Investing for appreciation carries higher risks and higher rewards.  Investors should focus on selecting the right market and the right property to execute this strategy.  While this strategy usually yields very little cash flow during the life of the investment, investors profit when they sell their investment property for a gain.

Appreciation focuses expected future rent growth.  Traditionally, markets with high appreciation experience strong job growth and have a significant retail presence.  Real estate markets experience a life cycle.  Appreciation ebbs and flows as prices increase and decline.  As major metro areas price homeowners and investors out of the market, they begin to move to less populated areas, which in turn begin to see a price increase.  As these areas become more populated, pricing pressures ease in major markets and the migration ceases.  Understanding this cycle helps investors better understand when and where to invest to capture the highest amount of appreciation.

Selecting the right market is paramount to execute this strategy.  Young markets with significant upside potential represent the best chance to minimize downside risk.  Additionally, small to mid-size markets with easy access to major metro areas, jobs and retail aid in future rent growth.  Be careful of markets that appear to be too strong or experience unreasonable appreciation levels.  As markets appreciate, affordability declines.  At some point all markets reach a tipping point where appreciation slows, stops or declines because they become unaffordable. 

Investors can also create value by choosing the right property to invest in.  In these markets renovations can make sense.  It’s usually best to choose the properties with the most upside potential, but it is equally important to choose the properties that suit the investor.  Large renovations take time, effort and capital.  Investors with limited capital resources investing in these markets should choose projects that need cosmetic renovations or upgrades. 

Remember, the goal is not to have the best house in the neighborhood, but rather to achieve the highest rent with the lowest capital spend.  Map out investment items and compare each item to an expected rental increase to ensure the upgrade or renovation makes sense.  Even if every home has newly remodeled bathroom, it could more sense to charge a below market rent then to actually remodel all the bathrooms in a home.

Appreciation and buy and hold usually go hand and hand.  Properties that appreciate 5% per year return about 25% per year to an investor, who put 20% down to purchase the property.  Let the appreciation and leverage work together.  Investors should watch the market closely for opportunities to exit or upgrade their investment.  As markets mature and appreciation slows, investors should be prepared to cash out and move to another growing market.

Low income areas often prove attractive to first time investors because of their low cost of entry.  Investment properties in low-income areas can be purchased for well under $100,000 and typically provide a nice stream of investment cash flows.  Investors can use this strategy to build up a strong base of investment capital and improve the community in which they invest.

With few exceptions, low-income areas tend to experience little to no appreciation for several reasons.  First, investors in these areas expect low future rent growth.  Typically, tenants in these areas have limited disposable income making high rent increases on a regular basis unfeasible.  Second, investors expect limited neighborhood improvement.  Again, with very little disposable income retail demand tends to be lower.  Furthermore, major offices tend to locate in more affluent areas, so new developments generally do not occur in these neighborhoods.

So where is the value?  Tenants and property selection create value in these neighborhoods.  Investors should first understand that not all vacant buildings are created equal.  Finding a structurally sound building in need of cosmetic repairs yields the most value for an investor.  With a ceiling on rents and low appreciation expectation, heavy financial investments in property upgrades will not make sense.  However, cosmetic touches like new doors, paint, landscaping, carpeting, etc. can go a long way in increasing the value to the perspective tenant.

Tenant selection also creates value.  Quality tenants, who pay their rent every month and take care of the property, generate significant value in this type of an investment.  Remember, current rent and expected future rental growth drive value in real estate.  Selecting the right tenant not only locks in current rent, but increases the expected future rental growth. 

Tenant selection is as much about the tenant as it is about the landlord.  Tenants will care as much about a property as a landlord cares about them.  If landlords are slow to respond to their needs or generally treat them poorly, tenants will be slower to pay rent and slower to appreciate the value of their home.  Investors should understand the cost in time and dollars of managing a rental property.  Saving a few dollars in the short run by deferring maintenance items that are important to the tenant will cost an investor a quality tenant in the long run. 

Finally, investors should always be thinking about their exit strategy.  It is important to understand that value is created upfront.  Once an investor completes the cosmetic repairs and places the tenant, he/she should expect very little additional value creation because of the factors mentioned above.  Young investors looking to move up to bigger properties should look to quickly sell these types of properties to investors looking for stable, easy to manage cash flows.  By establishing a niche in this investment type, an investor could quickly obtain a stable of willing buyers and create a very profitable business model.

Investment strategy starts with choose the right market.  Markets drive strategy.  In markets with rapid appreciation or escalating rents, buy and hold strategies or renovation strategies might be appropriate.  In more stagnant markets it might be less attractive to renovate, but investors might be able to generate value by placing quality tenants in quality properties.

Remember, current rents and expectation of future rent growth drive the value of real estate.  An investment strategy is the way in which an investor will affect one or both of these metrics to improve the valuation of the property.  Simply taking an empty property and putting in a tenant increases the current rent and potentially increases the future growth potential; therefore, the property valuation will increase.  Additionally, renovating allows investors to charge higher rents, in turn increasing the current rent and the future growth potential.

In considering the first investment, an investor needs to develop a clear understanding of the market and formulate a strategy that will be successful based on those market factors.  Once an investor selects a strategy, the investor must implement the strategy in a cost effective way to increase value by more than his/her costs.  While this seems obvious, novice investors often underestimate their costs and overestimate the value they should receive from their investment.

Consider an investor, who has chosen to renovate a small foreclosed home in a less than stellar neighborhood.  In this situation, the most important investment strategy should be tenant selection.  Renovations will return very little on their investment because of the general neighborhood conditions and the expectations that the neighborhood will not improve.  If an investor performs cosmetic renovations (~$1,000 – $2,000) and selects a quality tenant that will pay rent on time and take good care of the property, that investor has just created a very attractive, easy to manage cash flow stream.  This investor now has the option of selling the property at a gain and potentially reinvesting the profits into another investment or simply farming the cash flow of the property.

It should be noted in this situation that the investor should not expect any additional appreciation beyond the value created from placing the tenant; therefore, should not plan to hold this type of a property for a long period of time, unless their goal is to invest in stable cash flowing properties.

Investors should look at each investment with a clear plan of action.  Understanding the market and formulating a clear strategy will increase the likelihood of an investments success.

Finding a good real estate market should never be an excuse not to invest.  Almost every market presents a unique opportunity for a creative investor.  Markets with low appreciation and few investors present excellent opportunities to buy cheap, renovate, rent and sell for a profit.  Markets with strong appreciation will require larger capital outlays, but allow the investor to spend less time per dollar invested.

Novice investors should maximize their competitive advantages.  Typically, people know a lot about the neighborhoods in which they live and the surrounding areas.  Little details about what block tends to be worth more than another or new plans for retail development present hyper local investors the opportunity to invest smarter and earlier then outsiders.  Do not give this advantage away by trying to invest in the “next hot market.”

Understanding where the market trends lead should help an investor formulate their investment strategy.  In some areas, renovating and leasing make sense.  In other areas, it might make sense to buy new construction at deep discounts, leases and hold for profits.  Regardless of the area, the more knowledgeable investors can be the better investment decision investors can make. 

Local investors have a valuation advantage as well.  Tracking real estate values in an area for 5+ years provides a good idea of good times to buy and sell.  Additionally, identifying long term trends can often signal market shifts and investment opportunities.  As the new mall becomes the old mall or the north side becomes younger and more desirable, it may be time to cash out of one investment and upgrade to a new area. 

Do not forget that relationship building also takes a tremendous amount of time and effort.  Getting connected to the real estate community is much easier when it’s a 10 minute trip to see an agent, accountant or lawyer. 

Regardless of where you decide to invest, you should be familiar with your local markets.  Investors should never miss opportunities close to home and should be constantly farming their local neighborhoods for like-minded investors.  Maximize your competitive advantage by knowing your neighborhood better than anyone else.

Major and minor developers and investors fill markets like Los Angeles, New York City and Chicago looking to capitalize on the growth associated with these markets.  Novice investors typically take the “me too” approach by trying to enter these markets on a smaller scale or drifting to the outskirts or city limits.  Conversely, smart investors know that by establishing a superior value proposition in an area with little competition yields the biggest return on investment.

Consider my own interesting start in the real estate business.  Living in Detroit, Michigan, I decided to start my real estate practice in the worst real estate city in the United States.  Luckily, I had two things going for me: 1) A tremendous passion for people and real estate and 2) An excellent eye for out of the box investment strategies.  After speaking with real estate agents and mortgage brokers, I discovered that most tenants would pay about $700-$800 to rent a two-bedroom home.  I also discovered that a two-bedroom house sold for $25,000 - $60,000.  The lowest end of the range represented fixer uppers without tenants, while the upper end represented nice structures usually owned by a family or rented to a family.  There would be no natural appreciation because jobs were leaving and the city continued to experience terrible urban decay.

Next, I got on the ground and spoke with the market.  After interviewing tenants, landlords and more agents, I found that most landlords treated tenants poorly and most tenants were only tenants because of their glaring credit score issues.  It turns out that it is very hard to live in Detroit without being laid off at least one time. 

By now I had established a need, an opportunity and a plan.  Everyone in the city needed a decent place to live where they could be treated with respect.  At $25,000 - $40,000, I had the opportunity to provide this at a cost to me of approximately $250-$300/month, while charging a rent of $700 - $800.  Finally, I put together a plan to buy two houses to start the business and test my theory.

My plan ended up being wildly successful.  Not only were both properties providing ~$300/month in cash flow after expenses and debt service, but the properties were appreciating.  They were not appreciating because of the neighborhood, but rather, they were appreciating because I was able to provide any future buyer with tenants, who did not miss a payment in 12 months, and who were locked into a lease at $750/month.  Properties purchased for $30,000 - $40,000 were now worth $50,000 - $60,000. 

This is one example of a unique plan tailored to a local real estate market.  With few investors interested in this market, I had all the investment opportunities I could buy.  Once I established my reputation as one of the best landlords in Detroit, I also had all the tenants I could house.  While this turned out not to be scalable because of its intensive management requirements, I could not have asked for a better first time investment experience.

Novice investors rarely understand the value of a great accountant until after they need one.  Real Estate accountants specialize in tax planning to help investors better understand the tax consequences of their investments.  Numerous laws govern taxes around profits and losses in real estate and a good accountant can help an investor navigate these laws to maximize their return on investment.

Before considering any real estate investment, an investor should speak with their accountant.  Many accountants provide free consultations and typically want to build a relationship in expectation of future services.  Like all real estate professionals, accountants should be vetted with a focus on their real estate experience.  Most accounts will have a cursory knowledge of the real estate tax code; however, an accountant that specializes in real estate taxes provides a much broader knowledge base and stays up to date on all of the latest tax changes.  While investors will certainly pay more for these professionals, the long run value will far outweigh the short term cost.

Investors should familiarize themselves with the following real estate tax terminology: Depreciation, Depreciation Recapture, 1031 exchange, and capital gains and losses.  Accountants also provide guidance around corporate structure.  Many investors don’t understand the value and simplicity of a Limited Liability Company or other forms of partnerships.  Accountants can recommend structures that supply protection against personal liability, while minimizing incremental tax burdens. 

Investors should utilize accountants year-round.  Paying too much in taxes is the same as giving money away.  Additionally, holding a property an extra month or year might not make a difference from a market price perspective, but that simple decision might represents thousands of dollars in tax savings. 

Finally, real estate accountants know real estate investors.  In real estate, access and relationships add value.  Accountants know investors that need to sell or buy properties right away for tax purposes, as well as investors looking for partners.  Their needs should be your gain.

Mortgage brokers provide financial solutions for investment properties.  They provide investors unparalleled access to a number a banking institutions and products, saving them time and money.  Like all real estate professionals, the great mortgage brokers create additional value for investors, while poor mortgage brokers simply take a commission and supply very few useful services.

Every mortgage broker can access the cheapest lending solution for your investment property.  Obtaining the lowest interest rate covers the origination fee mortgage brokers charge, but excellent mortgage brokers have the ability to do so much more.

Great mortgage brokers understand the interest rate environment extremely well.  While it may be impossible to predict future interest rates, having the knowledge of any regulations or economic impacts on rates will help investors make better financing decisions.  When considering whether to secure a fixed or adjustable rate mortgage, helpful advice from a good mortgage professional can assist you in choosing the best financial option. 

Excellent mortgage brokers also provide broader financial solutions.  Many mortgage brokers have familiarized themselves with hard money lenders, other real estate investors, mortgage lenders and other alternative sources of financing.  As a side note, many of these financial solutions should not be chosen by novice investors; however, as investors become more sophisticated it will be extremely useful to have a mortgage broker with access to additional financing sources.

Lastly, good mortgage brokers have great relationships.  Real Estate investors make up a very small world of professionals focused on a single asset type.  Mortgage brokers, who work with investors regularly, can supply potential investment partners and investment ideas as you develop your investment business.  Additionally, mortgage brokers know very detailed financial information about their clients, so their partner recommendations come pre-vetted. 

Great mortgage brokers provide low cost financing, fair pricing and connections to other investors around the real estate investment landscape.  The costs of a good mortgage broker and a poor mortgage broker vary slightly, but the value provided differs greatly.  Maximize your investment in a mortgage broker by choosing an excellent mortgage professional. 

Mortgage brokers provide an invaluable service when the time comes to obtain a financing solution on an investment property.  Great mortgage brokers provide more than loans with competitive interest rates, many provide creative financial solutions that can help maximize the value of your investment.

Like all real estate professionals, all mortgage brokers are not created equal.  Any basic mortgage broker can locate the lowest interest rate loan you qualify for.  It never hurts to call around to ensure your professional is getting you the best rate, but 90% of the time the rates will be the same.  The value of the mortgage broker can be seen in their creative financial solutions and interest rate advice.

It is important to understand how mortgage brokers are compensated, so that you understand the motivations behind their suggestions.  Good mortgage brokers have your best interest in mind regardless of their compensation, but an informed investor should always be cautious.

First, mortgage brokers are paid an origination fee based on the size of the loan they secure.  This fee can range from 0.5% - 1.0% of the loan amount.  In addition to an origination fee, brokers charge a host of processing fees, which should be scrutinized carefully.  Ask a lot of questions and don’t forget to negotiate.  These fees can add up to another 0.5% - 1.0%.

Second, mortgage brokers receive a rate lock fee.  Fee quotes normally last for 30 days; however, consumers have the option to lock in the quoted rate for some fee for a longer period of time.  Normally, this fee is not worth the trouble.  While rates will certainly move up and down as you decide on the appropriate lender and loan, this “insurance” is usually not worth the trouble or the money.

Third, mortgage brokers receive a fee from the lending institution that originates your loan.  This fee is sort of like a “finder’s fee.”  This is the big watch out because most banks tie the highest compensation to the loans they really want to push on consumers.  While a 30-year fix rate standard loan might be your best option, if a mortgage broker is being paid an extra 1% to put you into a 30-year Adjustable Payment/Adjust Rate Mortgage, you can bet most brokers will be pushing the later even though it is not in your best interest.

Additionally, watch out for fees you don’t understand.  Yield Spread Premiums for example represent the amount a broker charges over the offered interest rate.  Essentially, if you pay this fee, it means your broker did not get you the best rate.  Know your credit score because the more challenged your credit score the more fees brokers will assess.  Ask questions and negotiate, negotiate and then negotiate some more.  

Investors make money when they buy smart and when they sell smart.  Finding the right real estate agent to market and sell your property can help secure substantial profits; however, their services come at a steep cost, usually ranging from 4-6% of the selling price. 

Remember, time is money.  Getting your investment property sold quickly for an above market price should always be the number one objective.  A great real estate agent can help achieve this goal for a savvy investor. 

As with all real estate professionals, an investor should conduct a rigorous screening process before settling on one real estate agent.  Investors should interview at least three agents and focus specifically on each agent’s marketing plan, valuation assessment, personal fit and commission.  For more information on questions to consider when interviewing real estate agents, please see the download section of the site. 

Many sellers do not negotiate commissions.  Everything in real estate is negotiable and every dollar saved on fees and commissions goes directly to the bottom line.  Maximizing value means getting the best services for the lowest costs.  Note, this does not mean sacrificing excellent service to simply save a few dollars.  When choosing a professional it means choosing the person that can achieve your goal at a fair price.   

Real estate marketing should go beyond putting up a website and an MLS entry.  Excellent real estate agents have a stable of potential investors they have worked with in the past and connections with other agents that represent active real estate investors.  They should also be able to do a walkthrough of your investment property and provide helpful suggestions to maximize value.  Putting in as little as $500 worth of finishes could increase the value of a home by $5,000 simply based on presentation. 

Always remember the goal is to get the property sold quickly and for the highest possible value.  Investors should communicate this goal with their agent during the interview process.  Additionally, any real estate agent should be able to provide an investor with time on the market data, comparable properties currently in the market and recent sales comparables.  A great agent will also know more detailed information about the recent sales and the comparable properties in the market currently.  They should be able to comment on the finishes in comparison to your property and provide a comprehensive analysis for their pricing suggestion.   

After choosing a real estate agent, trust their instincts and be responsive.  An investor should not expect quick and timely performance from their real estate agent if they are not quick and timely in their responses back to the real estate agent.  Furthermore, a great real estate agent should know the market at least as well and hopefully better then you.  Be vigilant, but trust their pricing, marketing and negotiating guidance.

  All real estate agents are not created equal. In fact, a vast majority of them provide no value, I repeat, no value in a transaction. Real estate buyers suffer from the false belief that they get a free ride since the seller pays both real estate agents in the transactions. This could not be further from the truth.

In truth, the real estate system stacks the deck against the buyer. Think about two key points:

1. Both agents compensation is based on the selling price. The higher the price the seller achieves, the higher the compensation to BOTH agents.  

2. If a seller did not have to pay an agent 6%, they would be able to lower the price by some amount up to 6% and still come out ahead. Both the buyer and the seller would be better off.

    

Considering the incentive alignment, buyers should naturally be on their guard when dealing with real estate agents. Every buyer and seller should interview at least three real estate agents. If the agents get uncomfortable with this in anyway, they should not even be considered. Great agents know their greatness and can prove it.  For a list of potential interview questions see the download section of the site.

Buyers should consider working with a buyers’ agent. These agents only work with buyers and tend to be more familiar with buyers issues and negotiations from a buyer perspective. Although these agents still receive their compensation from the seller, the additional experience working with buyers can be helpful.

Real estate agents should also be chosen based on their past experience with INVESTORS. Even when buying single family homes, a real estate agent, who is familiar with investors needs, will be able to answer questions about market rents, comparable rental properties, tenant/landlord laws, etc. better than agents that work with primary home buyers. Additionally, these agents should be able to source investment properties much better than other agents.

Novice investors should take their time with this process. The interviewing process should be a great time to learn about the market, the neighborhood and any other quirky real estate news happening around town. The agent should be chosen based on experience, knowledge of the market and personal fit.   

Lastly, be upfront with the agents. Let them know exactly what the process entails. If you plan on interviewing three agents and then buying a single family property in the $150,000 to $200,000 that can rent for $1,000, let them know the plan. Importantly, do what you say you will do and get back to them right away. If you choose one agent, let the other two agents know that they were not chosen and why. This professional courtesy keeps the lines of communication open and provides avenues for future deal sourcing.

In the land of the illiquid investment, cash is king. After 2008 lending institutions severely tighten their underwriting standards, requiring 20%+ down payments for investment properties. 20% down makes even the smallest investment a capital intensive endeavor. Buying a $100,000 property now takes $20,000 in cash. Not a small sum for many first time investors. What makes real estate even more challenging is the fact that the $20,000 investment will be tied up for the next two years (minimum) and cannot be used for any other down payments.

For many novice investors, this proves to be a significant barrier to entry and puts a hefty premium on success. However, even by putting 20% into an investment, real estate still remains one of the highest leveraged investments many individuals will make. This leverage provides the power behind investment returns in real estate. Let’s demonstrate this with an example.

Assume an investor puts $20,000 down on a property worth $100,000. Next, let’s assume the property appreciates 5% in the first year and the investor sells the property. For ease of explanation, let’s assume no selling costs. Upon selling the property, which is now worth $105,000 after the 5% appreciation, the investor pays off the $80,000 and receives $25,000. In one year, the investor turned $20,000 into $25,000, a 25% return, based on an appreciation rate of only 5%.

This is the lure of leverage. A great way to work with friends and family, who want to invest in real estate, is to promise a fixed return plus some return of principal. Consider a stable property selling for $100,000 with a market rent of $700. Rather than putting $20,000 down to secure the property, an investor might consider raising $10,000 from friends and family by promising them a yearly return of 10%, much better than a return they might get in a saving account. Again, let’s assume in the first year the investment appreciates 5% and the investor sells the property. Now the investor pays of the mortgage of $80,000, plus the friends and family loan of $10,000 and keeps the remaining $15,000. After subtracting the $1,000 additional interest payment, the investor is left with $14,000 or a return of 40%.

Importantly, leverage works both ways. While it magnifies gains, it also magnifies losses. Using the same examples above, if the property lost 5% of its value the returns would be highly negative. Leverage provides an excellent tool to stretch investable income and to boost returns, but it also adds to the risk of the investment and costs money in the form of high interest rates. All investors should take care to understand the cost of any financing they employ in their real estate investments. 

 An underestimated, but extremely important, source of real estate profits, financing can drastically changes the success of an investment. While an investment should not be made solely on the fact that a borrower can obtain favorable financing, financing options should play a very important role in analyzing an investment opportunity.

Consider the interest rate an investor will pay on a mortgage. Lets take a $125,000 investment property as an example. An investor puts 20% down and obtains a standard 30-year amortizing mortgage for $100,000. At an interest rate of 5% the investor pays approximately $535/month, at 6% its $600 and at 7% its $665. At 5%, the investor pays $130/month or $1,560/year less than he/she would have paid at 7%.

Taking this a step further, lets say an investor has to choose between buying today or waiting six months in hopes that the home will sell for less. If the home decreases in value by 5% after six months, but the interest rate increases by 1%, was it worth the wait for the investor? Lets take a look. Now the investor pays $118,750 for the house or 5% less than $125,000, but has to pay an interest rate of 6% instead of 5%.

Interestingly, the investor saves $1,250 on the initial down payment. Now, instead of putting $25,000 down or 20% of $125,000, the investor only puts down $23,750 or 20% of $118,750. The monthly payments show a different story. The $125,000 pays $535/month, while the $118,750 investor pays $570/month or a difference of $420/year. In less than three years, the $125,000 investor will be better off. Again, we assume that this is the same property, so there will be no difference in future appreciation. In this example, the owner of the $125,000 house would see their value depreciate 5% in the first six months and would then experience the exact same upside or downside as the owner in the second scenario who buys in at $118,750.

This analysis shows the importance of locking in low, fixed-rate financing for long term investments. Periods of historically low mortgage rates represent excellent buying opportunities in down markets. Low fixed rate financing allows long term investors to weather moderate deprecation, while locking in a low interest expense when the market turns around.

Novice investors often worry too much about buying before the bottom. When considering investing, it is better to consider the entire investment landscape. Historically low interest rates and deep discounts in real estate values provide excellent investment opportunities. 

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.