How often is there a post on BiggerPockets from a newbie saying they are overwhelmed by all the information out there and how do they choose what to invest in? Think about all the different options:
- Buy & Hold
- Lend Money
- Tax Liens
- Buy Debt
These are different techniques of investing in real estate, but to be honest learning the strategies is probably the easiest part of investing in real estate. Go to the library and you can find any number of books on investing in real estate in exactly the way that you want to learn how. You can look here on BiggerPockets and find almost any piece of information in the Forums. The techniques are well documented. What isn’t well documented is why are YOU investing in real estate?
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Figuring Out Your “Why”
For simplicity’s sake, there are only two forms in which you can invest in real estate. You can either invest in real estate from an equity perspective or from a debt perspective. There are many different variations and combinations of these, but for this article, we are going to limit the variations.
Before you can determine what the right investment strategy for you is, you have to determine the “why.”
- Why are you investing in real estate?
- Are you tired of your job and want to start a new career?
- Do you love your job and would like some supplemental income?
- Are you looking to diversify out of stocks and bonds with real assets?
- Are you doing it because your cab driver said it was a good investment?
Real estate investing is both an investment and a business. If you don’t know why you are getting involved in it, you could end up stuck with a business that you didn’t want or vice versa. Think about it: You are in a job you love and have excess cash that you are looking to invest. You want to slowly build some passive income. Why would you run out and buy five distressed properties with borrowed money from your friends? Do you have the time or desire to manage that? Probably not. But there are plenty of people on BiggerPockets who are professional real estate investors telling newbie investors that they should do something like this because the turnkey provider they want to buy from is going to make money on the transaction.
Do you not buy toothpaste at the store because it is cheaper for you to make it at home?
Once you figure out the “why,” you need to figure out what resources you have. The types and amount of resources that you have will have a huge impact on the strategy that you choose. If you have no cash, it would be hard to be a private lender. If you have no time, it would be hard to self-manage some rental units. If you have cash and time, then the world is your oyster.
Lastly, a concept that should probably be discussed more frequently is risk. There are two pieces for assessing your risk tolerance.
2 Pieces for Assessing Your Risk Tolerance
Ability to Take Risk
The first piece of risk tolerance is understanding your ability to take risk. You need to figure out what your position in life is. Part of this will be determined by your age, and the other part will be determined by your income and net worth. Typically the younger you are, the more risk you can take. Also the more money you have, the more risk you are able to take. This comes from the idea that the older you are, the less time you have to recover from a bad investment.
Also in general, if you have more money, it would be easier for you to recover from a mistake. Another thing to consider when determining your ability will be what you need the money for. For example, if you have your child’s college tuition coming up next year, you probably should not invest in a syndication that has a five-year lock. Your need for the money reduces your ability to take risk.
Willingness to Take Risk
The second piece of assessing your risk tolerance is your willingness to take risk. This is more subjective than determining your ability. There is no absolute measure. There are questionnaires that you can fill out to help you determine your willingness, but sometimes this is not very effective unless you have experienced significant financial losses or gains.
Conducting the risk analysis diligently can help you make the right choice. The thing is, a lot of newbie real estate investors get carried away by listening to all the success stories. But you need to realize that there’s a lot of hard work and planning involved behind it. You can’t just jump into the pool because you like water. You need to learn the basic steps and take it from there.
Newbie investors: What’s your “why” for investing in real estate? How are you going about finding your niche?
Leave your comments below!