Appreciation always wins. Novice investors can fall in this trap unknowingly as they search for the perfect first investment. Consider two potential investments: 1) Single family home with a purchase price of $100,000 and a market rent of $1,000. 2) Single family home with a purchase price of $200,000 and a market rent of $1,000. The novice investor will always pick the first investment. It represents a way to stretch investable income and it is intuitively less risky because the rent will more than cover the cost of ownership. So who would ever choose the second investment?

A better question to ask is why the second investment is worth an additional $100,000? There are two ways to answer this question. The simplest way is to say that investors expect the $1,000 generated by the $200,000 property to grow at a much faster rate then the $100,000 property.

Here is an example. The $100,000 property might have rental growth rates of 5%, while the $200,000 might have a rental growth rate of 10%. After 5 years, the $100,000 property will have rents of about $1,275, while the $200,000 property will have rents of about $1,600. What about after 30 years? The $100,000 property will have rents of about $4,300, while the $200,000 will have rents of about $17,500. Over a 30 year period, the owner of the $200,000 will secure about $1.3 million of additional cash based on the higher rental growth rates.

This analysis gets more pronounced when additional renovations that further add to the property are consider because the higher rent also grows at a higher rate. Conversely, it becomes harder to generate appreciation through renovation in lower income, slower growth properties. Typically, the cost of an improvement are fixed (i.e., a washer and dryer costs ~$500 regardless of what neighborhood it is purchased in) but the potential rental increases are highly variable. In some neighborhoods the inclusion of a washer and dryer will bring rents up $10/month, while in other it could be as high as $100. At $10/month, it could take up to 50 months to recover the initial investment, while in the other example, it could take as few as five months. 

Remember the risk/reward trade off in these scenarios. Expected future growth is always riskier than steady consistent cash flow. While the $200,000 property has the ability to appreciate at a much faster rate, it also has the ability to depreciate at a much faster rate. Until 2008 many real estate investors had no concept of deprecation. When expected growth rates adjust downward rapidly, prices follow. Smart investors navigate these ups and downs by buying smart. Great neighborhoods will always be great neighborhoods. Great tenants will always be great tenants. Investors should mitigate the risk they can control, watch the markets diligently and look for potential for area and property specific appreciation. 

 Many first time real estate investors choose single family homes because of their low cost and familiarity. The similarities to purchasing your first home enable the buyer to better understand the risk and offer the buyer an inherent familiarity with the product type. This can be a double edge sword; however, when a buyer becomes so enamored with what he/she wants and forgets about the main focus, the tenant.

Single family investments increase in value based on two factors: asset appreciation and rental increases. Consider two homes in the same neighborhood. One home has a tenant paying $600 per month, while the other has a tenant paying $700 per month. Assuming the market rent is $600 per month and the houses are identical, the $700 per month home will be more valuable because of its higher cash flow. Furthermore, as neighborhoods improve, investors may be willing to pay a higher price for any house in that neighborhood. Perhaps the neighborhood has more jobs, retail, better schools, etc. This increase in value represents appreciation or the thought that the market rent growth rate for a neighborhood should be greater. 

Novice investors have no problem understanding the first concept of rental increases lifting market values; however, the more challenging aspect to understand is appreciation. Appreciation can certainly be property specific.   As an investor installs new kitchens, bathroom, etc. their home increases in value based on these additions. Again, the value increase is because investors expect that they will be able to secure higher rent rates based on the nicer amenities of the property. As in the neighborhood improvement above, investors are willing to pay more today to secure a property where rents will grow at a more rapid pace.

Consider two identical properties today, both rented for $100. An investor buys one of these properties and installs a washer and dryer for $500 and raise the rent $25. Now one property rents for $100 and the other rents for $125. In this example, the fact that one property nets an additional $25 per month in cash flow will add value. Additionally, if market rents increase 10% a year, in the second year the rent for the unit without the washer/dryer will increase by $10, but the unit with the washer and dryer will increase by $12.50.

Based on this simple understanding of appreciation, investors should understand how to create value and how to spot a potentially successful real estate investment. First, look for neighborhoods with strong appreciation. Avoid areas where prices appear to be abnormally high or falling rapidly, even if you think it’s a good deal. Second, look for properties with potential for appreciation. It is rarely a good investment to buy a newly renovated home as a rental because you will have to pay the price for the expected higher rental growth. It is much better to buy a home with no renovation, put in the items that will yield the highest returns and then let the appreciation work for you. It’s always better to buy the worst home in the best neighborhood, than to buy the best home in the worst neighborhood. 

 Everyone possesses different strengths and weaknesses. Successful investors maximize their strengths and surround themselves with professionals that compensate for their weaknesses. Real estate investing requires skills with people, relationships, organizations and finances.

Regardless of where your personal strengths lie, investors should understand the importance of comparative advantage. Comparative advantage describes a situation in which an individual should focus their time on activities that they are best at. Even if a person is an expert at everything involved in real estate investing, time limits how effective that person can be at each skill. 

Early in my real estate investing career I quickly found that the numbers aspect of real estate drew me to the investments. While I am certainly good with people, relationships and organization, my passion and training fall on the side of finance. In order to maximize my effectiveness in real estate investing, I spend more of my time underwriting investments and sourcing deal. Furthermore, I surround myself with partners and professionals that work well with people and have great organization skills.

While comparative advantage is extremely important, investors should not neglect their weakest skills. Solely relying on people skills or finance skills opens investors up to missing opportunities or being taken advantage of by professionals who are well rounded. An investor must be responsible for their own investment decisions, must be able to keep their business organized and must be able to source tenants, investments and other real estate professionals. Real estate investing requires a basic level of understanding in all of these areas despite what an investor may inherently be better at. 

Novice investors must constantly be learning every aspect of real estate investing; while more advanced investors should ensure that they deploy their efforts to the activities that will yield the biggest return on the time investment. 

 Before considering real estate investing, investors should take stock of the amount of resources they have to invest. This analysis should go beyond the current bank statement. Real estate investors raise money from a variety of sources: Friends, Family, Co-workers, Investment Clubs, Angel Investors, etc. Additionally, investors overlook an extremely valuable commodity, time.

Once you decide to invest in real estate and decide how much you can comfortably afford to dedicate to the activity, you must figure out a way to best deploy your limited capital. If your capital limits constrain your investment opportunities, it might be worth considering adding to your capital base through additional resources. Having a good assessment of who can be relied upon to provide additional investment support should the right invest turn up will be invaluable as you start seeking investment opportunities.

In addition to having a good grasp on financial resources, investor must understand their time. Real estate investing requires hands on, up close and personal, hard work. If you work a 9 to 5, appreciate the fact that real estate investing could be a second job that requires long evening hours.

Investors, who stretch their resources by doing work themselves, should appreciate that they are trading money for their time. Spending a weekend painting a house means that weekend will not be spent with family or friends or looking for additional investment opportunities. Smart investors value that time. When considering doing something yourself always think about how much time you will spend not doing something else. This applies to managing properties, renovating units, sourcing investment opportunities, completing real estate taxes, etc. Hired professionals trade their time for your money.

A good foundational knowledge of your resources provides an excellent investment base; however, this assessment should not end after making the first investment. As you build relationships and grow your investments, remaining vigilant around resource optimization will help you maximize your investment potential.

 Before making their first real estate investment, investors must understand their basic needs. Beyond food, clothes and shelter, what is important to investors and their family should play a large part in how investments are made. Real estate entrepreneurs must be prepared to endure sacrifices as they start their real estate investment business, but a good understanding at the beginning of the investment process smooth the transition for all parties involved.

Everyone needs a cash safety net. Depending on responsibilities, some investors need three to six months of their primary home mortgage in the bank, while others may need three to six months of their primary mortgage, a vacation fund, a college fund, a new baby fund, etc. Remember, when investing in real estate investors risk losing their entire principal and then some at worse. Investors also forfeit the use of that cash for long periods of time while invested. Even investing too much in successful investments could leave an investor in dire straits if an immediate cash need arises and the investor happens to be unable to liquidate their investments.

Real estate investments are not like stock. They can not be liquidated at a moments notice and they cannot always be refinanced despite what a mortgage professional might say. Even refinancing a good property with significant equity requires the borrower to have strong credit and a good source of income. First time investors serve themselves well by investing their funds in multiple properties over time if they have the capital to do so. 

Wants provide the reason for investing. Investors want to move from their current financial standings to higher financials stands in order to secure their wants in life. Understanding the end goal of investing should also shape investment strategy. A 50 year old looking for a little extra income during his/her retirement should approach real estate differently than a 25 year old single person looking to make real estate investing their primary career. 

First time real estate investor often become too enamored with getting rich quickly to realize what they truly want out of real estate investing. Sacrifices must be made to achieve goals in real estate investing, so investors must properly understand where they want to go. 

 A great real estate investor always knows the pulse of the markets they invest in. Understanding every aspect of a neighborhood helps investor know the best times to buy and to sell in order to maximize profit and minimize losses. While many companies offer a variety of market data, in my many years of real estate I have found the best way to get to know a market is to simply talk to the locals.

Appraisers, bankers and sophisticated investors guard the most well kept secret in real estate when it comes to market research. Despite the vast amount of resources at the disposal of these sophisticated real estate professionals, they rely on walking the neighborhood, connecting with multiple real estate brokers and attending various community meetings. While many data providers exist to round out this process, any serious real estate investor will be a regular at open houses, local real estate board meetings and have a rolodex of good real estate professionals to periodically check the pulse of the market.

Before considering any investment, an investor must understand the comparable properties. Many novice investors make the mistake of relying on appraisals or one real estate agent to provide them all of their important market data. The only way to understand how much a property can be leased for is to understand the quality and quantity of similar units currently in the market.

Get into the tenants shoes and start shopping. If you are an investor planning to buy a rental property that will charge $600, then you should start you process by first attempting to rent a $600 home or apartment. What do you see? Is there extremely poor service or are the offerings few and of low quality? Why? Often, in landlord friendly markets, tenants will pay a small premium for attentive landlords that provide timely maintenance and repairs.

Comparable shopping provides a road map to maximizing an investment. If no unit in the market comes furnished or with appliances, then its probably a safe bet that most tenants have their own and that it would be a poor spend of investment dollars to provide them. Again, investors should look to be slightly better then the competition, while getting to that point by spending as little capital as possible. 

Market research requires leg work and relationships. Investors that plan on being in a market for an extended period of time serve themselves well by going to a planning meeting, attending open houses, shopping the competition on a monthly basis and getting to know the best local real estate professionals. Not only will those investors make smarter investment decisions and limit their risk, but they will also find this to be a great source of future investment opportunities. 

 Real estate is personal. Each individual will be attracted to a variety of styles, trends, furnishings, etc. One of the most important rules every investor must remember is to invest for the tenant. While you may like a subzero refrigerator, stainless steel appliances and cherry wood floors, your tenants might be quite happy with bargain brand new appliances and linoleum floors. 

Most novice investors make the mistake of going too expensive or too cheap with furnishings and amenities. Whether you are a minimalist or a person of high fashion, the only focus an investor should have when purchasing, renovating or furnishing an investment property is the buyer or potential tenant. Rarely is it as simple as buying a cheap house and furnishing it cheaply or buying an expensive house and furnishing it lavishly. 

Investors should first understand the expectations of the tenant. The simplest way to do this is to tour the competition. Understand the offerings in the neighborhood. Do houses or apartments typically come furnished and with washer/dryers/stoves/refrigerators/etc? Ask the detailed questions because you never know where you can save money. In one of my earliest investments, I interview several tenants the day before I was going to buy appliances for the property. It turns out every tenant had their own washer/dryer/refrigerator/stove, so I save about $1,500 in upfront costs. Additionally, I would not have worry about any future repair or maintenance of those items. Remember, every dollar saved goes right to the bottom line.

After understanding the expectations of the tenants, an investor should strive to slightly exceed them in the most cost effective way. Consider the value of each investment decision. If there are basic item that need to be replaced to get tenants in the door, those should be done immediately. Items like painting, laminate flooring and new doors and fixtures and exterior maintenance go a long way to adding value at low costs. 

Lastly, make a budget and stick to it.  The key to making a good budget is to tie every item to the rental income stream. For example, if you can get a tenant into the property at a rent of $100 today by doing nothing, but after installing appliances, they will pay $150 then you know your budget for appliance should be around $500-$1,000. A good rule of thumb is to expect a 5-10% yield on renovations. In the example about $500 in appliances lead to a $50 increase in rent or a 10% yield ($50/$500). Had the investor spent $1,000 on appliances and gotten the same $50 increase, they would be getting a 5% yield. Making a budget with yield figures helps an investor understand what is value add and what is not. Forecasting this is more art then science and investor become more accurate over time and through talking with tenants and touring competing properties. 

 Investments by definition require some level of risk. Before deciding the type of real estate investor you want to be you must understand the amount of risk you can tolerate. No matter how successful of an investor you become, there will be ups and downs. Traditionally, a lot of these hiccups come at the beginning as a result of novice mistakes, but investors always risk issues from general market conditions and unforeseen circumstances.

Many investors do not understand the risk they face in real estate. It is easy to feel secure exchanging money for a solid, tangible building. Until 2008, many real estate investors felt that real estate at the bare minimum would always retain its value. Unfortunately, investors and homeowners alike realized too late that it was possible to not only lose their entire equity investment, but also be forced to add additional equity to support a mortgage worth more than their property value. Even in the stock market, the most an investor can lose is their original investment. Furthermore that would require the underlying company to go bankrupt, which is a rare occurrence.

Too often investors underestimate the risk in real estate. Part time investors, for example, that have day time jobs and invest in real estate should have enough saving to cover the mortgage of their investment property(s) and their primary residence. Investors should factor in at least three to six months vacancy at any time based on their geography. Real estate is a people business and people are often very unpredictable. Some times they move out in the middle of night or get laid off or simply stop paying rent. In most states the foreclosure process is very tenant friendly and very costly to the landlord.

When it rains, it pours, so accurately forecasting how much rain you can sustain is vitally important. Over investing or investing too quickly can often allow small shocks to create undue hardships. This site will go into specific details around the risk of each investment, but it is important to understand the real estate itself is a risky asset class.  

 Real estate professionals represent the real estate investor’s base. Agents source investments, mortgage brokers arrange favorable financing, accountants minimize tax liabilities and offer investment structuring advice, management companies maximize the value of the asset and leasing professional secure cash flow through tenant location. Consider who each of these professionals call first when they get a great opportunity and then consider why they call that investor or client first.

The easiest answer is professionals call their biggest clients who bring them the most business. While this certainly happens more often than not, there are also times when they call a small investor who they worked with in the past that they value. In Detroit, my partner and I build a great niche single family investment property business. Working with us never brought our professionals tremendous income, but time and again we were the first people called with single family investment opportunities. We always received the best financing rates and we were able to work with one of the best accountants in Michigan for a bargain rate. 

Why? The answer lies in the way we did business with people. Great professional relationships start with honesty, integrity and simply doing what you say you will do. Time is money for professionals that get paid on commission. It is extremely important to understand that a mortgage broker or a real estate agent works for free until the deal closes. They can spend hours with a client and get to the closing table only to see the client walk away from the deal and thousands of dollars in commissions slip away. The more certainty a client can provide these professionals, the more eager they will be to work with them in the future.

New and novice investors often try to exploit professionals to get free advice or simply don’t understand the value of loyalty in real estate. More importantly, these investors don’t understand the payoff of building professional relationships. Making it easier for professionals to work with you by providing them information on a timely basis, being reasonably demanding and doing what you say you will do gives professionals more confidence that they will be rewarded for their time. 

Every investor expects nothing but the best from their hired professionals, but remember they are people with their own lives and motivations. When they have finished assisting you with your needs, you want them to feel they worked hard with you, not for you or in spite of you. With time, honesty and integrity, you can become top of mind with your real estate professionals mind no matter how big or small you are. 

 Unlike many other asset classes, real estate investing requires intimate interaction with people every step of the way. Many successful real estate investors are great salesmen or great marketers or simply great people persons. While this is not an acquired skill, basic people skills can be learned relatively quickly and can greatly aid in the success of the smallest investor.

Understanding people starts with understanding their motivations. It is natural to assume that every person you interact with will be concerned with finances. The real estate agents in the transaction receive a commission, the mortgage broker receives a commission, the account receives a fee, and the tenant must decide to part with a large portion of their income every month in order to keep your investment thriving. 

Being successful with people goes beyond understanding their base motivation for assisting you with your transaction. Taking five minutes to talk genuinely about life can often reveal astonishing detail about secondary motivation. People respond uniquely when they feel someone has genuine concern for their well being.

A real life example of this kind of interaction helped me get my tiny real estate business off the ground. My first investment property was a small bungalow in Detroit, which my partner and I rented to a couple who told us they had no kids and were looking to move from their current residence because of landlord issues. While not the optimum first tenants, my partner and I had a good feeling about them and they were willing to pay our asking rent, so we agreed to let them rent the house.

At the end of the first month, my partner and I went over to collect the rent and we discovered at least four additional people living in our tiny rented bungalow. While I expressed concern about the additional tenants, my primary focus was on collecting the rent and getting on with my evening. My partner decided she would take a minute and ask how, Gloria, our tenant, was doing. Needless to say, they share about 20 minutes of conversation and begin to build a relationship. 

Every month my partner would go over to the house and collect the rent and sit with Gloria for as little as five to as much as sixty minutes chatting about life. One month, Gloria had a particularly tough month and had significant financial troubles. When my partner went over, the lights had been cut off, but astonishingly Gloria had the rent. When asked about what was going on, she informed my partner that she was having troubles, but knew how important the rent check was to our life. So rather than disappoint my partner, she went without paying her electric bill so that she could pay the rent.

This is an extreme example and not to be expected in every situation, but taking a little time to remember the people behind the business will pay dividends. 

 Entrepreneurs are born, not made. Entrepreneurship is the embodiment of both self-confidence and risk tolerance. It is the easiest endeavor and the hardest. As of the last census there were over 19.5 million self-employed individuals out of a working class of approximately over 134 million people in the United States. Is less than 15% of the American population designed to be entrepreneurs? 

Of course, not, the percentage is much higher. Every time someone generates a new idea or takes a risk on their job, they are demonstrating entrepreneurship. The only difference between employers and employees is risk. Employees trade the upside of their great ideas for the protection from the down side of their bad ideas. 

I started my career in sales and marketing at Procter & Gamble. In my first year, I increased sales at my tiny accounts by just under a million dollars through a variety of innovate ideas and hard work. Of that million dollars, I was pay a cool $55,000 and very happy to get it. I was quickly promoted to an even bigger account where I increased sales by several million dollars. Of that several million, I was paid $89,000 and not quite as happy to get it. 

At some point all talented people have the epiphany that they are paid a fraction of what they generate in profits for the company they work for. At this point, they make a conscious choice to either ignore the voice that says, “Wait a minute, I can do this on my own…” or they listen and really consider entrepreneurship. The people in the former group were never destined to be entrepreneurs, but rather they were destined to be very talented employees. The latter group has the potential, but still faces tremendous challenges in working for themselves. 

There is nothing right or wrong about choosing to work for yourself or someone else as long as it is done for the right reasons. Some people can’t take the stress of the uncertainty of self-employment or need to be motivated; still others simply enjoy working 9 to 5 and having their own personal life outside of work. 

The hardest part of becoming an entrepreneur is taking the first step. Many times the first step is not quitting the day job, but simply researching the market for your services and putting together a business plan. The only way to become an entrepreneur is to become and entrepreneur. At some point the “I can do this on my own…” has to change into “I will do this on my own…” 

 To be considered a successful real estate investor, a person needs to make at least one real estate investment in which he/she receives a positive return of capital. Sure, this seems like a low bar, but 90%+ of the people that visit this site will never make an investment in real estate. 

The hardest part of being an entrepreneur is making the first investment. Taking the first investment risk is akin to a child taking their first step. Visualize this from the perspective of a child…the world seems safest when a child puts themselves in a position from which they cannot fall. The child develops a sense of comfort in their mobility, despite seeing so many people around them standing, walking and even running. At some point curiosity gets the better of them and they try to stand, supporting themselves on a piece of furniture, a parent or anything the child deems solid. Rarely does their first time go as planned. For some, the simple act of standing proves to be too overwhelming, for others letting go of their grounded support system stymies their try, but eventually, everyone gathers the courage to take that first step. Some turn their first step into an NBA career, others become great dancers and for some the simple act of walking stands as an achievement all its own.

Investing perspective should yield the same individualized results. Some investors will turn their first try into unimaginable fortunes, others will secure a comfortable retirement and still others will simply enjoy the confidence of pushing beyond their comfort zone. You define your own success and this site is designed help you stand up and take the first step. 

Everyone needs a place to live, work or play whether it’s a hotel, condo, house, office, apartment, or other. Real Estate tends to make the most entrepreneurs because it is one of the easiest asset classes to understand and invest in. At some point most people will buy/rent their own place and for many people their home is their most valuable if not their only asset. 

For some people real estate becomes more than buildings, but rather a curious obsession. The oddities of why one side of a block can be more expensive than the other or why the house next door can sell for 20% more then its neighboring houses can be intriguing. Understanding the intricacies of real estate can yield significant wealth. Unlike many other asset classes, it rarely takes a complicated financial model to predict values. It simply takes local market knowledge. 

The answer could be as simple as one side of the block pays 15% higher property taxes than the other or the school district changes at one particular house on the middle of the block. They could also be far more complicated by revolving around zoning and easements. Regardless, profits await the person or people who are able to figure out the “why” and use it to their advantage.

Unlike many entrepreneurial fields, real estate has extremely low barriers to entry. I made my first real estate investment for $6,000, most of which I recovered in the first year of being a landlord. Non-real estate entrepreneurship tends to discourage people because there is significant start up costs. Real Estate investments require time and research, but rarely do simple entry level investments require significant capital. 

Like all acts of entrepreneurship; however, real estate investing does require you to actually make investments in real estate. This site is designed to push you to do that very thing. After coming to this site, there is no reason why every single reader should not be able to make at least one successful real estate investment and claim their title of real estate entrepreneur. Risk will be present in any investment. The key to success is to understand the risk and then simply take it. Define your success in what ever way you like, but every successful investor started by making their first investment.