How To Build a Winning Real Estate Investment Strategy
Welcome back, fellow alchemists! Today we're brewing up some essential wisdom about one of the most crucial early decisions in your property investment journey: choosing your investment strategy. Just as you wouldn't try to transmute every metal at once, you can't master every corner of the vast real estate market. From cozy single-family homes to sprawling industrial complexes, each niche requires its own special formula for success.
Like any powerful potion, your investment strategy needs to be precisely tailored to you. Whether you're the hands-on type who loves wielding a wrench, or you prefer orchestrating from afar through a management company, there's a perfect blend waiting to be discovered. Remember: the most potent strategy is one that aligns with your lifestyle – when your business feels natural, you're more likely to keep adding ingredients to your success.
Property type - Think of property types as different base metals in our alchemy. Multi-family properties are like silver – steady and reliable – while office buildings are more like mercury – volatile but potentially more rewarding. There are also industrial , retail, rural, and many others markets to consider and learn. For those crafting a side-hustle, I recommend sticking to residential properties. No need to turn your steady path to wealth into a dangerous experiment!
Age, Class, Condition - Will you pay premium for that shiny new turnkey property, or are you ready to transform a diamond in the rough? Here's a secret from my laboratory: the more elbow grease you're willing to apply, the faster you can transmute equity and cash flow. My personal formula? Find the roughest gem in the finest setting. (The ugliest building in the best neighborhood I can afford)
Responsibility level and Lifestyle - how much of your life are you willing to dedicate to your business? Do you want to be hands-off or the ringmaster of your own circus? For side-hustle success, it needs to be tuned to fit around your family and your job. That said, the less you do the less you profit.
Market and location - Buying the house next door or in some other state? The more engaged you want to be, the closer your property needs to be. Location is also a proxy for price. So, often where you invest is driven by how much you have. There are lots of small ponds (aka small cities and rural towns) where you can be a big fish.
Lease and Tenant Objectives - Who will your customer be? Families, students, offices, retail businesses, or manufacturers? What socio-economic customer are you looking to serve? Commercial and residential leases can carry very different responsibilities for the owner. A commercial triple-net lease is a "set it and forget it" kind of deal, while short-term rentals (Air B&B) require constant attention.
Financial Objectives - your investment time horizon, return requirements, and availability of capital can help you quickly narrow things down. Are you looking for the quick cash returns of a flipper, the slow cash returns of a long-term operator, or the equity returns of a speculator. How long can you wait for profit? Are paper profits good enough or do you want cash? These objectives will likely be some of the most important goals you will need to set for your investment journey.
Financial Objectives - Your investment time horizon, return requirements, and availability of capital can help you quickly narrow things down. Are you looking for the quick cash returns of a flipper, the slow cash returns of a long-term operator, or the equity returns of a speculator? How long can you wait for profit? Are paper profits good enough or do you want cash? These objectives will likely be some of the very goals you will need to set for your investment journey.
Value-Add objectives - Are you looking to operate properties for cash flow or make improvements to create equity? To build equity, you have to find something that requires work or has under-market rents. If done well, large-scale renovations can increase the value of the property dramatically. As a rule of thumb, each $100 increase in rents increases the value of the property by about $24,000 (for more detail: Mastering Present Value: A Real Estate Investor’s Essential Guide)
Embarking on your property investment journey is akin to alchemy—transforming potential into prosperity. To succeed, you need to choose a strategy that aligns with your lifestyle and risk tolerance. To start, you should explore yourself. Document and catalog everything you need to account for and spend time thinking about how much time you want to commit. Buying property can be a lifestyle-altering decision on par with having a child or buying a goldfish. It is up to you to understand what will work well with your lifestyle, work schedule, and family. With all that thinking under your belt, you are ready to start building your strategy.
The next step of developing your strategy will require deciding on the condition and class of the property you will target. You need to determine if you want a turnkey property or a fixer-upper. The more work you put in, the more equity you can build. Your level of responsibility should match your lifestyle and availability.
"Invest where you know" is a good mantra to remember when picking where to buy property. The closer the property, the easier it is to manage, and the investment required will depend on the location. If you are going to be hands-on, assume you will visit at least once per month. New locations will also require building new relationships with the vendors and trades you will need to repair and operate your property. Conversely, if you use a management company to operate your property, its distance from you matters much less.
Finally, decide if you want to generate cash flow, build equity through improvements, or some mix. Sometimes, the property you find will dictate the right strategy. Writing big checks and managing vendors can be incredibly stressful, even when everything is going well. Carrying the responsibility of managing projects that can quickly balloon into the hundreds of thousands of dollars is not for everyone, more so because of the emotional rollercoaster than the financial strain.
When faced with such challenges I remember the old Wall Street saying, "be fearful when others are greedy, and greedy when others are fearful." This serves as a lasting reminder that when it comes to money, behavioral economics teaches that we humans often do the opposite of what is economically optimal, because of emotions. Fear is a powerful emotion that can save your life, but it can also hold you back far more than you ever realized. Having a strategy and plan helps focus one’s discipline over time and vanquish that fear.
Happy investing, fellow alchemists!
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