to put systems in place, but they are a one man/woman show now.

4 - Active Investor - Has a portfolio that creates enough cash flow to cover living expenses. They have some systems in place to make managing the portfolio easier, but they are still actively involved in all decision making.

5 - Business Investor - has a large portfolio and employees and systems that take care of most everything. He/She may or may not be the point man to major decisions with the portfolio, the systems in place allow them to make the choice how much involvement they have in the portfolio management.

Now, how do you move between the ranks? The first thing to know is that there is not a magic formula. That means, that what worked for one person is not guaranteed to work for you no matter what they tell you.

The only thing I can do is discourage people from trying to become a real estate investor. Going through the ranks is not easy. Being a successful investor requires knowledge, luck and hard work. The less you have of one, the more you need of the other 2. That means, there are people out there that think they have some magic solution and investing is easy because they had a lot of luck. It can certainly become easy higher in the rankings, but when you are just starting out it is not easy at all.

Consider this. Approximately 1% of type 2 investors will get to type 4 investing. It is likely that < .1% of type 2 investors will ever get to type 5 investing. It is unknown and likely no way to identify the percentage of people that are type 1 to become type 2. The percentage is likely very very small possibly 1% or less. Many may buy a book or find an internet site and then never do anything. So, in reality type 1 is hard to help. My best help is don't become an investor.

With that said, sometimes ignorance is bliss when it comes to investing as long as it is done one property at a time. This means, don't get too caught up in needing to know everything before purchasing a property. Get your feet wet. Pay enough attention to the investment that it doesn't cost you money each month. Just knowing that you have not injected any money in your portfolio for any surprise repairs or vacancies is a testament to you heading int he right direction toward the next level of investing. Buy one property and try landlording or managing a property manager until you are comfortable enough to buy another(FYI, this does not happen in 1 month).

Learn as you go, get a "free" mentor in your area. Type 5 investors love helping people for free. It is best that you have had some experience with REI before meeting with a type 5 investor. They are probably not going to be interested in explaining what a mortgage is or what a vacancy is. Take them to coffee as often as possible. Learn what they do and have done. Identify if that fits your personality and traits or if you are willing to modify some of your behaviors to move to the next stage of investing. Don't feel bad if your personality, motivation or lifestyle doesn't fit the mold of an investor. You don't have to be an investor. You don't have to move to the next level of investing today or even tomorrow or even ever. What you choose to do, is the best decision for you. Money doesn't equal happiness in any way shape or form. Many people with the most money and the biggest ego put on a huge front, but are not satisfied with their lives. They have million dollar or billion dollar problems instead of 10 or 100 dollar problems.

Good Luck in making good decisions for your investing.

I agree with Megan. You say a type 1, which was every investor at some point in their life, should not become an investor? I know many people on this board have become very successful with real estate and some have completely changed their life because of it.

Even further you say...

The only thing I can do is discourage people from trying to become a real estate investor.

Well this post counteracted with one person (me) because you just made me even more hungry for success. I had my first small taste of success today but will make sure I don't become one of your statistics.

Approximately 1% of type 2 investors will get to type 4 investing. It is likely that < .1% of type 2 investors will ever get to type 5 investing.

I dont want you to think this is an attack on you I just really dont like people who try and take other peoples dreams away from them. I believe anyone who takes the right action and gets the right education can do anything they want in the business world. And with the amount of people on this forum itself to mentor young investors and the knowledge on this site I think anyone can get to a "Type 4 or 5".

I have to agree with Mike here. Would you consider being a real estate agent investing? I think most folks would not. So, then how is wholesaling investing? The wholesaler deliberately does not use any of thier own money. That is, they don't invest anything.

Investing means putting money into something with an expectation of a return. Performing a job and getting paid a comission is not investing. Therefore, brokering real estate and wholesaling are not investing. Real estate jobs, yes. Good experience at finding and evaluating deals, yes. And a good way to make some cash, sure. But investing? No.

Fix and flipping is also a real estate jobs. Like developing, its a manufacturing job. You're taking a crummy property (flipping) or empty land (developing) and manufacturing a nice property.

In either case, you only get paid if you turn the crank. As soon as you stop turning the crank, the income stops. That sure sounds like a job to me. As long as I show up and do what my boss asks, I get a paycheck. Stop showing up or stop doing what the boss asks, the paycheck stops.

But, you're right, Jim, that the phrase "real estate investing" is a broad one. BiggerPockets and most real estate investment groups use it in the broader sense to cover actual investing (i.e., owning rental properties, making loans, investing in flipping or development deals) as well as some real estate jobs (wholesaling, flipping, though oddly usually not brokering.)

I am happy to receive these responses. The last time I published this, no one questioned it and I received good feedback only.

Matt, Your response shows me that you caught the message in the post. Good for you. Good luck in your investing and business aspirations. My one recommendation is, write down(literally) what you want and why you want it. Use it as your guide and direction when things aren't going well.

jawsette, I definitely have not limited myself in my investing. As Jon said, "Investing means putting money into something with an expectation of a return." That puts it fairly succinctly. I never said that I don't wholesale or that wholesaling is bad, just that it is not REI by definition.

Purchasing an income producing asset is an investment with an expected return. Being a finder or a wholesaler or a transactional lender(this I consider being a banker not a real estate investor, you are investing in people not property), you can have systems and create a business around it, but in the end it is not a real estate investment, it is at best a business investment or self employment at its simplest. This post is not intended to confuse the difference between purchasing income producing assets and pursuing work in the RE industry. I am not saying someone should not become a wholesaler or lender, I am just recommending that folks don't bother becoming a real estate investor(in its pure form, buying income producing assets) unless they are going to invest and know what their goals are and work to achieve them.

If this is discouraging to you and you quit, good for you, you have realized that real estate investing is not for you. There is nothing wrong with that, in fact, I see it as a good trait that you can identify that you are not cut out to be a RE investor. You can certainly invest passively through a REIT if active investing doesn't work for you. You can open a restaurant, if that is what you desire. The key is you need to find out what is important to you and then do it.

"All you can do is all you can do, and all you can do is enough" - Art Williams

I will differ again, in this respect.

I purchase (tax sale properties) very cheaply and fix them up to provide "starter homes" for young adults that have proven themselves creditworthy. I will then seller finance these properties to these people. I now have an income producing property that I put money into expecting a return of several times the actual cost to me.

I do agree with the principle that is espoused for those "no money down" systems. As that is not truly wholesaling (at least as I see it). Wholesaling is really nothing more than buying cheap and selling cheap usually to someone who is not the end user, but a retailer so to speak. Since I do have my money in the game, I am investing in the properties with the expectation of a return for many years to come.

jawsette, I definitely have not limited myself in my investing. As Jon said, "Investing means putting money into something with an expectation of a return." That puts it fairly succinctly. I never said that I don't wholesale or that wholesaling is bad, just that it is not REI by definition.

And yes if I ever stop investing part of my profits into purchasing more units to replace the ones that reach the end of their payment time, then the money would stop comming in. Just the same as a landlord who stops investing time and money in replacing a tennant and fixing up the damages will have their income stop comming in.

In investing replacing that which is about to exceed its expected lifetime is a necessary expense to keep that income stream comming in.