If you’re new to the real estate investing game, you may think your sole objective is to find properties with the biggest possible rates of return. Unfortunately, making investment decisions driven exclusively by financial factors could lead to serious problems with your strategy.
Table of Contents - The Who, What, When, Where and Why of Investing
If you ignore interpersonal factors, convenience and your expertise when selecting real estate to pursue, you may end up losing out on opportunities less lucrative, but easier to own. While financial independence is an important goal, it should never cause stress or come at the expense of your quality of life.
The simplest way to guide your investment decisions is to ask yourself the basics before diving in Who, what, when, where and why?
Who you’re investing with
Real estate investing is a relationship-based industry. It’s very common for investors, especially first-time investors, to enter into a transaction with an investment partner. While that partner maybe a friend, family member or someone you met through your local real estate professionals network, it’s important to always work with someone you feel comfortable with.
Discussing finances is challenging. Real estate deals involve a lot of money, which can make it hard to voice concerns. Even if a person is very well capitalized, if you don’t have a clear line of communication, you’re better off finding another investment partner.
What you’re investing in
Multi-family rental housing may promise the greatest rate of return, but that doesn’t mean it’s the wisest type of asset to purchase.
Many investors find, for instance, it’s better to buy a single-family home and rent it out, to begin with. This is significantly easier than renting out a multi-family property for several reasons and can provide you with the experience and expertise necessary to pursue more complex transactions in the future.
Additionally, be careful of buying properties that seem like great deals. These properties may have serious problems, costing significant money to address, resulting in a lower rate of return.
When to invest time vs. money
If you’re only out to make a quick buck, you’re going to spend a lot of time with your investment property. Probably, too much time.
It might seem easier to handle things on your own instead of paying a professional. But this often isn’t the case. Most real estate investors, especially those first entering the industry, also work full-time jobs. If you’re spending all day at the office and every evening attempting to fix up your property, you’ll quickly find yourself burnt out and dissatisfied. Money spent on property management is money well-spent. It helps many investors keep their assets from overtaking their lives.
Burnout doesn’t just lead to dissatisfaction, however. It may cloud your thinking, and lead to poor financial decisions jeopardizing your career as a real estate investor.
While it may require a bit more money at the outset, hiring professionals to perform certain tasks at your property is often worth the expense. The time you’ll save is irreplaceable.
Where you’re investing
If you’re planning on making a real estate investment shortly, you may be attracted to cities with hot, hyperactive real estate markets. After all, isn’t that where you’re most likely to reap a significant return, based on the appreciation of the assets alone?
Not necessarily. Hot real estate markets often require more time and attention to enter, and they can be extremely expensive to operate in. While experienced, well-heeled investors are capable of making a tidy profit in active markets, first-timers may struggle to establish the infrastructure necessary to operate their assets.
Instead of focusing exclusively on the potential returns of a single asset, look at the location of a prospective investment more holistically. Is it convenient for you to get to? If not, is it at least in an area you enjoy spending time in? Chances are, you’re going to have to commit to spending some amount of time at your investment property. If you’re spending hours commuting to a place you don’t enjoy spending time in, you’re allowing your investment portfolio to control you, not the other way around.
In addition to convenience, consider the overall market fundamentals. This includes the barrier to entry associated with the market you’re exploring. Purchasing a high-value condo in central Toronto may seem lucrative, but you may end up spending more operating the property than you anticipated. Analyze the market’s history, its job market and economic forecasts to determine whether the market makes sense as a part of your investment strategy.
Why you’re investing
If you don’t have a clear, identifiable reason you’re investing in real estate, stop. You shouldn’t be spending money on real estate if you don’t have measurable quarterly, annual and years-long goals you’re actively working toward.
To be a successful investor, you need to be able to think long-term. If you’re exclusively focused on ‘making money,’ you’re more likely to make bad investment decisions adversely affecting your ability to pursue additional opportunities.
Investing in real estate to make money isn’t defined enough. Everyone wants to grow their net worth. What are you hoping to do with your expanded assets? Do you have a clear plan to either save or reinvest your earnings from your real estate ventures?
Many people invest in real estate with the intent of obtaining financial independence. By expanding your real estate portfolio, for instance, you may be able to retire earlier than you anticipated and live comfortably outside of a traditional corporate 9-5 job. Others buy real estate to diversify their existing investment portfolio.
Regardless of the reason you’re acquiring real estate, always have clearly defined goals you can measure on a quarterly and annual basis. If you don’t have goals, there’s no way to determine whether you’re successful or not!
While making money is the intent of any real estate investor, setting up clearly defined rules and parameters for your investment activity ensures you’re working toward a positive investment outcome.