Please enjoy this guest post from my friend Joseph Hogue. He's a great guy, and someone I've actually met in person! I love his take on real estate investing since it's not my thing.
These three solutions won't solve all your problems as a real estate investor but they will help with the three biggest hurdles.
Miranda isn't a real estate investor but I've always been impressed with some of the expertise she's been able to round up on the blog. I read one of the best reviews of the risks and rewards in rental real estate on the blog earlier this year.
It's articles like these that can help you manage one of the best investments available. Few investments have created as much legacy wealth as real estate but it's not without its hurdles.
How I Started Real Estate Investing
I started investing in commercial and residential property just out of the Marine Corps in 2001. I was fortunate to get in at the beginning of the real estate boom. By the time I started selling in 2006, I owned six houses and investments in several retail spaces. While I've scaled back on my direct investments over the last ten years, I still believe real estate is one of the best opportunities for individual investors.
3 Biggest Hurdles to Real Estate Investing
Like many individual real estate investors, I had to learn property investing the hard way and through some expensive lessons. I worked as a commercial real estate agent while in college and studied finance but had to learn the residential real estate market as I went.
There are a hundred little things that can go wrong when you invest in real estate but three major problems represent your biggest hurdles to success.
1. You need to be a jack-of-all-trades with your first real estate investments.
There are always professionals to help you, but all those expenses for contractors, lawyers, agents and plumbers start to add up.
Real estate investments rarely provide much free cash flow after paying the mortgage in the first few years and you may not have enough savings to cover miscellaneous expenses.
2. New real estate investors find themselves in a constant tug-of-war between the time needed to learn and manage their own properties versus the ability to hire out expenses.
A big hurdle to real estate investing is the inability for most investors to buy enough properties for the diversification needed by property type and location. Most new real estate investors are only able to buy one property and maybe add another after years of investment.
Owning just one property in one location leaves them exposed to all kinds of risk. Something could happen to limit the upside to the specific property type, i.e. residential, office or industrial property. Economic problems could hit the city or region and limit the upside to the property market.
3. Investment diversification in real estate means buying into at least a few property types and in a few different markets, something out of reach for most investors.
The final hurdle for real estate investors is the constant management necessary for a lot of property types. This goes beyond the other professionals you'll need for maintenance and legal work. Just keeping up with tenants, marketing vacant properties and balancing the books can be a full-time job.
Hiring a property manager usually means 10% off the gross rent, seriously eating away at your investment return. It's either that or learn to juggle your property management with your day-job.
Managing real estate properties can be a full-time job and all the stress to boot.
3 Solutions to Build Your Real Estate Investing Empire
Fortunately for investors, there are solutions around the biggest hurdles to real estate success. Each can help solve the problems in their own unique ways. Look into each solution to see which is most appropriate for your needs and consider trying a little of all three solutions.
1. Join a real estate investment club.
For investors that want to directly invest in real estate, a real estate investment club can help to carry the burden of management and expenses.
There are two ways to set up your investment group, as a limited liability corporation (LLC) where everyone invests together or as an informal group where you trade advice and services. Even the informal structure can save you thousands on trading services and teaching each other a part of the business.
Recruiting for your real estate investors' club locally means you'll be able to meet in-person and can find all the best local deals. Looking further out for your group, through online forums and in a Facebook group, can help find and manage investments in different regions.
Look for these roles in your real estate investment group:
- Accountant: Find someone that understands real estate accounting and the process for a 1031-exchange to save money on taxes.
- Contractor: Along with a list of building professionals, a good contractor can help get as much money as possible from your sweat equity.
- Agent: Property brokers see all the best deals first and understand better than anyone where the best investments are found.
- Investment Analyst: Every real estate group needs someone that understands how to turn an investment into consistent cash flow.
2. Real estate crowdfunding offers low-barrier access.
Real estate crowdfunding investments are a relatively new way to invest in property and can help individual investors afford multiple properties in different regions. There are dozens of crowdfunding sites specifically set up to connect real estate developers with investors. Investments generally come with all the rights of a first lien and can be debt or equity investments.
Remember to buy properties in different regions of the country to diversify your portfolio against economic risks in specific markets. Besides geographical diversification, don't forget to invest in different property types.
- Residential real estate rentals aren't exposed to economic cycles as much as commercial property but returns are generally lower.
- Office property and industrial property are exposed to a changing economy but contracts are longer and returns can be high.
- Storage units are fairly easy to manage but may not see the price appreciation in other property types.
- Leisure properties like hotels and resorts should benefit with an aging population that wants to travel more.
- Retail properties like malls and stores benefit from the fact that consumers drive 70% of the economy.
The downside to investing in real estate crowdfunding is that it's an indirect investment. You are investing in someone else's project and don't hold the property directly. You get professional management and a hands-off investment but trade for a potentially lower return in the process.
3. Consider Using REITs as part of your plan.
Another indirect option for real estate investors is to invest in real estate investment trusts (REITs). These are companies that hold hundreds and even thousands of properties and sell a share ownership in the portfolio. REITs trade just like any other stock with low management fees. You get professional management and instant diversification in all the property held by the company.
REITs get a special tax break if they pay out almost all profits to investors. That means a hugely efficient way to hold property and regular cash flow for investors. The downside is that REITs trade like stocks and may rise or fall along with the stock market. Returns for REIT investments are good but not generally as high as you'll find with direct investment in properties.
(Editor's note: Hi there. I use REITs to add a little real estate to my own portfolio, even though I'm not into real estate investing.)
Three solutions won't solve all your problems but they will go a long way to overcoming the three biggest hurdles. I've used each of the three solutions in my real estate investing and each can benefit investors in a unique way.
4 thoughts on “3 Secrets to My Success in Real Estate Investing”
My biggest “secret” in real estate investing was to find an expert who would show me the ropes.
I did just that — I networked and found a friend/real estate agent who taught me everything about investing in real estate (I bought all my properties using him as payment in return).
If it hadn’t been for him, I would never own the 14 units I have now and I certainly wouldn’t have been able to retire early.
That’s a really good idea! A mentor can be a great help.
Finding a mentor is a great idea in any idea but too often neglected. So great to be able to start from experience rather than to learn the hard way! Thanks for the comment.
Excellent article as always Joseph. Real estate is an awesome asset class that provides both income and equity appreciation, which provides the ultimate financial flexibility.