“I’ve got it. I understand the wealth building principles of investing in real estate. I understand the WHY… now I need to know the WHAT… then I can determine the HOW! I am ready to get started”
If you find yourself thinking this – I invite you to continue reading, this article is for you.
The Two Best Strategies to Get Started
Overall, real estate investing (REI) is one of the simplest and easiest forms of investment to conceptually understand. It doesn’t come without it’s growing pains, though. Understanding the nuances of underwriting, contracting, negotiating, residential or commercial lending, asset protection, estimating renovations, property management, managing renovations, etc. is difficult without prior experience, and seemingly worthless unless you intend on investing a SIGNIFICANT amount of time learning this trade. Even at its highest levels, where REI is extremely sophisticated, it still is not rocket science.
But it sure feels like that when starting out….
There are two ways of investing in real estate, though, that are ideal for investors that building that education and experience. In fact, both of these investment strategies mitigate many of the competitive advantages that comes from having high levels of education and experience that comes with years of performing.
After all, according to Benjamin Franklin, there are only two guarantees in life, and being a successful real estate investor is not one of them. In order to better your chances out of the gate, follow some of the advice below.
Strategy #1 – The House-Hack
House-Hack– Catchy-term, age-old wisdom. House-hacking is the purchasing of a primary residence (1-4 units) and implementing an investment strategy that makes you money either:
a) while you live there (rental)
b) when you sell the house (live-in flip)
c) a combination of the two
d) indefinitely (long-term, buy and hold)
There are several different ways to house-hack, which range from buying a duplex and living in one unit, to renting out private rooms on platforms like Airbnb or VRBO, to buying a (livable) “fixer-upper” and renovating, or the easiest and most common form of moving from a primary residence and maintaining that house as a rental after moving as opposed to selling.
House-hacking has the competitive edge over other strategies for several reasons:
Fundamentally Sound, Simple Business Plan
The gap between best-in-class operators of the house-hack and amateurs is considerably smaller than you will find in other asset types. The simplicity and soundness of the business plan makes for an easy method for anyone to adopt.
Inefficiency of the market
In 2012, Warren Buffet wanted to purchase a “couple hundred thousand” single-family homes (SFH), but did not have the method to do so. Real estate has always challenging for hedge funds or Wall Street to buy in an efficient manner. This inefficiency of the market provides opportunity for investors of all sizes, including beginners.
Incredible, long-term, fixed-rate financing options
No other investment can you borrow up to 100% of the cost of the investment with such long-term, fixed rate debt. At the time of this writing, mortgage rates are near 2.5%, an all-time low.
Low cost of entry
Don’t have a lot of capital to invest? This is a perfect investment strategy for you. With different financing options, you can purchase a home for 20%, 10%, 5%, 3.5%, or even 0% down (it is possible, and not difficult, to get your first house-hack with NO money out of your pocket).
House-hacking is scalable. As long as you are willing to move once every year or two and live in a property that makes you money (good investment properties are typically not the standard retail home), this strategy is one several investors have used several times over.
Excellent Resources to Learn More
- Link here to a slide deck of an original meetup on the subject House Hack Presentation
- Service member or veteran and looking to house-hack (everyone should)- you HAVE to read Active Duty, Passive Incomes FREE E-book first.
- Overall excellent knowledge with “Coach Carson“
Strategy #2- Syndication
Syndication is the most powerful strategy in real estate for many reasons. For the context of this article, it’s most important to understand that syndication allows qualified individuals, regardless of their individual experience level, to partner with professionals and invest in asset classes that traditionally are not available (to get a clearer picture of what a syndication is, check out this article). This includes, but is not limited to commercial multifamily, self-storage, office buildings, retail, warehouses, light or heavy industrial, hotels, developments, etc. Syndication is the method that allows virtually everyone purchase a piece of larger and more profitable asset.
There a several phenomenal reasons why investing in a syndication is great strategy – enough to write a book on (maybe that’s a precursor of more to come…). For now, we’ll focus on what I believe to be the 5 most important reasons why syndication is IDEAL for beginning investor.
Access to Bigger (and Better) Deals
There are countless, frustrated beginners out there looking in their market for deals that pencil but find it difficult to locate at this time. Syndication provides opportunities to participate in deals that are simply not available through any other means. This obviously provides access to a wider pool of opportunities and provides deeper connections within specific asset classes. When an owner or broker is contemplating selling, they scrutinize buyers heavily, so time is not wasted on someone who cannot close. Often, these listings are distributed to only a few select buyers via “pocket listings.” These pocket listings are typically much stronger fundamentally than other deals found through other sources, such as official listings.
“Leverage” is used in real estate investing most often to describe the use of debt (mortgage) to purchase a property. While that still holds true in syndications, it also applies in at least two other ways that benefits investors tremendously.
- Leverage other-people’s money (OPM). Even with a 70-80% LTV loan from the bank, a 20-30% down payment, closing costs, CAPEX, operational capital, and reserves can still amount to a lot of money. Why not grab 10, 20, 50 people, everyone pitch in $50,000, and buy something much bigger and more efficient than each individual could buy themselves.
- Leverage a syndicator’s expertise. You partner with someone who has years of knowledge, tons of experience, has developed professional relationships and specializes in the asset class and business plan you are seeking to invest in.
Truly Passive investment
Real estate income is sometimes referred to as “mailbox money,” as in, you invest, sit back, watch Netflix, and get mailed checks once a month. This is not the experience of a majority of real estate investors. In fact, most shy away from real estate investing because of the hard work and headaches of being an active investor. Syndication pairs skilled operators (general partners or GPs) with capital investors (limited partners or LPs). This provides the limited partners with the benefits of direct ownership, with none (or minimal) of the hassle. The “true mailbox money.”
Warren Buffett’s famous first rule of investing can be a tall order for someone getting started in REI with little knowledge and experience. Syndications in certain asset classes (i.e. commercial multifamily) have natural mitigation of risk built-in due to the asset class’ premium risk-adjusted return. Also, when investing as an LP in real estate, the limited partners are only held liable for their investment. That means these investments are protected against lawsuits, recourse of non-payment of debt, or overall failure of the business.
Economies of Scale
Ever try to get some special attention from a property manager on one of your single-family rentals? Trust me when I say that just because this is fifth on the list, does not take away from how powerful this benefit truly is. With a syndication, you have a larger, more efficient deal. Having professional and sophisticated team players is not a luxury at the level- it is a requirement. Team members include property managers, asset managers, CPAs, securities lawyers, real estate attorneys, contractors, lenders, etc. Try paying for a lawyer to review your contracts and negotiations and a CPA to do your taxes at a smaller scale, and there goes all of your profit (ask me how I know).
The things you should identify to get started…
- An asset class- spend time researching what type of assets align with your goals.
- Team- Investing in a syndication is all about finding an operator that you believe in. Find a syndicator that you know, like and trust and will be an excellent steward of your money. Once you decide on joining a syndicator’s team (investing in a deal), your team expands rapidly!
- Identify Goals- Identify your top priorities- cashflow, appreciation, tax-savings, wealth preservation, income production, etc.
Excellent Resources to Learn More
- Podcasts- The Syndication Show with Whitney Sewell, Apartment Investing with Michael Blank, The Best-Ever Real Estate Podcast with Joe Fairless,
- Books/Articles- The Best Ever Apartment Syndication Book- Joe Fairless, How to Legally Raise Private Money- Kim Taylor, Related Blogs (like this one)
- Network with syndicators- Taking the step to have that discussion is one of the most beneficial ways you can set yourself up for success.
Real estate investing is the greatest wealth building vehicle available to anyone. One of the keys to being successful in this field is getting the first deal complete. That first deal is often the hardest and will typically build momentum that yields more success. Regardless of where you want to end in your journey, both of the strategies listed above are proven ways that beginners have made large profits from their investment.
Always feel free to reach out with questions, comments, or complaints!