Congratulations, you have decided its time to start investing in Real Estate. Who can blame you, Real Estate has always been a tried and true method of wealth creation and preservation through out history. Today, it maintains a special place among all investment possibilities, because of the ability for leverage, tax advantages, and stable cash flow among many others. However, with all the different options you have in Real Estate, from REITS to Raw Land, it is important that you define for yourself the following six questions:
- Why are you Investing? What is your Goal?: This is perhaps the most important question to answer. You need to know what your purpose is in order to define the vehicle to use and maintain the focus necessary to reach that objective. Are you trying to fund your retirement, or maybe your children’s college education? Maybe looking to hedge or diversify your general investment portfolio. No matter the aim, it is important to be clear, only in this way can you make a decision on where to invest.
- How long is your Holding Period?: Defining the length of time to hold your investment goes hand in hand with your goal. As Warren Buffet has stated the “ideal holding time is forever”, but if you do not want to hold the investment forever, a Fix and Flip strategy, or investing in Tax Certificates maybe better. The longer you hold the more benefits you may be able to reap, so leveraged rental properties,or other buy and hold strategies may work better. How long the property is held is key to your overall strategy.
- What is your Risk Tolerance?: It is well known that high risk equals high reward, conversely, low risk, low reward. On this broad spectrum you have to place yourself in order to make a decision when it comes to investments. Real Estate is a broad asset class, meaning there is something to accommodate any type of investor. The key question is how comfortable do you feel with putting your money at risk?
- How Involved will you be?: Are you going to be an active investor, self managing and doing everything yourself? Or will you hire property managers, contractors or even partners to handle the day to day operations? This is a key factor as you look forward to investing, since Real Estate is not strictly passive.
- Location, where will you invest?: As you answer these questions, and start forming an idea of the type of investor you are, location becomes another important issue. Are you comfortable investing thousands of miles away? Are you more comfortable with your own neighborhood, county or state? If you are chasing the best possible deal you may have to look elsewhere, but staying locally can provide a steady return over time as well as more peace of mind.
- What is your Strategy going to be?: Essentially there are two types of overall strategies, Buy and Hold or Fix and Flip. The latter is a more active investment strategy, looking to combine action and timing for a quick, under a year, return. Under this strategy there are property flippers, or tax certificate purchasers. Buy and hold is more passive and looks to the long term, years down the road. Within this strategy are rental properties or raw land, where appreciation and cash flow may be what is important.
The concept of Real Estate as a vehicle of wealth creation or a store of value is tried and true. But as you contemplate your decision to invest you must feel comfortable with the six questions above to maximize your results over time. Answer these to form a solid foundation and begin an amazing journey.