Step 3: Baby's First Words
Say It Out Loud
- Money Spent: 0
- Commitment Level: 0
- Time Required: 15 minutes
So you’re just starting down this road of real estate investment. What is your goal for this project? Say it outloud (even though it sounds corny).
You may have said: "I want to buy a property.”
I’d like to say that there are no right or wrong answers… but that’s the wrong answer.
Your goal is not “to buy a property.” Anyone can do that. I’ll sell you one right now. It’s partially burned down and crackheads are squatting in the attic. There are $20,000 of back taxes due. I’ll sell it to you for $5. This meets your goal to “buy a property.” Why wouldn’t you want it?
Your goal should be more specific and have targets. Some common goals for effective investors are:
- I want to buy a rental property that earns cash-flow every month for the indefinite future.
- I want to buy a cheap property in an up-and-coming area and sell it for double in 5 years.
- I want to buy a fixer-upper property, flip it, and sell it for double in 6 months.
- I want to move 25% of my money from stocks to property for diversification and tax-sheltering.
Whoa, baby! I just threw a lot at you. We need to get your brain working in these terms. Think about what your real goal is and your timeline.
Real estate investments have a lifecycle. There’s Acquisition, Stabilization, Management, and Exit. We’ll talk about these later, but it helps to consider Exit Strategy first. Your Exit Strategy is when you plan to sell the property and move your money elsewhere. If you have a property that generates cash flow every month, your may want to hold it for many years. If you’re hoping to expand your portfolio, your exit strategy might be to sell it when it’s paid off and buy 2 properties with the profit, for example. That’s a pretty long lifecycle. If you are flipping houses, your exit strategy is to sell it as soon as you’re done fixing it up, which is a much shorter lifecycle.
Think about what your goals are, and how they fit into your current lifestyle now and where you see your lifestyle at the point of exit.
Think about a revised goal statement. It’s ok if you have multiple goals or if the targets are fuzzy at first. But you must consider exit strategy and your tolerance for risk to define how you want to proceed.
Once you have a goal and an exit strategy, you can think about what investment options are available. I practice a “safer” method involving “Buy-And-Hold”. This method relies on homes that rent for enough money to cover all of my expenses (plus a safety margin). Other people make money “Flipping” or “Speculating” on up-and-coming areas, but these techniques are riskier and require more work and capital up front, and are more difficult to do remotely.
You’ll have better success if you define your goal and aim at a specific niche during your first project. I like the Buy-And-Hold method because the risks are more manageable and there are fewer surprises. The profit margins are lower than Flipping or Speculating, but you can still make money and it’s more hands-off so you can keep your day job.
Say your new goal statement outloud, write it down or email it to yourself. This quick lesson should help you figure out what to expect in the days ahead. Good job!
