As a top-performing real estate professional and business owner, you have built your career by helping clients through their homeownership and real estate investing journeys. With that experience under your belt, you may want to capitalize on the passive income and long-term appreciation benefits associated with real estate investing. Before you embark on this journey, here are a few tips to get you started and in the right mindset.
1. Prepare for safe investing
When you are not financially prepared, risk amplifies. While real estate investing is traditionally one of the safest investments, having a diversified investment portfolio is best. Before you begin, secure your family savings, school funds, and retirement accounts.
To purchase responsibly, be debt-free with an emergency fund that covers six months’ worth of expenses, and, if possible, prepare to pay in cash to gain an edge against competing offers.
2. Network with other real estate investors
As an established team leader, your real estate network is robust, with a brimming database, widespread agent relationships, and countless connections with professionals at every stage of the real estate process. But how many are real estate investors? To grow your real estate investor network, attend local masterminds, meet-ups, and have more intentional conversations with investor clients. Their wealth-building knowledge and expertise can be invaluable, and you may find potential partnerships.
3. Set real estate investing goals
For any residential investment property, you typically aim to collect passive income, prevent avoidable costs, improve property value, and increase property appreciation. With vacancy rates (typically 6-8%), not every month may yield returns. With that in mind, as you review potential properties, it is essential to understand what’s important to you. Is it:
- Cash flow
- Tax benefits
- Property appreciation
- Protection against inflation
- Investing for retirement
- Investing in generational wealth
- A mixture of these
Having goals in place helps narrow down potential properties and strategies.
4. Pick a rental investment strategy
When choosing a potential real estate investment market, research rental laws, ordinances, and regulations, as they may differ between rental types and property locations. Based on your preferences and budget, there are three property types: single-family housing, multi-family housing, and a condo or townhouse. Each has pros and cons.
- Single-family house
- Pros: High appreciation, low vacancy, tax benefits, and low tenant turnover
- Cons: One cash flow
- Multi-family house
- Pros: Continued cash flow during partial vacancies, tax benefits, and a gateway to commercial real estate
- Cons: Large initial expense
- Condo or townhouse
- Pros: HOA maintenance, community amenities, enhanced security, and tax benefits
- Cons: HOA fees and restrictions and government regulations on condos
Once you understand the rental laws, you can establish if short-term, mid-term, or long-term rental properties are best for your real estate investing goals.
Short-term rental strategy
This strategy ranges from one-night to month-to-month rental periods for those traveling for business, vacationing, or biding time between homes. Rentals in this market are typically near attractions, such as a metropolitan city, national park, beach, amusement park, wine country, coast, or historical areas.
- Pros of a short-term rental strategy: quick return, high per-night rates/rent, frequent rate changes, and flexibility for occasional personal use
- Cons of a short-term rental strategy: varied seasonal income, local regulations, utility costs, necessary smart technology, constant maintenance, and cleaning (or you may receive negative reviews), management fees, furnishing costs, and numerous minimally vetted tenants
- Anticipate particular expenses: bath products, welcome baskets, entertainment subscriptions, and stylish furnishing.
- Remember that tourist traffic significantly affects your return on investment (ROI). Attractive tech, features, and amenities are why renters dismiss hotels and cheaper options, so choose a property with a niche look (outside or inside) or complete the necessary renovations to charge a premium.
Mid-term rental strategy
This strategy includes rental periods that typically fall between three to six months but can be as short as 30 days or as long as 12 months. Renters drawn to this are often traveling nurses, doctors, executives, or people in transition, like military personnel, recent home sellers, or students.
- Pros of mid-term rental strategy: steadier cash flow, less hassle, more flexibility, and sometimes you can charge more
- Cons of mid-term retinal strategy: higher tenant turnover, rental must be furnished, and you may have more legal issues
Long-term rental strategy
This strategy uses 12+ month leases and provides consistent monthly rental income. In longer-term leases, tenants often build lasting connections with the property and, in the best cases, will be mindful of damage, care for the yard, and pay utilities. Without thorough tenant screening, you may enter the property a year later and discover damages or filth.
- Pros of a long-term rental strategy: low vacancy, low tenant turnover, appreciation potential, and tenant screening
- Cons of a long-term rental strategy: eviction process, fixed rent rate for length of lease, and turnover costs
You should determine if you are interested in rental properties that need renovations or turnkey rent-ready properties. To determine which type yields the best results, create a pro forma for potential properties, detailing the following:
- Projected rental income
- Mortgage principal, interest, taxes, and insurance (PITI)
- Renovation costs
- Operating expenses (property manager fees, maintenance, utilities, landscaping, HOA fees, accounting or legal fees).
Then, subtract the net operating income (NOI) from PITI, renovation, and operating expenses to project monthly cash flow.
5. Be open to partnerships
Finding the right real estate investing partner takes time and many conversions, so don’t immediately jump into a partnership. Ultimately, you are looking for a partner who inspires you and provides you with something you lack that elevates investment prospects.
The key steps are to take the time to learn about their current business, goals, available time, and resources. A strong potential partner embodies the following values: collaboration, open-mindedness, positivity, and humility while being data-driven, gritty, and results-focused. If the vetting process is positive, define expectations, responsibilities, terms, and structure in writing. Create strategies for potential disagreements, losses, and worst-case scenarios in writing. Protect yourself with a binding contract reviewed by a real estate lawyer.
- Advantages of business partnership: more capital, split risk, support, flexibility, additional perspective, combined portfolios, and divided tasks
- Disadvantages of business partnership: division of power, split earnings, different management styles, and complex liquidity
Solo or through a partnership, you can build an investment portfolio to create reliable passive income that feeds your savings monthly and helps establish your desired lifestyle at retirement.
6. Invest in a Real Estate Investment Trust (REIT)
If you need to start your real estate investing journey on a smaller scale with less capital, invest in REITs. These companies have portfolios made of commercial real estate or related debts, interests, and equity. An above-average return on REIT investments is likely because the U.S. Securities and Exchange Commission (SEC) requires them to pay 90% of their income to shareholders. REITs produced the most significant wealth increase in over 50 years compared to the rest of the stock market, and over 90% of financial advisors recommend REITs.
Retirees commonly invest in REITs because they diversify portfolios and provide a consistent income stream to withdraw from conservatively. The minimum investment typically starts at around $1,000, depending on the portfolio, and investors recommend a 4% to 15% allocation. There are several types and subtypes of REITs, so choose one with familiar property types. Review briefings of REIT’s financial reports and invest in REITs through a mutual fund with the help of a long-term management team experienced in international investments.
- Pros of REITs: total return, instant liquidity, diverse portfolio, low cash flow risk, and trade-friendly
- Cons of REITs: limited growth in share value, vulnerable stock share price, and heavy taxes
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