Tips and Tactics Versus Strategy?
Too many first-time real estate investors just make it past the finish line. Successful first-time real estate investors fly past the finish line and keep on soaring. Too many first-time investors rely on a few tips and tactics. They may be good tips, but successful first-time investors adopt a proven strategy and they stay with it. They modify tips and tactics as they need to so they achieve their goals.
Here is a simple analogy; to win a race a useful tip is "Run as fast as you can" and a good tactic is "Go on the 'B' of Bang." They both need to be modified depending on the race. Running as fast as you can in a 100 meters sprint is not the same as running as fast as you can in a 3000 meters middle distance race, and being the first off the line in a longer race is not that important. So, how a successful runner applies tips and tactics depends on the race.
The same is true in real estate investing. Successful investors modify their decisions and actions to suit their strategy. Our investor clients base their success strategy on four things.
The 4-Part Strategy
The strategy which many successful first-time real estate investors work to is based on Goals, Location, Type, and Advice.
- Goals are paramount. Goals are the anvil on which all tips and tactics are tested.
- Goals help to determine property Location.
- Goals also help to determine property Type, and
- All successful first-time investors rely on Advice from seasoned professionals.
Adopting a proven strategy and using real, detailed knowledge will minimize, if not remove, the risks that often go with first-time investing. Every investor can do their own research and property analytics, but "delegating" to experts is what most business leaders do in their regular activities as well as in stock market investing. So it makes sense to apply that same process to real estate.
Real estate investors' goals often generally fall into one of the following areas:
- Make a quick profit by selling the investment as soon as is practical.
- Generate high yield on currently-owned rental properties to buy more properties in the future for the least out-of-pocket expense.
- Generate high yield to create further wealth to boost, say, retirement income.
- Buy a second or third property for occasional use by the owner that is paid for by rent from occasional tenants.
- Begin a second business so a child, for example, can learn how to manage a "passive business" in preparation for them to take over the family business or to start their own business in a more dynamic environment.
- Use rental properties as a tax haven, because paper losses on current properties can offset profits elsewhere in their investment portfolio. United States tax laws make owning rental real estate very attractive to both domestic and foreign owners.
Different goals help to determine where the first rental property will be, and what type it will be. Taking advice on both of these is an efficient and effective use of the investor's time.
It is easy, especially for an overseas investor, to think in terms of a broad location such as "major city," or "waterfront." But a basic principle of successful investing is that real estate is local. New York is a major city, and so is Miami for example. New York has five boroughs, Manhattan and Brooklyn are two of them. Miami has a Downtown, as well as neighborhoods such as Brickell and Coconut Grove. Each of these neighborhoods has good investment property. The goals help determine which neighborhood is best for each investor.
Successful and experienced real estate agents know a great deal about the local markets so they can advise on which areas and neighborhoods within a major city an investor should focus.
In New York City, there are major new developments overlooking Central Park on Billionaires' Row and others closer to the Financial District. There are also well-established locations elsewhere, with very attractive investment properties. The cities of Miami and Miami Beach also have new developments and well-established neighborhoods. All of these locations offer different opportunities for an investor.
A well-established real estate agent will have their "ear to the ground," and will know of properties that are currently available for purchase, and ones not on the market, but owned by someone who needs to liquidate. Those owners will offer the property at a price that generates a profit for them, but which is also low enough to result in a quick sale - and a bigger profit later for the new owner after they have rented it out.
An investor who wants to generate good rental income may choose to focus on a location with a high percentage of young professionals who choose to rent rather than buy their home. These locations mean responsible, hassle-free tenants who will pay a higher rent to live close to their place of business as well as enjoying high quality amenities. Such properties in such a location will also result in low vacancy rates for the investor-owner, so will generate a higher net cash flow.
New York City has a high stock of rental properties, a strong labor market, little spare land for new properties to be built, and a continually high supply of tenants.
Another approach includes the fact that high net worth individuals living in New York City adopt a lifestyle that often includes the phrase, "summer in the Hamptons and winter in Miami." An investor may decide that the right location is a very expensive home at the east end of Long Island or a lower cost, but equally appealing home in SoFi in Miami Beach. both should generate high rental income.
Different locations determine different rental markets and attract different kinds of tenant. They also determine different future market values. Clarifying investor goals helps to determine property location.
Location impacts property type. An investor who wants their own pied-à-terre paid for by short-term tenants may decide that a two bedroom condo unit in a particular development with great amenities, and on a high floor (good views are both pleasant and generate premium rents) will be ideal.
An investor who wants to generate long-term rental income may also decide on a condo unit. The decision they must make is which type of unit will attract the kind of tenant they want. Should the investor choose, say, two studio apartments, or a one bedroom or a two bedroom unit? Their real estate agent will know which type will generate the right level of net income and will increase most in value.
It may be that a young professional family will pay a premium rent for a two bedroom unit, but the market has more single professionals looking for a one bedroom unit. The market for studio apartments may also be strong but buying two units will incur more property management costs, and may incur higher utility costs and property taxes.
A brownstone in a well-established New York neighborhood may be a better choice for generating higher rental income. Some brownstones may be separated into two apartments, thus generating higher yields, and some may not, depending on the local government rules. A well-established neighborhood may also have protected rents for existing tenants, thus reducing the investor's cash flow and future market value.
Other multiple family properties - duplexes, triplexes, and fourplexes - provide good opportunities for rental income. Multiple property units in a well-established, but less expensive location may be ideal for the investor who wants their child to live in one unit and manage the others so they learn about running their own business before they inherit and run the family firm.
One element of property type that investors must be clear about is condo or coop. Both are legal terms and not descriptions of architecture or building style. A coop will have very strict rules about rentals, and may even not permit it until the owner has held the unit for a couple of years. This would not be a good rental property decision.
Good business advice is the only instrument of production not subject to the Law of Diminishing Returns. Successful first-time real estate investors seek out and rely on good advice.
When the professional real estate agent knows the investor's goals, the detailed work can begin. Before investors make a purchase decision they want to have a comparative market analysis done on the location and type of properties that will deliver on their goals. This enables detailed searches to find the most ideal property on which to make an offer. They also want a detailed property analysis done so they know the details of regular income, cost, and yield, as well as how to make most of tax laws when they come to sell.
The agent's local, detailed, and up-to-the-minute knowledge about neighborhoods, developers, current owners, property types, and specific locations results in a best-advice scenario. Some locations will see increased investment in infrastructure, transport or commercial development. All of these can mean a location will see higher residential real estate prices in the future. Few overseas or out-of-state investors will have this data to hand, a good agent will. Their agent's knowledge and advice will help make sure that the right decisions get made.
Every state has different real estate laws. Each state and each city also have different tax regulations. So knowing how to align goals with laws is essential for long-term success.
In addition, the successful investor uses the right real estate attorney to draw up the contract to buy, and the contracts to lease for their tenants. Their tax accountant will ensure that the investor takes maximum advantage of local, state, and national tax laws to minimize their costs, lower their tax burden, and generate the highest yield. Their accountant will also know how to follow the 1031 Exchange legislation so the investor can defer all appropriate taxes when they sell the current property and invest in their next, and even more profitable piece of real estate.
The right real estate agent will be able to advise their client on which is the best first property for them to buy, and which attorney and accountant they should speak with to ensure the legal elements are handled correctly. Their agent will also help them choose the right property management company, if they decide they need one.
The first-time investor's goals will also enable their agent to plan ahead so they can build their real estate empire when the time is right to buy more rental properties. Their agent will also be there to advise them on the best time, and best way, to sell a current property for maximum profit.
Goals, location, property type, and advice are, indeed, the four elements of a truly successful real estate investment.