It seems most everyone talks about real estate investing. Housing booms, market slowdowns, changing demographics, geographic shifts, upsizing, downsizing, baby boomer buying patterns, interest rates, speculative house flipping, chasing foreclosures, 1031 exchanges, renovating and rehabbing, multi-use developments, and the differences between condos, townhouses, and patio homes are just a smattering of the common conversation topics touching on the U.S. housing market, but ears perk up and juices start flowing when someone starts to get specific about a successful real estate investment. Everyone may not be a real estate investor, but it certainly appears that the majority of adults in our country with any disposable investment income talk about investing in real estate and more people have opinions than first hand knowledge.
This disparity in experience and lack of real knowledge often confuses or overwhelms folks who could benefit from well chosen investments in real estate. Many people stop before they even get started because someone who may or may not know what they’re really talking about shoots down a particular investment opportunity because it doesn’t meet a specific objective or match a particular characteristic. A wealth builder, for example, could be highly critical of someone who invests for cash flow, who in turn might turn up her nose at someone who wants only to “flip” properties. (If you clearly understand the former sentence and the ramifications of each investor’s bias, you can stop reading here . . . otherwise, read on.)
The fact is there are a wide variety of real estate investments and, fortunately suppose, there are also many different types of investors, with different needs, goals, resources, and expectations. You don’t need to know all there is to know about every type of investment and, particularly if you choose your investment team wisely, you don’t necessarily need to know everything about any one type of investment property. What you must do, however, is identify your goals and the type of investor you are.
But how do you find out your investor type? It doesn’t have to be difficult. As a real estate broker who specializes in working with experienced and novice investors on a daily basis, I’m used to helping people sort out what type of investors they are. We’ve developed a short 10-question, self-scoring quiz that helps our clients. You can do it, too, in less than 5-10 minutes. There are no right or wrong answers.
Real Estate Investor Quiz
Read and consider each of the following questions about residential rental real estate investments. On a separate piece of paper, record an A, B, or C for each question, choosing the answer that best matches your opinion, preference, or experience.
1. How long do you foresee owning any specific investment property?
A. For as long as it can be expected to increase in value.
B. As short a time as possible, I’ll sell it as soon as I can make a good profit
C. As long as it keeps making me money.
2. How important is it to you that investment property breaks even monthly or has positive cash flow?
A. Not too important. I don’t mind paying some extra money each month as long as the property continues to grow in value.
B. It doesn’t matter at all because I’ll resell it before I even think about getting a renter, and hopefully before the first mortgage payment.
C. Totally important. Cash flow rules! If it’s not going to make money I don’t want it.
3. How important is it to you that property appreciates over time?
A. Long term appreciation is most important to me. I’d love buying in a new or under-valued area that increases in value over the years, doubling in 6-8 years or less. B. Super important but I want appreciation right off. Ideally any property I buy will increase by 50-100% within one year at most.
C. It’s not that important as long as I keep making money year in and year out.
4. Which of the following sounds most like an ideal residential real estate investment to you?
A. A new home in an entry level neighborhood in a growing area.
B. A run down dump in a depressed area that is about to turn around.
C. An apartment building.
5. How long would your ideal tenant plan to stay in investment property?
A. Two to three years.
B. 0 time, I don’t want to have tenants before I resell.
C. 10-15 years.
6. How much of a risk are you willing to take on a real estate investment?
A. It’s all a calculated risk, but I want investment property that clearly makes sense in the long term.
B. No risk, no great rewards. If it looks good I’m going to jump on it!
C. I don’t take risks, I invest with known returns.
7. Which of the following management tasks suits you best?
A. Property management
B. General contracting – managing construction or renovation.
C. Financial management.
8. How quickly do you make and act on investment decisions?
A. When the right opportunity is presented, I react in a timely manner.
B. If you snooze, you lose. I’m ready to act fast for the right deal.
C. I take my time to be sure it all “pencils out”.
9. At which of the following skills are you most successful?
A. Seeing future value in an area, detecting the “path of progress” and rise and fall of values.
B. Figuring out how much it will cost to fix something in a house
C. Managing cash flow.
10. Which would you rather be?
A. A wealthy owner.
B. A wealthy trader.
C. A wealthy landlord.
OK, now tally the A’s, B’s, and C’s. Chances are you have some of each, although you may have all of one letter.
If you have all or mostly A’s – your primary investment goal is Wealth, so you are a Wealth Builder. We’ll call you a Mogul.
If you have all or mostly B’s – your primary investor goal is Profit, so you are a Profit Maker. We’ll call you a Trader (if you’d rather be called a Player, that’s OK, too).
If you have all or mostly C’s – your primary investor goal is Income, so you are an Income Builder. We’ll call you a Landlord.
What if you have a mixture of A’s, B’s, and C’s? Well, that’s very common, so just figure out which letter you selected most and that’s your primary type. If you have a tie, than do it alphabetically and don’t worry about it, you can be two types; you just have to be careful to separate your goals whenever you consider a potential investment property purchase.
When we give talks or run seminars we ask three questions at the very beginning. “Who wants to build wealth?” “Who wants to make a profit?” “Who wants income?” Usually almost everyone raises their hands in response to each question. The problem is, if you think you’ll get all three (long term wealth, profit, and income) from any one property, you’re bound to be disappointed. That’s why it makes a lot of sense to figure out what kind of investor you are and what your goals are before you get down to evaluating and selecting a specific property.
Once you know your primary investor type, you can start your short, medium, and long-term goal planning. Many of our investor clients have plans to build portfolios of 10-20 investment properties, usually over a period of years. By knowing how strong their relative type preferences are (wealth-focused, profit-focused, and income-focused) we can help investors decide the balance of property acquisitions that will best help them meet their goals and stay in their comfort zones.