Investing in real estate presents numerous opportunities for potential entrepreneurs to make money. From wholesale deals and house flipping to real estate investment trusts (REITs), the avenues are limitless and always bountiful when investing in real estate. The deciding factor, however, is which real estate business strategy to choose, as each is comprised of its own degree of risk and reward.
How To Get Your Real Estate Business Strategy Started
For successful investors, a real estate business strategy is clearly defined with short and long term goals. In essence, they’ve designed a roadmap to their destination that reveals not just the easiest route, but highlights potential pitfalls along the way. The problem is that many beginner investors get stuck in the early stages of deciding which route to pursue, instead of putting together a detailed real estate business plan and taking action.
As a new investor, it’s completely natural to be hesitant on which real estate business strategy to pursue. Investing is comprised of unpredictability, trial and error, so a little bit of indecisiveness is to be expected. Having said that, hesitancy disappears when goals are defined and your purpose for getting started is uncovered.
The first step in defining your real estate business strategy is to expose your “why” for getting started. This is the reason for wanting to succeed in the real estate investment landscape, whether it’s financial freedom or flexibility, and your purpose for getting started.
Let’s say your motivation for investing in real estate is to earn more money. While this is definitely a reason many entrepreneurs get started, it’s important to dig deeper and consider the root, as it could range from wanting to pay the bills to affording a family trip. Whatever the reason, this is your why, and it will help you to overcome hardships and achieve your long-term goals when investing in real estate. Believe it or not, the right mindset is the first step to a successful career in real estate investing.
Another critical component of the process is real estate education, which can benefit investors by mitigating risks and improving their return on investment. Although risk is involved in all types of investment, understanding the ins and outs of real estate investment, along with business strategies to make deals less risky, will help to increase a new investor’s level of preparedness. Having a well-rounded education in real estate can also improve an investor’s bottom line, helping to save money and avoid inefficiencies.
Aligning Your Goals With Your Real Estate Business Strategy
Once your purpose for getting started in real estate is defined, the next step is to align your goals with the right business strategy.
There are numerous options to invest in as a beginner investor, including wholesale, prehab, rehab deals, and even real estate in the stock market (REITs); but each path consists of specific duties and responsibilities. As a beginner, it’s important to write down both your short and long-term goals as they come. Although they may change over time, you’ll have a clear understanding of the objective at hand.
The next step is to determine what you want out of a career in real estate investment, including the responsibilities associated with each strategy. Consider factors such as your short and long terms goals, as well as your current situation, including access to capital and time constraints that may inhibit you. The key to determining a real estate strategy is to first comprehend what you want to achieve and then align that desired goal with the right business strategy to achieve it. Here are some examples:
Investors with short-term real estate goals should consider:
- Wholesaling: This strategy consists of acquiring distressed properties at prices significantly lower that market value and controlling them through a contractual agreement known as a purchase and sale agreement. The investor then secures a buyer willing to purchase the contract before closing. Costs associated with wholesaling are very minimal and generally in the form of a earnest deposit.
- Prehabbing: This real estate business strategy is perfect for beginner investors as it applies the speed and efficiency of a wholesale deal, but with less risk and higher profit margins. Generally speaking, a prehab can take upwards of six months and fetch anywhere from 10 percent to 20 percent of the final sales price.
Investors with long-term real estate goals should consider:
- Rental Properties: Rental properties are ideal for long term appreciation, which have historically averaged four-to-five percent a year. In addition, many of the costs related with rental properties are also tax deductible, making them great for both short and long term investments.
- Rehabbing/House Flipping: A rehabbed property will typically earn a higher return on investment compared to a prehab or wholesale deal. However, the costs associated with a rehab differ tremendously. For lower-end tasks such as landscape, painting and small repairs, the cost can range from a few hundred dollars to $25,000, with bigger rehab projects ranging from $25k-$75k. According to RealtyTrac’s latest report, homes flipped in Q1 2016 yielded an average gross profit of $58,250, the highest average gross flipping profit since Q4 2005. That’s an average 47.8 percent return on the original purchase price, the highest average gross flipping ROI since Q3 2012.
Investors looking for passive income should consider:
- Rental Properties: As one of the more popular investment vehicles, a rental property generates an investor’s favorite thing: monthly cash flow. These investment gems can even be achieved on a part-time basis depending on whether a rental management company is hired, or the investor chooses to become the landlord. Time and costs will differ with each method.
Financially strapped investors, with little time, should consider:
- Wholesaling: Wholesale deals requires minimal capital, no experience and offers the quickest method for generating a healthy income.
- Prehabbing: For investors with limited funds, prehabbing is an innovative business strategy as it dependent on the seller’s ability to unlock the property’s value with sweat equity.
Investors looking to build wealth should consider:
- All Of The Above
“It is easy to get sidetracked or have a change of heart when you don’t have conviction in your actions, “ says Paul Esajian, my brother and colleague. “As an investor, you have numerous options and ways to run your business. Instead of trying them all out at once, take your time and pick one and go with it.”
If your goals are clearly defined from the beginning, your real estate business strategy will become clearer as you progress.
Picking Your Real Estate Business Strategy
With goals in mind, the next step is to confirm which real estate business strategy you want to pursue. It’s important to note that each approach will have its share of pros and cons, but it’s critical to consider each route before delving into an unwanted situation.
One way to gain insight is to commence a real estate networking campaign as it has the power to build contacts, potential deals, and the unique ability to educate investors. Since you’ve never invested in a rehab property or purchased real estate stocks, you really don’t understand the full extent of what you’re getting into. By listening to individuals in various investment fields, beginner entrepreneurs can see inside various real estate business strategies, while studying the pros and cons of each path.
When networking, investors need to focus on three aspects: be considerate of what matters to others, strengthen relationships by focusing attention on conversations; and use a “give to receive” mentality to earn the right to do business with your contact. My business partner Than Merrill recommends that beginner investors familiarize themselves with the following five steps to improve networking connections:
1. Make the connection authentic and meaningful.
2. Cater to their needs and inquire about their personal life.
3. Place their needs ahead of yours and help them achieve what it is they want.
4. Become a “value creator.”
5. Be sure to follow up on your initial connections.
Networking can be a time-saving solution when determining one’s real estate business strategy. Along with learning the ins and outs of each business strategy, beginner investors can hear first-hand about the duties and responsibilities involved in each endeavor, as well as the success and failure associated with each path.
The final step for investors is to elect which strategy to pursue. Remember that no investment path is risk-free or void of uncertainty, but conducting due diligence will ensure you make the best possible decision based on the information you’ve gathered and the people you’ve spoken with.
Are you ready to pick a real estate business strategy?