Some people treat real estate investing as a monolith. They have only one strategy for every deal, which means they often don’t know which deals to pass on. The important thing is to decide what kind of investments you want to make and then pick the right strategy to support your goals, not to force every “good” deal that comes along into your approach and hope for the best. In fact, the most unhappy investors I know take deals without examining whether or not they support their long-term goals.
Other than making money, there are three approaches to satisfying your goals:
- Passive income investing
- High-yield investing
- A blended approach
But the most important thing is to identify what your goals actually are.
- What are you trying to accomplish?
- What do you think about debt?
- How much risk are you willing to take?
- How quickly do you want to build your wealth?
- How much capital do you have to start with?
- How much time do you have and want to contribute?
Once you have decided what you want to accomplish, you can determine which approach best meets your goals. To help with that decision, I’ll talk about the pros and cons of each approach.
Passive income investors take the long-term view. They support Warren Buffet’s assertion that you shouldn’t buy any asset you wouldn’t want to hold for 30 years or more. In the equity markets, investors who look for passive income tend to invest in bonds. In real estate, this means rental properties—whether single family, multi-family, or commercial.
The advantages to this approach include:
- Low stress—you are under no pressure to buy any single property.
- Less involvement—these investments take less of your time to find and manage a deal.
- Lower risk—you can be successful buying as few as one or two properties a year.
- You can pay more for a property than a “flipper” and still make money.
- You can still recycle some of your investment fund by forcing appreciation and refinancing.
The disadvantages include:
- The yields are usually much lower—in the neighborhood of 7-10%.
- It can take much longer to build your portfolio to self-sufficiency.
- Capital requirements—you have to have money to passively invest. There are approaches that don’t require you to use any of your own money, but these are not passive, even if the income they generate is.
High Yield Investments
High-yield investments also have parallels in both real estate and equity market investing. Wholesalers—people who “flip” contracts—are the real estate equivalent of day traders. Traditional “flippers”—redevelopers, renovators, and so on—are more like those who invest in high-yield, higher-risk growth funds.
- Higher income when the deals work
- Can result in a growing investment pool
- You get to choose whether you do a deal a quarter, a deal or a month, or a deal a week.
- Much more work (time)—these are all active, not passive, investments. You have to spend time analyzing each deal before you invest and managing it afterward.
- Higher-volume business—because profitability relies on short-term forced appreciation, there is no ongoing income stream from the investments. That said, You get to choose the volume and level of profit that satisfies your goals.
- Higher risk—the gains derive directly from your efforts (or the efforts of the team you oversee).
The high-yield approach is simply another lane in the rat race. I know investors who put in more than 50 hours a week managing their teams or doing the work themselves. You have to decide if that’s something you’re willing and able to do.
A Blended Approach
This is my favorite, because it can combine the best of both the other two approaches. It can also combine the worst, depending on how well you execute the plan and how well you ensure each deal you take supports the goals you set out. We have a goal of holding one of every three houses we buy.
Another blended approach is private money lending. If you lend to an active (high-yield) investor, you don’t have to do the marketing or renovations yourself, yet you still reap many of the rewards of the renovator’s efforts. Unfortunately, you take on many of their risks, too, which is why you should only lend to people you know well and trust.
In summation, if your goal is simply “financial independence” (whatever that means to you), any of the three approaches could work for you. If your goal is simply to get out of the corporate rat race, you probably need to spend more time evaluating what it is you really want before you choose a strategy. But if your goal is to spend more time with your family, you want a more passive approach.
I hope this discussion helps you decide what it is you want to accomplish.
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