Real estate investment is the top choice for the wealthy worldwide. If you want a piece of that pie, getting started is easy but succeeding is another matter entirely!
Most of us want to invest passively – that is, without having to dedicate too much time and attention to growing our wealth. After all, most of us have careers and other ambitions.
If you already know you want to be a passive real estate investor, there are a few things you need to know before you really dive in. Knowledge isn’t just power – it also prevents new investors from making costly mistakes.
8 Essential Tips for New Passive Real Estate Investors
Tip #1 – Make No Assumptions
Due diligence is the cornerstone of effective investing. For passive investors, due diligence is the continuous act of checking data, verifying information, and expanding knowledge. In most contexts, due diligence in real estate refers to things like conducting a home inspection and running the numbers. For the passive real estate investor, though, this also includes the conscious and ongoing effort to know your business inside and out.
Don’t assume something will work out one way. Don’t act on hunches or feelings. Verify the numbers. Vet your team members. Ask tough questions.
Tip #2 – Craft Your Battle Plan
There are different avenues of real estate investment available to you. Before you get started, you want a battle plan for your portfolio. What kind of real estate investments do you want to pursue? Do you want the experience of full ownership in residential or commercial real estate or do you prefer REITs and crowdfunding?
While you can always diversify over time as you see fit, an initial niche focus will keep the learning curve from growing too steep and allow you to sharpen your skills first. Start by identifying what kind of investment properties you want followed by setting portfolio goals and gathering everything you need to make those goals actionable.
Tip #3 – Learn the Ins and Outs of Market Analysis
Passive investors often go beyond their local markets. This is enormously beneficial but comes with its dangers. Learn what to look for in a real estate market and how to gauge its worth as an investment market. Remember: many of the best markets for passive real estate investors are relatively unassuming.
Look for:
- Economic and job growth
- Population growth
- New home construction
- Housing inventory and demand
- Rental vacancy rates
- Property values & price growth
- Economic diversification
Tip #4 – Manage Your Expectations
You likely have big ambitions and high expectations for your investing career. Enthusiasm is great fuel, but don’t let it cloud your judgment and expectations. Passive real estate investing is about getting rich slow and gaining more value than in passive income alone. This is a process, and one that takes years to develop and master.
If you go into the business thinking you’ll get rich quick, you’ll find yourself sorely disappointed.
Tip #5 – Know Your Numbers
Every investor needs to know what numbers are valuable. What numbers do you need, what do they mean, and how do I interpret that data in the context of my portfolio and goals? These are key metrics to look at before going through with a real estate deal:
- Capitalization Rate (Cap Rate)
- Cash-on-Cash Return
- Cash Flow
- Net Operating Income (NOI)
- Occupancy Rates
- Debt Service Coverage Ratio (DSCR)
- Operating Expense Ratio (OER)
Tip #6 – Play the Long Game
Prepare yourself for the long haul. Success as a passive investor doesn’t happen overnight and you need to plan accordingly. What’s your plan for your first year? Your first five years? Ten? Be willing to see beyond the immediate moment. What do you want for your portfolio and, more importantly, why do you want it? Study your motivations to better understand the goals you should be setting for yourself.
Tip #7 – Study Strategic Moves
There are nuances to the real estate investing game. From creative exit strategies like the unique 1031 Exchange and SDIRA investing to specific tax breaks and advantages, investors would do well to familiarize themselves with all their options. Dig deep into the resources before you, consult the professionals, and examine every opportunity to save money and build your wealth.
Tip #8 – Work with the Right People
As a passive investor, your team is an invaluable asset. They play a critical role in your success – not only do they do the heavy lifting for you, but they help guide you along the right path. That is, if you work with the right people. Do your due diligence in selecting turnkey providers, financial and portfolio advisors, CPAs, legal counsel, and more. Target people who have experience, integrity, and a record of success and excellent service.
New to real estate investing? Get started by calling your personal portfolio advisor!
