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What’s the Best Strategy for New Real Estate Investors (The Answer May Surprise You)

by Michael Blank on April 21, 2014 · 13 comments

  
Best way to start real estate investing

When I first got started with real estate investing I jumped right into rehabbing houses. I found the houses via direct mail and local wholesalers.

In fact, from 2009 through 2012 I got 90% of my properties from wholesalers. I kept a few of the houses as rentals, so I was able to experience being a landlord as well. I also own apartment building units, and I’m currently looking for more.

People often ask me what the best real estate investing strategy is, and which one they should start with. As with most things, the answer is “it depends” on your personal preferences, strengths and goals.

How I Started Investing in Real Estate

My ultimate goal with real estate investing has always been to build up passive income as quickly as possible. I knew intuitively that the way to accomplish that was to build a portfolio of rental units – the more the better. I felt that buying and holding real estate was the best way to create passive income and long-term wealth.

So why did I start with rehabbing houses?

It has to do with my (limited) comfort zone at the time. It’s also what my mentors advised me to do. But looking back on this, it may not have been the best advice because it distracted me from my ultimate goal, which was building passive income.

My first mentor was actually a wholesaler. Wholesaling is always a good way to get started with real estate investing because it’s low risk and it gives you experience finding and negotiating deals. But you have to do a lot of deals to make a living.

So I decided to skip the wholesaling and go right into rehabbing. With rehabbing, you can make a decent living flipping 2-5 houses per year. In the beginning I felt that doing rehabs produced the most amount of cash in the shortest amount of time. But make no mistake about it, there is nothing passive about flipping houses. It’s a LOT of work all the time. And there is a certain amount of risk that you just don’t have with wholesaling.

One of those properties I kept and sold on a lease option. I really like lease options as an exit strategy to flips if you don’t need cash out immediately. The profits are much higher. But now you’re also a landlord. I had three house I was renting out, but I knew it wasn’t for me. So building a portfolio of rental houses was out.

I do like the idea of combining rehabbing with rentals because rehabbing is an excellent way to generate cash that you can put into rental properties. Using these two tactics is a powerful combination to accelerate your investing career.

My Ultimate Destination for Real Estate Investing

The ultimate destination for me was apartment buildings.

There are so many advantages of apartment buildings: you are less dependent on the surrounding real estate market for valuations. You have a great degree of control of the building by how you manage the income. Banks are eager to give you loans. Because you have multiple units under one roof, you can achieve economies of scale that you can’t achieve with house rentals. It’s customary to have property managers manage the building for you, which is key to achieving passive income. And lastly, the long-term wealth that you can generate with apartment buildings can be significant.

I’m convinced that accumulating a portfolio of apartment buildings is the single best way to achieve your financial goals. (Go ahead and Tweet this quote if you agree!)

But when I first got started, I was told I needed to start small and S L O W L Y work myself up to apartment buildings.

I’m not sure that was the best advice.

On the one hand, I did get real estate investing experience over the course of five years doing rehabs and rentals. But I wonder what would have happened if I had simply focused on buying my first apartment building, right from the start? I would have had to raise money from others (which I did for the rehabs anyway). It probably would have been a slowe start, maybe it would have taken me one or two years to buy my first building. But over the same time period, perhaps I would now own 100 units.

How Should YOU Start?

Whatever path you decide on, ask yourself what you would enjoy doing the most. I know wholesalers who make a great living doing what they do; they have no interest in managing contractors and rehabbing houses.

On the other hand, the rehabbers don’t feel like they can make enough money just wholesaling, and they enjoy building a team and managing the entire process. But if your goal is passive income, consider skipping these strategies.

I think you have to ask yourself what your goals are, what you want to accomplish, and where you want to be. Then figure out the most direct route to get there. If you feel that you want to retire in 5-10 years and replace your job’s income with real estate, then you might want to focus on apartment buildings right from the start and not be distracted with anything else.

Related: How I Bought a 12-Unit Apartment Building with No Money Down (And How it Nearly Bankrupted Me…)

What is your favorite real estate strategy today and why? How do you see that changing in the future?

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{ 13 comments… read them below or add one }

Brandon Turner Brandon Turner April 21, 2014 at 2:48 pm

Great post today Michael! I agree 100% :)

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Michael Blank April 21, 2014 at 3:35 pm

Thanks Brandon !

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Walt Payne April 21, 2014 at 3:19 pm

Or maybe fix and hold? That is a good way to get relatively low cost rentals, and stretch your investment money.

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Frank Wheeler April 21, 2014 at 4:45 pm

Thanks for the post! It is hugely relevant to me at this time, being a new/unexperienced investor. I have been educating for a few months now and I can fully attest to the anxiety associated with analysis paralysis!
My goal is to build passive income. My initial thought was to start rehabbing to generate cash to put towards single family/small multifamily buy and holds, with apartments being the longer term goal. I may have to re-assess! Looking forward to reading your ebook.

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Michael Blank April 21, 2014 at 7:33 pm

I’m not saying you shouldn’t start with rehabbing or wholesaling. I just want you to think about what your goals are, and then find the most direct route. One question to ask is “what would I do if I weren’t afraid?” — then do that.

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Frank Wheeler April 22, 2014 at 8:06 am

Great advice. Thanks!

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Sharon Tzib April 22, 2014 at 8:11 am

Incredible advice, Michael! I’ve unfortunately taken too many off ramps during my REI career – time to get back to the direct route lol!

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Mark Ross April 21, 2014 at 11:24 pm

I want to be a real estate investor someday, that’s why I’m taking note of this strategy of yours.

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James Pratt April 22, 2014 at 11:19 am

Great post Michael. With my many years of experience I still like rehabbing and keeping SFR. They stay for longer periods of time as compared to apartment renters which tend to move every 6 months or less (in my case).

I completely agree that rehabbing is the most profitable way to make/earn money weather you’re just starting out or well experience. Using a HELOC loan, one can shorten their time span by many years. By buying at 60%, rehabbing, get it rented and refinance with no money out of pocket. Built up a portfolio of cash flowing properties in a few years this way.

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anthony huntington April 22, 2014 at 4:57 pm

Thanks for the great info! I own a duplex and have been looking at investing in an apartment building, but I am told I have to have at least 20% down. How am I ever going to come up with that much money? I feel like my dream of building passive income through real estate investing is about to end before I have even had a chance to get started! Is a partnership the only way I can make something like that work?

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Michael Blank April 23, 2014 at 6:42 am

Anthony – the answer is to raise money from friends and family and from those they know. I write extensively about how to do this. Check out my other articles on Bigger Pocket (http://www.biggerpockets.com/renewsblog/author/michaelblank/) and also download my free ebook on this subject (on my web site). Please strongly consider raising money because it will liberate your investing career.

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Shaun April 26, 2014 at 4:21 pm

One thing that is advantageous with the experience you laid out is that you can look at a property and have multiple possible exits for it.
I stated off with small SFR. Then after making no money for a few years I started looking at wholesaling. Got some properties that I wasn’t moving easy so I did the rehabs and made way more money so focused more on that. I have not done any lease options but have studied up on them and would use that in the right situation. So now if I get a single or small multi deal I can decide if I want to rehab and retail, wholesale it if it isn’t an ideal project for me, hold it if there is a nice equity cushion and cash flow, or do some kind of lease option to get the max profits but get some cash flow and better tax treatment on it.

That being said, I want apartment buildings. :)

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Jonathan Quiceno May 7, 2014 at 9:37 pm

Well said! Albeit new to REI, your underlying message resonates with me, have a plan and execute!! I believe that’s what separates the truly susseccful from those that get by. Passive income is the name of the game and you have mad a good case, I want in :)!!!!

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