4 Fundamental Questions Before You Become a Real Estate Investor

You’ve saved well, your retirement is fully funded, your investment portfolio is well balanced to your risk tolerance. So what’s next?

You want to diversify and hedge against inflation. You’re eager to build wealth. Bitcoin? Gold? 

Historically, no asset class has transferred more wealth than real estate and we are blessed in that the housing market in the DMV can be incredibly consistent in the returns it produces if you know where to invest. 

Still, many would-be investors get tripped up for three reasons. First, investing in real estate takes more than the click of a button, and let’s face it, there are a lot of immediate ways to get the rush of investment. Second, as an investment, real estate is less liquid than most. Wealth builders understand the ROI on the right real estate can be phenomenal. The third is the stumbling block of where to invest. This takes deep research, patience, and discipline. This is where we come in. 

Here are four fundamental questions that you’ll need to answer before you step foot into your first potential investment. 

Question 1: What property type is my ideal? 

Recently, I was called on by a new client who had purchased a condo fifteen years ago. As we ran the numbers, it became clear that he not only grossly overpaid for the property, but that his assumptions about the gains the property would enjoy were poorly founded. After over a decade of hold time, he’s losing money. The same funds, invested into different housing stock (townhomes, for example) over the same period would have seen gains of at least $80,000.  Many people fail in their real estate investments because they don’t know what they are looking for. But the right criteria allow an investor to hone in on a shortlist of possibilities and to be surgical in the types of offers they make. 

Question 2: What is the optimal financing structure? 

This may seem simple, but it’s essential. Are you able to win because of an all-cash offer, or will you take out a loan? Your decision here affects both your acquisition and management strategies. Knowing how you will finance will also change how long you will hold onto the property. Using a loan makes you less flexible with your asset, but it puts you at lower risk on the investment. The right balance of leverage and capital investment is key. We will often collaborate with your investment advisor to determine the optimal use of your funds to keep your money aggressively working for you.

Question 3: What are the business insights I need? 

A buyer takes shots and hopes for the best. By contrast, great investors are superb shoppers. Their emotion is always in check and they see each move as a business decision. Excellent moves are informed by timely market evaluations. Knowing which submarkets (down to the specific housing stock within them) have the highest appreciation rates and rental rates, and what the rental upkeep costs of specific properties allow investors to see with clarity the right moves. 

Question 4: What is my management strategy?

Once you own your property, knowing how you’ll achieve the best possible ROI will largely be tied up in your decisions around managing renters and the physical upkeep of the asset itself. How do you plan to market your investment to renters? Which improvements to the property will make the biggest difference to potential renters? Who is your target renter? What are the rental rate and the worst-case vacancy rate? Do you want to manage the rental yourself or outsource the management? 

Whether you are investing to build a high-end AirB&B or acquiring housing stock for military personnel, university housing, or commuters. These are the types of questions that we help investors answer so that every dollar spent on your investment can be optimized.