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.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
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.