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The Best Real Estate Investing Strategy for Regular Investors

by Erion Shehaj on February 6, 2013 · 21 comments

  
Blueprint

An old proverb proclaims that “there is more than one way to skin a cat” and nowhere is that more evident than here on BiggerPockets. Week in and week out, some of the brightest minds in each “skinning” technique offer advice on how to take action and make things happen with flipping, wholesaling, landlording, lease optioning etc. All these real estate investing methods, when followed diligently and acted upon with purpose and perseverance, will produce results. But as effective as they might be, they aren’t universal and they don’t work for everyone. A hammer is a great tool to nail down a piece of wood but it’s not very effective if you use it as a saw. There is a crucial distinction between a real estate investing strategy’s effectiveness and its suitability to accomplish a certain goal and it’s often ignored to grave consequences.

The most common reason why real estate investors get wrong answers is that they ask the wrong questions in the first place. Instead of generally asking whether a real estate investment strategy works, aspiring real estate investors should go deeper and ask whether that same strategy is the best tool to accomplish their goals. Let me let you into a little secret: Every investment strategy or every business you could possibly conceive is making money for somebody right now. The overall effectiveness of the tool is irrelevant – what matters is whether that tool is the best for the job you need done.

Start with your goals

The basis for success in solving any problem is a clear understanding of that problem. We cannot begin to create an effective real estate investing strategy until we know what we are trying to accomplish. So before you do anything else, let’s start with your investing goals.

A real estate investor whose goal is to double her capital in a short amount of time is very different from another whose goal is to retire in 10 years. And most importantly, the strategies they should employ to reach those goals must be different as well.

In my experience, I’ve observed that most new investors are so eager to “start building” that they skip the entire “blueprint” phase. “Who has time for all that grandiose talk – let’s start laying down some bricks!” But as my 8th grade math teacher used to say: Once you figure out what the word problem is asking, the math part is actually quite easy. Before you start to delve into the details, the formulas, the figures – get clear and specific about your goals.

Two types of investors

The way I see it, there are two major real estate investor categories: On one hand, you have folks who are (or aspire to be) professional real estate investors. Their goal is to make a living by investing in real estate full time. If given a choice, they would quit their current job or career and actively pursue real estate deals day in and day out. They are in it for the lifestyle as much as they are in it for the money. For this group of investors, the principal goal is to make enough money from real estate deals to create an income in the immediate term. The real estate investing strategies of choice to accomplish this goal are short term flipping and wholesaling. A long term investment strategy for this group of investors would be useless.

On the other hand, you have regular real estate investors. Unlike their professional counterparts, their goal is to create a large enough income stream in the future to retire on or subsidize their other income. Some investors in this category might seek to quit their current career once they are financially free. But they want to do so, to pursue other endeavors – not live the lifestyle of the professional real estate investor. I believe the overwhelming majority of real estate investors fall into this category – and for their goals, there is no better suited strategy than a well crafted long term investing strategy. Short term strategies may sometimes play a minor role in reaching the principal goal of regular real estate investors but in most cases they are inefficient and downright counterproductive.

Using a Blueprint for Your Real Estate Investing Strategy

In my business, I help long term real estate investors accomplish their retirement goals, and in my contribution to BiggerPockets, I intend to give you a detailed view of all the dynamics that make our investing strategy tick. But for purposes of an introduction, I want to give you its rough and basic outline.

Step 1: Dissect your goal – It’s very important that we pin down exactly what we’re trying to accomplish. If retirement is the goal, what income stream would allow you to retire and how long do we have to get there? Also, what capital are we starting with and what’s our savings capacity per year?

Step 2: Craft a Custom Blueprint – Now that we know what our destination looks like, we can figure out a route to get there. The custom blueprint will tell you how many assets you need to acquire to produce the desired income, how much capital it will take to acquire them and how long it will take to have a free and clear portfolio.

Step 3: Asset Accumulation – This is where we move from planning into execution. Now we know how many properties we need to own, so we go about the business of accumulating them.

Step 4: Capital Growth – Once we’ve acquired the right number of good quality properties, it’s time to grow our capital base. Since the goal is to reach a certain level of income at retirement, we can use the current income produced by our portfolio to aggressively pay down the mortgage debt on our portfolio with focus.

Step 5: Maximum Income – Time for you to get rewarded for your discipline and ninja execution. Your entire portfolio is free and clear and it produces income at its maximum capacity right when you need it – at retirement.

As I said, rough outline. Consider this just a “hello” – the deep conversation is coming next.
Photo: FreeDigitalPhotos.net

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{ 21 comments… read them below or add one }

Jeff Brown February 6, 2013 at 6:00 pm

Lovin’ it.

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Erion Shehaj February 6, 2013 at 9:03 pm

Much Appreciated, Sir.

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Rachel February 7, 2013 at 10:24 am

This post was exactly what I needed today. I think my husband and I are going to sit down tonight and start crafting our plan. I can’t wait for the deep stuff coming!!!

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Erion Shehaj February 7, 2013 at 11:07 am

Thanks, Rachel. I’ll be sure to keep the posts coming. If you ever have any questions, you can post comments here or take them offline via email.

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JohnGalt February 7, 2013 at 4:52 pm

Goals are important, but if you don’t have precise ones, accept that and forge ahead anyway. I own dozens of cash-flowing properties and make a good living at real estate, but I’ve never had any goals other than to find as many good, truly good, deals as I can and buy (and hold) as many as I can. Still, I’ve rarely bought more than one a month, and I still have most of them. Early on I agonized over this deal and that deal for months and looked at a lot of properties until I finally figured my gut would tell me a deal when I saw one, plus it would have to be worth at least $20k more than I could buy it for, and/or had to rent for at least 2% of my purchase price every month.

I’m not poo-pooing goals–they are crucial for many–but don’t use the excuse of not having precise, carefully-crafted goals as an excuse for inaction.

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Erion Shehaj February 8, 2013 at 9:41 am

@JohnGalt

I agree with you on the “fluidity” of investment goals. The truth of the matter is that every investor can only see so far as their “current horizon”. It’s only natural for their goals to change as they reach higher plains and see the full potential of real estate investing.

Also, doing something is always better than sitting on your hands. No arguments from me there.

But you have to start with something specific. Even a GPS cannot help you if you don’t tell it where you’re trying to go. A plan isn’t required for general success – you can create some positive cashflow by buying a property here and there at random. But if you’re trying to reach a specific goal – like retire in 10 years – that won’t happen without a well thought out plan,

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Tracey March February 7, 2013 at 5:02 pm

It’s great to see an emphasis on a long-term investment plan. Although investing in real estate is “do-able” for many of the “regular” people you describe, I think too many people jump into it without the proper planning and research. Yes, most of us know about how to maintain a home, but we’re not all experts at spotting a great deal, negotiating a purchase, running numbers, estimating expenses, creating budget projections, and managing property and tenants. The first step is the investment plan. Thanks again.

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Erion Shehaj February 8, 2013 at 9:44 am

Glad to hear it Tracey. Investing in real estate is done best when it’s run like a business. In that sense, just because you can do everything yourself, it doesn’t mean that it’s the best thing to do in the business of real estate investing.

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Ren February 8, 2013 at 7:06 am

Please keep more coming, this is exactly what I am looking for. Books only prepare so much, and it is the intermediate step of learning to apply the knowledge you have before actually hitting the pavement that is the biggest hurdle for us now. Thank you so much!

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Erion Shehaj February 8, 2013 at 9:46 am

Thanks Ren – New post every Wednesday, that’s the plan. Books are fine but they have their limitations as the information in them remains static. The beauty of a blog like BiggerPockets is that you’re getting fluid knowledge that’s accounting for changes in the market, economy, taxes etc. I appreciate your attention and comment.

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Allan S. Glass February 8, 2013 at 11:43 am

Very thoughtful post Erion. All great journeys begin by understanding who you are and where you’re going. Are you a regular investor or a professional?

Cheers,
A

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Erion Shehaj February 8, 2013 at 11:57 am

Thanks Allan! I’m a professional who helps investors craft and execute the strategies I’ll be covering on BP.

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Allan S. Glass February 8, 2013 at 12:07 pm

I’m always interested in hearing the perspective of architects when it comes to investing. Look forward to reading more.

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Erion Shehaj February 9, 2013 at 7:40 pm

@Allan

Architect is being used in a metaphorical sense – as in the guy that does the blueprints for you. For the record, I’m not a licensed architect :-)

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Brian Mitchell February 9, 2013 at 4:19 am

This is a great article because I want to invest in Real Estate part time while I am currently
doing my job.I want to know what I am doing so a blue print does help.

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Erion Shehaj February 9, 2013 at 7:41 pm

Thanks Brian. Happy to be of help.

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neilinmadison February 9, 2013 at 10:56 pm

Erion,
Interesting post. I routinely see suggestions that buy and hold investors should always use a pay down strategy as you have suggested here. However, with today’s rock bottom interest rates and the powerful leverage that financing produces, I plan to milk those low rates for as long as possible and to recycle the cash flow from those properties to purchase more properties instead of paying down the existing properties. I believe this will produce more cash flow overall at retirement, in fifteen years, because I will own more cash flowing properties, even though some will still be leveraged. I must admit, however, that I am not sure I know how to calculate whether the paydown or acquisition strategy is better. As you write your next piece, perhaps you would weigh in on those kinds of considerations. Thanks in advance and nice work thus far. Neil

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Al February 14, 2013 at 11:30 am

I agree completely. Knowing your goals is important to success. Of course, everyone finds different things work for them, but for my money, nothing beats residential real estate – especially multi-family dwellings. That’s where the real money is.

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Ali February 18, 2013 at 2:26 am

I hate bringing up this point for the thought that I probably sound hominy-hominy and spacey saying it, but don’t forget in all that planning to really focus on what vibes with you. You can make a flipping plan, say, all day long but if flipping isn’t your thing, it will never work! Find your thing. It may take trying a lot of ‘wrong’ things, but you will find it. But Erion is right, you should always have that plan. Even if it is for what won’t end up being ‘you’. Won’t know until you try. But when you do find your thing, and add one of those plans, look out world!

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Erion Shehaj February 18, 2013 at 9:57 am

Ali

That’s not spacey at all – It’s sound advice!

It’s important for every investor to know where they stand before they get started – the risk and investing pace with which they’re comfortable. There are investors who should stay away from any type of flipping as they couldn’t handle the risk involved. Then there are others who find long term investing boring and slow. So you said it best, “find your thing” and then make a plan to make it happen.

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Kasondra January 9, 2014 at 5:15 pm

So, I’m a normal person that doesn’t have 50K in cash sitting around to buy a distressed property outright or pay 20-25% down to finance an expensive property. How do you feel about people borrowing from 401K (its 6 figures and I’m in my mid 30s) to put down payments down to buy a property?

Also, do you recommend a bunch of small holdings (like 20 two family rentals) or more partial to major rentals (ie. 40 unit apartment building).?

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