More people are renting today than at any other time in the last 50 years, so now is a great time to own properties. The market for commercial multifamily real estate is strong with no sign of slowing down anytime soon. Real estate investment is a smart way to build reliable tax-advantaged passive income and equity growth to achieve permanent wealth.
As profitable as it can be to own rental real estate, not everyone knows how to get started. Here are four things to think about to help jumpstart your real estate investment journey.
1. Know Yourself
I assume that all real estate investors have the same goal. They want to make money. At a more granular level, we’re all looking to create recurrent stable streams of tax-advantaged income and equity growth. It’d be nice if those investments also provided us with diversification, multisource income, a hedge against inflation, and other benefits.
Now that we’re clear on the goal, it’s important to work backwards. How will you get from where you are today to where you want to be? After all, everybody is different. You’ll have to go inward and take a long hard look at yourself. Remember that the starting line begins with a fork in the road. You need to decide if you’re going to invest actively or passively.
Active vs Passive Investing
Active investors embrace management. It can be asset management, property management, or both. These type of investors are involved. Typically they bring real estate experience and expertise to the project that drives success. They implement a business plan that propels rent growth and appreciation. Their level of involvement encompasses the buy-sell decisions, the business plan, the capital improvement plan, net operating income targets, and more. Some will even involve themselves in the day-to-day operations (property management).
Before you decide to be an active investor, you need to ask yourself a few questions. Do you have enough time to dedicate to the success of your project? Many people think they do, but allow their optimism to get in the way of realty. Their full time job and family obligations come first leaving them little time to dedicate to successful operations.
For those that do have the time, the next step is to take an honest assessment of your expertise. Were you born into this business and taught it by your family? Is it something that you work in everyday? Have you had a mentor show you step-by-step what it takes to win in real estate investment? If not, you better learn it quickly or perhaps you’re better suited for passive investing done fractionally.
There are many ways to invest passively. Ultimately, passive investors want the benefits of real estate investing without the headaches of management. These people hire trusted professionals to do the management for them. That means they need to do their due diligence up front and make sure they’re working with reputable people with a long track record of success.
2. Commercial or Residential
Once you decide if you’re a better match for active or passive investing, the next step is to decide what type of real estate you want to invest in. You have lots of options, but the two general categories are residential or commercial.
Commercial real estate encompasses things like retail, office, industrial, hospitality, storage, and multifamily (resident occupied real estate – five units and larger). Residential real estate is resident occupied real estate that is four units or smaller. It includes single family homes, duplexes, triplexes, and quads.
Many people view residential as an entry point into real estate investment. And certainly there are plenty of people who make money investing that way. However, the lack of economies of scale and professional property management in that space can limit your overall success.
Why Commercial Multifamily?
We invest in commercial multifamily real estate for several reasons. First apartments have the economies of scale necessary for larger success. It’s an investment in the basic need of shelter which means demand will never go away. However, the biggest reason why we invest in commercial multifamily real estate is due to its safety profile.
As you know, all investments have risk, but they don’t have the same risk. Over any long-term period, commercial multifamily real estate has the best risk-adjusted return. We invest conservatively. Our goal is to get the best return possible while taking the least amount of risk. Commercial multifamily real estate has had the best Sharpe ratio (risk-adjusted return) of all the real estate classes. It wins hands down.
Our approach may or may not be right for you. You need to weigh your goals, with your strategy, and your risk tolerance. Research your decision and be disciplined. Avoid the temptation to chase trends or blindly follow the prognosticators and soothsayers.
3. Do Your Research
Some people think that the real estate investment journey starts with buying a property. But buying a property without doing your research is a recipe for disaster. If you’re going to build wealth through real estate, you need to do a lot of research. The amount of money that you can make is based on the health of the housing market, job market, and emerging industries among other things. I’ve said it before and I’ll say it again, market matters – a lot!
Don’t buy anything until you know your market and have matched that market to a business plan that will work in that market. You want alignment of your market, your business plan, and your capabilities. Misalignment of any one of these three can dampen your results.
Ensure Alignment Of Your Market, Capabilities, And Business Plan
Are you investing in a college town, the urban core of a major metro, or out in the suburbs? What are the demographics of your renter pool? Is it mostly student housing, senior living, white-collar professionals, blue-collar workers, or subsidized housing?
Where is your market in the real estate cycle? Is your market oversupplied, undersupplied, or at equilibrium? What are the cap rates, occupancy rates, and rent growth in that market? Make sure you know the landlord tenant laws and stay abreast of any new changes.
This research may not be fun, but it’s vitally important. It’s kind of like eating your vegetables and getting regular exercise. Without it, the health of your investments will suffer. As exhilarating as it can be to buy properties, that excitement will fade fast if you haven’t done your research.
If you’re not going to be an active investor, then you can outsource a lot of this research to professionals. However, you should question them as to how and why they choose their markets as well as their track record within those markets.
4. Get Rental Income
Investing in real estate can provide multisource income. You can make money in the form of passive income (yield) as well as equity growth from appreciation and paying down the mortgage. In that way, it’s a blended return. We focus first on cash flow as we know that increased cash flow leads to equity growth. Properties that spin-off passive income are also well positioned to withstand downturns in the market.
Unfortunately, some real estate investment strategies are more speculative in nature. We see people buying low cap rate properties primarily in coastal markets that don’t provide passive income. These investors are banking on appreciation. That approach can pay off but involves considerably more risk. A market downturn can be disastrous for people who invest speculatively without cash flow. For that reason and more, we highly recommend that your real estate investment strategy involve properties that provide passive income from day one.
Real Estate Investment And You
Real estate investing is a proven way to create income outside of your primary job and grow lasting wealth. If you haven’t yet started investing in real estate, be sure to use this guide to get you going. Ultimately, you need to know yourself and whether or not you’re better suited for active or passive investing. From there you should decide whether you’re going to invest in commercial or residential real estate and you need to do your research.
Whatever you decide to invest in, make sure that it will provide you with positive cash flow from day one. We help passive investors secure their retirement and create permanent wealth by investing in large multifamily apartment buildings. If you’re looking for a company that’s consistently named as one of the top 5000 companies in the U.S., you should contact us today.
To learn more about commercial multifamily real estate investing, download your free copy of Evidence Based Investing from 37th Parallel Properties.