Two Critical Things You Should Know Before You Invest in Real Estate

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Note from Paula: This is a guest post from my friend Brandon Turner, a guy who shares my love for real estate, traveling and cats — not necessarily in that order.

Brandon used to write a blog called Real Estate in Your Twenties, which appealed to me for obvious reasons. These days he lurks around the corners of Bigger Pockets. He’ll introduce himself at the end of this post. Until then — take it away, Brandon!

The Only Two Things You Need To Know To Invest in Real Estate

The Only Two Things You Need To Know To Invest in Real Estate

I’m not a big fan of file cabinets right now.

Last month I bought a new file cabinet for my office. In an effort to make my office look more “home-y” I sprung for the nicer wood cabinet that resembles a dresser you might store your clothes in. Real fancy. I picked it out at my local Staples and told the associate I’d take it.

“You’re in luck! We’ve got one left. I’ll go grab it,” the associate said.

He returns a few moments later with a box.

Not a file cabinet. A box. That easily weighed over 100lbs.

“This is how we keep our prices so low! You get to put it together yourself and save! But don’t worry – there are instructions!”

I’m a fairly handy guy, so I buy the file cabinet *** box and take it home. I know how to use a screw gun – I can handle it. After all, he said there were instructions.

The “instructions” ended up being 40 pages of pictures with no words. Just terribly drawn pictures of a cartoon man putting together a cartoon file cabinet.

Two hours later, the cabinet was put together and finally resembled a nice piece of furniture. However – several key pieces of the “guts” were missing, requiring me to fill out an online order form to get the new pieces. Two weeks later they arrived … and were the wrong kind. I’m currently waiting for order number two.

A month into this ordeal, all I have gained is a large file cabinet that cannot hold files. The only one getting any positive use of this thing is my cat, who has taken up residence on top.

Sometimes, life is just so complicated. From the box, to the manual, to the missing parts – it’s been so frickin’ complicated.

Perhaps you are wondering where I’m going with this thing. Trust me – I have a point.

In a world where everything is so complicated, there is one thing that doesn’t need to be: real estate investing.

I know – you think I’m crazy. Perhaps real estate investing seems as complicated to you as that file cabinet did for me, or maybe worse. However, the basics of real estate investing are actually so simple that even a child can understand it. This post is going to quickly break the whole industry apart for you into only two things you need to know.

A niche, and a strategy.

Allow me to explain.

Your Real Estate Niche

The first thing you need to determine for yourself when investing in real estate is your niche. Your niche is the type of property you want to invest in. There are many different kinds of property and like beer, paint, modes of transportation or clothing style – no “one niche” is right for everyone. That’s what makes real estate so fun – your personality gets to define your niche. Let me explain some of the more “popular” niches to invest in:

  • Single Family Houses-
    No need to explain this one, but a single family home is the most common type of real estate investment. This could include a nice house in the ‘burbs, an inner city house, a condo, or any other type of real estate in which just one family lives.
  • Small Multifamily Housing-
    This would include duplexes, triplexes, and quads (properties with 2, 3, or 4 units.) These properties are still considered “residential” in a lender’s eyes – making loans much easier to get.
  • Large Multifamily Housing-
    Anything five units or larger is part of the “commercial” lending world and can range from a simple 5-plex all the way up to hundreds of units.
  • Commercial Real Estate-
    Commercial real estate involves renting property to businesses. This could be an office building, warehouse, a shopping mall, a coffee shop, or any other kind of business.
  • Notes-
    Perhaps you don’t want a physical piece of property at all. Investing in “notes” involved the buying and selling of loans. Although many don’t know it, notes can be invested in using the same strategies as actual properties. We’ll get to strategies in a second.
  • REITS-
    Another method of investing without actually dealing with specific properties, the REIT (Real Estate Investment Trust) is like a “mutual fund” for real estate. Essentially, a multitude of investors pool their money into a fund to buy large pieces of real estate and share in the profits.

Each of these niches also have sub niches you can choose to explore as well. For example, you may want to invest in a single family home, but you can narrow down your niche even further into mobile homes or McMansions. The choice is yours!

Choosing Your Strategy

By now, perhaps you have an idea of the kind of property you want to get involved with. Maybe small multifamily properties really float your boat (it sure floats mine!) Or maybe you like the idea of investing in “notes.” Whatever choice – it’s not enough to simply buy something. How are you going to make money in this niche? This is why the second thing you need to decide on is your strategy.

Your strategy is the method you use to turn your niche into wealth. While not every niche will work with every strategy, you’ll find that most do. Investing in real estate simply comes down to picking a niche and then picking a strategy. It really is that simple. The following is a list of just a few of the more common strategies you can use:

  • Wholesaling-
    One of the more popular ways to enter the real estate investment business, wholesalers are the “scouts” of the industry, who seek to find deals for other investors and make money for finding those deals. In a typical wholesale deal, a wholesaler will find a great deal, put the property under legal contract, and then sell that contract.For example, Bob the Wholesaler finds a small duplex that the owners are looking to sell. He signs a legal contract to buy the property for $100,000 and then finds a local landlord, Susan, who is looking for duplexes. Bob sells that contract to Susan for $10,000 and Susan closes on the duplex. In the end, the seller got what they wanted, Susan got what she wanted, and Bob made a nice profit.
  • Flipping-
    If you have cable TV, you probably know about this kind of investing. House flipper seek out great deals (often from wholesalers) and rehab the property, turning an ugly house into a beautiful home that they can sell on the open market to a family. For example, Julie is a house flipper. She buys a property for $105,000 and hires contractors to put $35,000 worth of labor and material into beautifying the home. She lists the home on the market for $190,000 and after paying all the selling fees and holding costs she makes around $30,000.
  • Buy and Hold-
    The most traditional of the bunch, a buy and hold strategy involves purchasing a property and simply holding onto it for many years. An ideal buy and hold property should produce both monthly cash flow (extra money after all the bills are paid) and appreciation (the value climbs over time). For example, Jerry buys a small strip mall for $1 million and holds onto it for 30 years, making an solid return on his investment each month, while the loan on the property is paid off and the prices rise over time. Jerry’s retirement is fully funded by the property.

Don’t Over-Complicate Things

Like the instructions that came with my file cabinet, many people seem to complicate the real estate world with manuals, guides, and missing parts. I’m not saying real estate doesn’t have a lot of moving pieces and intricate details. However – the details will come as you get into it – you don’t need to know them all right now.

Don’t let the complications be a barrier to you when considering real estate as a source of income for you and “vehicle” for your investments. As you progress, you can learn more and dive in more deeply, switching between different strategies and niches and even combining different strategies to make even more profit. But don’t worry about that now!

This post was meant to give you a big picture framework for thinking about real estate and how people actually make money doing it. It really does come down to just knowing those two things: your niche and your strategy. Do you know yours? What is your favorite niche and your favorite strategy so far? Why?

Let me know in the comments below!

(I’ll go first: my current favorite niche is large multifamily properties and my current favorite strategy is “buy and hold.” Why? I love the cash flow I’m getting from my my large multifamily properties, which allow me to work how I want, travel when I want, and live the life of my dreams… well, my dreams without a file cabinet anyways!)

My Current Favorite Niche Is: _______________________
My Current Favorite Strategy Is: _____________________
Why? ________________________________________________

Brandon Turner is an active real estate investor and head of community at BiggerPockets.com – the real estate investing social network. He obsesses about real estate and his cats, and likes writing epic blog posts on things like the best way to screen tenants and the best way to rent a property out.

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27 Responses to “Two Critical Things You Should Know Before You Invest in Real Estate”

  1. William @ Bite the Bullet
    11. Apr, 2013 at 11:17 am #

    Great advice… especially not over complicating things.

  2. Mike Damazo
    11. Apr, 2013 at 3:37 pm #

    Awesome read Brandon, great simple breakdown, def will check out your blog. Do you have any book recommendations prior to figure out my niche and strategy?
    If I had to choose a niche it would be a single family home and strategy would be buy and hold. Right now I’m focused on getting out of debt, but I know once out owning real estate will be my next goal.
    Any suggestions on setting myself up for success as I’m tackling my debt?

  3. Mark Ferguson
    11. Apr, 2013 at 4:52 pm #

    I like single family homes. There aren’t many multi family properties in my area. I flip quite a few in order to get capital for buy and holds. I’m getting over 24% cash on cash return on my buy and holds.

  4. Tiffany @ Extraordinary Reasons
    11. Apr, 2013 at 5:27 pm #

    Great post! My niche is single family housing and specifically college housing and my strategy is “buy and hold.” I didn’t go into real estate with this in mind, but I’ve recognized it since and I think this works for me, for now. I’m a fan of this because I feel that flipping is similar to stock trading– pretty speculative. But with buy and hold, even if your property doesn’t appreciate in value over the period you hold it, you are still making that monthly rent income. Price appreciation is just icing on the cake :)

    I think my niche might change, though. This is definitely my start, and while I want to continue with college housing (high demand) I also want to potentially move into the commercial sphere once I’ve built up some more capital (thanks to the cash flow from my college housing investment). Specifically multi-unit housing and office space. We’ll see what happens!

  5. Mark Ferguson
    11. Apr, 2013 at 5:28 pm #

    My current favorite niche is single family homes from $80k to $120k.
    My favorite strategy is buy and hold, but I also fix and flip.
    I use fix and flips to fund buy and hold properties. I am getting over 24% cash on cash return on all my buy and hold properties and I am trying to buy as many as I can.

  6. krantcents
    11. Apr, 2013 at 6:22 pm #

    As a former landlord of 10, 24, 9 units and a shopping center, it is not quite that simple. There is a lot of work, but worth it . It helped me achieve financial freedom 28 years ago.

    • N.Thompson
      25. Jul, 2013 at 6:50 pm #

      Hi Krantcents,

      My name is Nate. I am looking to do exactly what you have done via your comment above. Would you be open to a few questions from me via email? Nate

  7. alana
    11. Apr, 2013 at 7:36 pm #

    love me some bigger pockets!

  8. Mrs. Pop @ Planting Our Pennies
    11. Apr, 2013 at 7:46 pm #

    We don’t really have a niche, with the exception that our properties are all within a 20 minute drive of where we live in areas that we have a confidence in their growth over the next 10-15 years. We’ve got 1 single family home (we live in), 1 duplex (two rental units), and one empty residential saltwater canal lot that we’re holding as a more speculative investment for appreciation. I like our little version of being fairly diversified.

    • Afford Anything
      16. Apr, 2013 at 10:34 pm #

      @Mrs. Pop — You are officially the only person I know who owns an “empty residential saltwater canal lot.” That’s so interesting! … I definitely think location (within a 20-minute drive) is a niche. All of my rentals are within a 30-minute drive of where I live (Atlanta), NOT because it’s inherently the best market, but simply because it’s the one I know best at this moment.

  9. Brian
    14. Apr, 2013 at 10:08 am #

    1. Single family dwelling (condo)
    2. Buy and hold
    3. Because real estate prices are very stable in Vancouver.

    While we don’t generate a cash flow right now, we do break even and are gaining equity at no cost top us. When we have enough equity, we’ll upgrade to a rental in a more profitable neighborhood.

  10. Little House
    15. Apr, 2013 at 10:07 am #

    I think Paula’s success with rentals has finally gotten to me. Since I live in a very expensive area, buying anywhere near me is out of the question. However, the next state over, where we also have family living, is 1/6th the price. We’re just starting to discuss purchasing a single family house and holding onto it for quite a few years. I think I like the single family, buy and hold plan for now.

  11. SB @ One Cent at a Time
    17. Apr, 2013 at 11:27 pm #

    We are still renting, although we can buy a 3 bedroom condo with cash with the money saved. Looking for buying our first single family home now. In a couple of years I may look out for buy n hold properties.

    I don’t think real estate investing is only about knowing 2 things. Property selection and negotiation are two bigger pieces to me.

    • Afford Anything
      23. Apr, 2013 at 1:15 pm #

      @SB — Selecting the right property is key. One of my investing mottos is: You make money when you buy, not when you sell.

  12. Alexa
    09. May, 2013 at 10:21 am #

    My current favorite niche is single family homes.
    My current favorite strategy is flipping.
    Why: This is the only real estate experience I have had. I got an amazing deal on a foreclosure two years ago painted a couple rooms and sold it two months later. I profited $9,000 after everything was said and done. It was a very exciting experience that I hope to do again in the near future!

    • Afford Anything
      09. May, 2013 at 12:05 pm #

      @Alexa — I’m in a similar boat; my favorite strategy is the only one that I’ve done, which is long-term buy-and-hold rentals. I’ve entertained the idea of flips, and I know plenty of people who have been VERY successful at house-flipping (including my friend Luis, who wrote a guest post on this blog about his house-flipping experiences).

      Given my personal goals (passive income), I think I’ll stick to rental properties for now. In the meantime, I’ll watch house-flippers with fascination …

  13. Pamela
    10. May, 2013 at 5:29 am #

    My Current Favorite Niche Is: small mulit(2) family or single family homes in lower income areas.

    My Current Favorite Strategy Is: Buy and hold

    Why? I want to have paid off all the properties by the time I retire and have the rental as an income stream. I buy in the lower income areas as they are cheaper so I can afford to buy them. Also in our are the rental recieved against bond repayment is better in the lower areas.

    • Afford Anything
      10. May, 2013 at 11:00 am #

      @Pamela — My strategy is very similar: I buy-and-hold single-family or small multifamily homes. I diversify between lower-income and higher-income areas, but I stick with the Atlanta area because that’s my backyard. And I have the same goal as you: I want a rental income stream for the sake of financial independence.

  14. kross
    16. May, 2013 at 10:27 am #

    I have done a couple flips, but mainly my strategy is buy and hold, small and medium size multi family properties, currently a 4 unit and an 11 unit, looking for another 3 or 4 unit to add. I like to be in the middle of the road, blue collar accomadations, affordable housing for the working man,and only in my local area. not really interested in the high end stuff, or the really low end stuff, by staying in the middle I think you will be well positioned no matter what the economy does.we have looked at single and duplex’s, but the numbers don’t work for us, they end up being a negitive cash flow, I have a Construction background, so i prefer to do a lot of my own maintanance etc.will be retiring in about 2 years at 50 from my regular job, and concentrating more on Real estate, and may do a few more flips, but I firmly belive that buy and hold multi family properties is the easiest road to wealth for the average person.

  15. Thomas | Your Daily Finance
    07. Jun, 2013 at 8:13 pm #

    The only way for me to get into real estate right not is to do the wholesale option. My question with that is what happens if you put it under contract and the person backs out and you are stuck on the contract. Are there ways around this?

    • Afford Anything
      10. Jun, 2013 at 3:47 pm #

      @Thomas — That’s the risk of wholesaling. :-) That’s not a dig at wholesaling in any way — There are plenty of people who have made great money wholesaling — but it highlights the risk within it.

      Now, I’m not a wholesaler myself, so my knowledge about that slice of the industry is limited — although BiggerPockets will have plenty of more specific info about how to get started in wholesaling.

      I’m a buy-and-hold (rental property) investor, so I (personally) would be inclined to save up, and wait, until you have the funds enter the rental market. But that’s just me, because I have a strong pro-rental bias. :-)

  16. Jen
    07. Oct, 2013 at 1:31 pm #

    Thank you for your article. I now have a better understanding in real estate investing. My niche is multifamily housing and eventually to single family homes. My strategy is buy and hold.

  17. Mariel
    28. Jul, 2014 at 3:06 am #

    Thanks for sharing your thoughts about cats. Regards

  18. Flip Real Estate
    01. Aug, 2014 at 7:12 pm #

    I don’t even know how I ended up here, but I thought this post was
    great. I do not know who you are but definitely you are going to a famous blogger if you aren’t already ;
    ) Cheers!

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