Kevin Guz | 11 Aug 2016 - Think Realty
As a real estate investor, should you be a jack-of-all-trades or a master-of-one? It’s a very important distinction because it will influence what kind of real estate investments you make.
In exploring this subject, probably the best place to start is with something relatively familiar—the concept of diversified investments. You are probably familiar with that term as it relates to traditional investing, or what you would do in the stock market, for instance.
If you’re at the point in your life where you’re thinking about retirement or thinking about investing for retirement, then you probably have thought about, read about or were advised to diversify your investment portfolio. And in the typical context, for most people, that means they need to buy some stock, bonds, annuities, Treasury bills or invest in some mutual funds or stockpile some cash within their investment portfolio.
When you engage in all these different types of investments it ultimately results in a diversified portfolio, which by most standards, makes a lot of sense. Diversify your portfolio and diversify your returns to diversify your risks.
The same concept holds true in real estate investing. It makes a lot of sense to use different strategies—like fix-and-flip, buy-and-hold, rental properties, etc.—for your investment properties. And those properties could be single-family or multifamily homes, which you turn around and sell, finance or even wholesale. There are many ways to diversify under the umbrella of real estate investments. At the end of the day these different types of real estate investments can be combined to ultimately produce more comprehensive and complete results for you in terms of returns or profits you generate.
Should You Try to Do Everything?
I think this is really relevant for new investors or those who may just be thinking about beginning their real estate investing. You may be questioning, “Do I try to do everything? Should I get some rental properties? Should I do some fix-and-flips? Should I be wholesaling all at the same time, right out of the gate?”
We referred to such a person earlier as a jack-of-all-trades. As a new investor you might also ask: “Do I sink my teeth into one type of real estate investing—focus there first to build my business on that foundation or building block? For instance, should I initially focus on wholesaling properties?” And if you choose, you can do that for an extended period of time, maybe a year or so until you build and stabilize your business while you educate yourself. Maybe then you’ll want to expand into other real estate investments.
I think it’s a relevant question also for investors who may be in the first, second or third year of their real estate investing careers. For instance, such an investor might be thinking, “I’ve been investing for quite some time, and I’ve become pretty good at wholesaling property. I’m ready now to diversify my real estate investing into some other arena.” Perhaps the other arena is acquiring rental properties or buy-and-hold properties. Perhaps the more experienced investor is seeking to grow and scale his or her business. Maybe that investor is ready to add fix-and-flips to a portfolio that includes wholesaling.
The point is, the question of whether to be a jack-of-all-trades or a master-of-one applies to both the new investor who is wondering where and when to start and to the more tenured investor wondering where to go in order to grow and scale.
The good news is that this diversification is doable and achievable within real estate investing. There are three core areas to look at: synergy, a “lumpy” business and the facets, or puzzle pieces.
Core Area No. 1: Synergy
Synergy is what enables you to easily expand into other real estate investing types without a tremendous amount of incremental effort, investment, education or resources. For most real estate investors, the single largest single expense–and effort—is typically advertising. Or to put it another way, our efforts to generate leads to motivated sellers from whom we can buy properties.
It is the single largest expense in my business, but it’s also the heart of my business. The more I advertise, the more leads I generate and the more real estate investments I can make in the form of purchasing single-family homes. There is tremendous synergy in the work you do in generating and cultivating these leads and sourcing them into your business. Some leads are going to be great buys for rental properties; other leads, depending upon price and location, are going to be great to fix-and-flip. Other leads might be great properties to wholesale, whereas others may be great to seller-finance.
You can see the synergy you get if you are advertising aggressively, professionally, efficiently and effectively. You’re generating leads that not only work well for your current strategy investing, but that also will enable you to easily expand and diversify your real estate investments because those leads will support, fuel and drive some of these other investment endeavors.
Core Area No. 2: A ‘Lumpy’ Business
Whether you are currently a real estate investor or someone just thinking about it and becoming educated on it through reading or talking to others, you’re going to hear the industry—particularly the residential side—referred to as a “lumpy” business. This simply means there are some ups and downs. There will be some troughs and valleys in the world and in the life of a single-family residential real estate investor. You are going to go periods of time where those leads are coming in and converting, but unfortunately, other times when not all of them will be good, quality leads that you can convert into properties to buy.
There will be times—whether that’s a week, a month, or whatever—that you will be able to buy multiple properties. But just as often, you may go a week or a month or so without buying a property off those leads. It creates a pretty “lumpy business” in terms of your incoming revenue.
What you will learn is that your success depends on your ability, your desire, your willingness and your capability to convert those leads. And when you have many different types of leads that enable you to diversify your real estate investing, it helps to smooth those lumps in your business and in your revenue stream.
Think about it: when you wholesale properties day-in and day-out, it sure would be nice if you had a portfolio of rental properties on the side generating constant and consistent monthly rental income streams. When you have those types of income streams—when they are stable and consistent—in addition to income streams generated from your other real estate investments, like fix-and-flip or wholesaling, they help to smooth out those valleys and troughs that can occur during times when leads aren’t converting.
The benefit of diversifying your real estate investing is that it helps to normalize your revenue streams in your business. And that ultimately makes the business a lot easier and a lot more fun to run—in addition to reducing stress.
Core Area No. 3: The Puzzle Pieces
The whole diversification process is almost like putting a piece into an incomplete puzzle, moving closer to completing the puzzle as you add another piece. As a real estate investor, your ultimate objectives are likely centered on the fact you want to generate income for cash flow you can use to live on—pay bills and cover regular living expenses. But at the same time you also want to generate and build wealth—income not being used to pay bills or support your current lifestyle. It’s money you are able to set aside to support your future lifestyle, into or beyond retirement, or maybe things like paying for college.
You are trying to build income, and you are trying to build wealth. Diversifying your real estate investing is going to help complete that puzzle, because there are different types of real estate investing that will drive income, and there are other types that will drive wealth. And when you put all those different types together, it’s like putting the total puzzle together.
With those real estate investments that you’re wholesaling and rehabbing, you’re generating cash and revenues in very large sums that will help cover your day-to-day expenses. I am talking about funding your lifestyle versus generating wealth, which comes more from rentals and seller financing. You may not be earning those huge amounts of money each deal or each transaction, but instead you are building long-term cash-flow streams.
A rental property may only generate $300, $400 or $500 a month in income, unlike a fix-and-flip that may generate $30,000, $40,000 or $50,000 when you sell it. But the income stream and the cash flow off that rental property will generate wealth. Your diversification of your investments help to complete that puzzle of income and wealth.
You may be a master-of-one now, but there is a time to become a jack-of-all-trades when you are investing. And when you do, it will get you to your ultimate destination.
You can listen to Kevin’s podcast here: