Harbaugh Real Estate

What Is the First Step to Becoming a Real Estate Investor?

By Lee Harbaugh

Before you dive into real estate investing, there is one HUGE question you should ask yourself–Is Real Estate Investing Right For Me?

a picturesque home in the mountains

Real estate investing is attractive to many people for many reasons - the idea of owning real property to build wealth seems straight-forward, TV shows make it look easy, real estate is a relatively safe investment, etc. But, is real estate investing the RIGHT choice for you?

Truly, before you invest in anything, you should always ask yourself the same question: Is this investment right for me?

What is the Best Investment for My Money?

As an investor, you have many investment options. And, in today's world, it is easier than ever to invest in almost anything. Think about all the things you can invest in right from your phone or computer. You can invest in stocks, bonds, CDs, cryptocurrencies, options, futures, and the list goes on. If you have cash to invest, real estate is just one possibility.

In order to determine if real estate (or any other investment) is the right investment for you, there are three key questions to ask yourself:

What is my expected rate of return?

Different investment vehicles naturally offer different rates of return. Generally speaking, stocks offer higher returns than bonds, and bonds offer higher returns than CDs or savings accounts. Cryptos and futures have historically offered the highest returns of all, but achieving those high returns generally comes with a cost: RISK.

As you investigate your investing options, do you have a particular return you are trying to achieve? For example, some investors need to make 10% annually or better. If this is you, real estate may not be your best bet since real estate investing has historically produced annualized returns of less than 10%. On the other hand, if you would be OK with 7% or 8% annualized returns, real estate investing might be great for you.

How Much Risk Am I Willing to Take On My Investment?

Every investment comes with some level of risk. Even if you put cash under your mattress because you don't trust banks and you are too leery of stocks and bonds, that cash could disappear in a fire, or it could lose value because of inflation.

As I mentioned above, cryptos and futures generally offer the most return, however they also come with the most risk. If you have ever watched the prices of these instruments, you have seen how they can go way up one day and down significantly the next. If you might need your money out of your investment in the near future, investing in these riskier assets could prove to be catastrophic. Imagine investing $100,000 in cryptos and it goes down 50% in the following months. Then, you need to sell your investment to cover some expenses you are having. You would be forced to take a $50,000 loss. If you could hang on to it longer, there is a good chance it will come back up, but it would likely take time. This is why considering risk is so important in investing.

On the other hand, you could take your money and buy U.S. Treasury Bonds. These are very safe assets (i.e. you have almost no risk in them), but their returns are also much lower than the typical stock, corporate bond, real estate, or just about any other asset class. However, if you needed to get your money out in a few months or a year or so to cover expenses, you would at least have made some money on your original investment.

How Much Time Am I Investing For?

As you can see, the more time you have to hang on to an investment, the more risk you can afford take. If you won't need your investment capital for many many years, investing in riskier assets might make some sense, especially if you believe in the fundamental properties of the investment. But, if you will need your money in just a few months or even a few years, you will be better served to invest in less risky assets.

So, How Do Real Estate Investment Strategies Rank?

In general, real estate investments are relatively safe investments for a long term approach. Real estate investing most likely will earn you less return than stock investing but more return than Treasury bonds. Real estate returns will tend to be in line with corporate bonds in terms of risk and returns.

Because buying and selling real estate takes a bit of work, it is not as liquid of an asset as bonds are. If you have to get your cash out of corporate bonds that you own, it's easy and quick to sell them. If you need cash out of a rental home that you own, it will take quite a bit more effort to liquidate that property.

Summing it All Up

To sum it all up, as an investor, the first thing you should ask yourself is, "Which investment is right for me?" To answer this question, you must consider the amount of return you desire on your investment along with the risk you are willing to take and the amount of time you are willing to commit your capital to the investment.

Once you've walked through these questions and determined that real estate investing is right for you, the next step to becoming a real estate investor is to look at the 5 real estate investment strategies and pick the one that makes the most sense for you.

For more information, you can check out my investing videos on my real estate investing page!