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
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 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.
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.
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:
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.
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 pays another $20,000 in holding costs and transaction fees (insurance, mortgage, staging, seller-paid closing costs, agent commissions, loan origination fees, appraisals, etc.) She sells the home for $190,000 and profits 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. Meanwhile, 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: _____________________
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.