I wrote a post about 5 Mistakes When Buying Your First Property that I personally made to give you insight into mistakes to avoid. The first area I messed up was in the amount of time it took me to secure my first deal. The below goes deeper into my 2nd mistake and offers ideas on how to avoid the Property Type & Location mistake.
I struggled to truly identify what type of real estate investing I wanted to pursue. I knew I wanted to invest in cash flow as I saw my family make mistakes investing based on appreciation during the bubble. I knew my one criteria is that no matter what the “value” of the property I wanted it to put more money in my pocket each month then it cost to own. What I did not realize was how many different ways from residential – single-family to multi-family, commercial, section 8, A-D class neighborhoods, and more factors to consider. There are strategies that work for almost every type of real estate asset and I struggled to find focus initially.
Before deciding on what types of property and locations to focus, first understand why you are investing in real estate. Is it to generate cash flow and income? Is it to diversify your investment portfolio? Or are you looking for a store of wealth? Answering the why behind your investment in real estate is important as it will help you determine what types of properties and in what markets to focus.
Once I identified my main purpose for real estate was to generate cash flow I then was able to start to identify the types of properties I should consider. Single-family, small multi-family (2-4 units), or apartment complexes. I initially made the decision to pursue small multifamily because I could qualify for traditional financing through a regular bank or credit union. I began looking on Zillow, realtor.com, and working with a real estate broker I found walking through an open house to see what areas the multi-family properties were located.
Simultaneously I got pre-qualified through a broker to understand what type of properties would fall into my price range. This allowed me to home down on what locations had multi-family properties in my area and were in my price range.
Where I got side-tracked was after looking at many dozens of multi-family properties I could not find any deals that were quality and would cash flow. I began looking at single-family homes and apartment complexes under 16 units. I spent a lot of time exploring more property types and ultimately losing sight of the type of properties I had identified as fitting my criteria. Eventually, I got frustrated and purchased a small piece of land zoned single-family as I needed to purchase something.
I’d now spent 10 months and bought a piece of property that did not meet my one criteria for why I was investing in real estate in the first place… cash flow.
To reconcile this I spoke with a couple of builders in the area and received estimates for putting new construction on the lot and seeing if there was an opportunity to flip it or build as a rental.
Then I received a call from the broker I’d been working with about an off-market duplex in one of the neighborhoods I had looked at many other properties. I already knew my numbers on the property for cashflow purposes and was able to quickly scoop up the property.
It took me about 15 months from when I first began looking, but I eventually was able to purchase my first property. My piece of advice for folks is once you understand your why behind real estate investing – select the property type and location. From there keep searching and don’t get distracted like I did!