In today’s episode of our passive investing series with Lon Welsh, we’re diving deeper into the Investor Decision Tree we introduced in Episode 3. Hundreds of, if not a thousand, people have gone through Lon’s investing classes and read his books on investing. Some take the advice he gives only to be disappointed because they didn’t fully understand what they were getting into.
To clear up the confusion, we’re focusing on which types of investments are appropriate for you and which are not. Now that you understand different investing strategies, how do you pick which one is right and set your expectations accordingly? We’re going to look at eight factors that will help you find the strategy that works best for you.
- Listen to the podcast “#390: 8 Simple Questions to Clarify Your Real Estate Investing Strategy” Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Eight Dimensions of Investing
There are eight aspects of real estate investing that will help you determine where you are now. By fully thinking through each one, you can make an informed decision and have a better idea of what to expect. Comparing your answers here with the Decision Tree self-assessment will allow you to figure out the right investment for your current situation.
We’re looking at these questions through the lens of someone interested in passive investing, or an active investor who wants to purchase a condo or small home. If you are thinking about a Fix and Flip or buying a larger asset like an apartment building, you’ll get a completely different set of answers than the ones we have here.
1. What’s the Amount of Equity Needed?
If you’re passively investing, you may need anywhere from $10K to $100K+ depending on the type you choose.
With active investing, you may need $25K to invest in a condo in Pueblo, or $50K if you’re looking for one in Denver. Purchasing a short or long term rental will cost the same, but short term rentals require an additional $10K-12K for furnishings and soft goods. Active investors need to calibrate this answer to their market and asset class (location of the house, condos, apartment building, etc.)
2. What Is My Credit Score?
In the Decision Tree, we categorize credit scores as high, medium, or low.
With passive investing, your credit score doesn’t matter. You may need to be an accredited investor, but this is entirely separate from your credit score.
Active investing involves buying an asset, which is easier the better your credit score is. Better credit scores = lower borrowing costs = better cash flow.
3. What Is My Experience Level with Contractors?
Do you enjoy, or at least tolerate, contractors? There’s a scarcity of talented contractors right now, so this question is very relevant.
Passive investors don’t need to deal with contractors at all.
For active investors who own a condo, the HOA will do a lot of the work (e.g., landscaping, snow removal, exterior maintenance). Many investors are resistant to properties with HOAs and think they’re a waste. Lon has owned a lot of condos and found that there isn’t a lot of fat in HOA budgets. Someone needs to shovel snow, maintain the boiler, and keep a reserve for the roof. All of these things must be maintained and paid for, so keep an open mind.
4. What Is My Experience Level with Property Management?
Again, this is not something that matters for passive investors.
For active investors, there’s a huge disparity in management of long term and short term rentals. For long term rentals, it can be pretty doable to self-manage. If you hire a property manager, though, it becomes easier.
Short term rentals are a lot of work, and property management can be the difference between success and failure. This is a competitive market, and many times, the first person who gets back to a prospect who has questions will be the one the prospect chooses. The speed and quality of your responses is important, so if you’re a busy professional, this can be a thorn in your side without a competent property manager.
5. What Is the Time Requirement?
Time can be segmented between the time it takes to find, purchase and get a property started, and the ongoing time it takes to maintain and manage the property. This tends to be the biggest aspect that surprises people.
For passive investors, there’s a time commitment upfront to figure out who to hire. There are over 1,100 Real Estate Investing Trusts (REITs), and picking one becomes a whole Decision Tree on its own. If you know syndicators, it can take time to choose the right one.
For active investors, finding the right neighborhood, price point, interviewing property managers and showing them the property, going under contract, the inspection, and closing can take 40 hours or more up front. If you write low offers, you may have to repeat this process many times before a contract is accepted. For short term rental properties, the time commitment can be up to 60 hours, as there is more due diligence involved.
Once the property is in place, there’s also an ongoing time commitment. For a long term rental with a property manager, this time commitment can be very low, at 0-3 hours per month. If the short term rental has a property manager, it can also be 0-3 hours a month.
For self-managed short term rentals, the time commitment jumps to 10-15 hours a month. That may not sound like a lot, but it can feel like a lot of little paper cuts. There are many urgent queries that require a quick response. It may not come down to hours, but the number of interactions that people find draining. Most of Lon’s friends whose short term rentals have property managers are happy with the results, but the ones who self-manage tend to be less pleased.
6. What Is the Number of Monthly Interactions?
For active investors with property managers, there are typically as few as 0-3 interactions per month. Self-managed short term rentals are generally nonstop in the number of interactions.
Passive investing requires nearly zero interactions. Investors are sent a quarterly report that they can look at, if curious. If the report is favorable and on plan, then most people don’t read beyond the executive summary. If the investment is in trouble, they tend to read through the entire document.
7. What Is the Perception of Hassle?
Hassle is in the eye of the beholder. In active investing, the lowest hassle is a long term rental with a property manager. For short term rentals, it depends on whether you perceive interactions with guests as a (usually) pleasant experience or an annoyance. If it’s the latter, then it’s better to hire a property manager.
8. What Is My Risk Tolerance?
With passive investing, investors aren’t guaranteeing the loan, so there’s a lot less stress.
If you are buying an asset, you are personally guaranteeing the loan. This can be stressful, and it can put stress on a spouse, too. Condos tend to be as low risk as it gets, as opposed to something bigger like an office building. Condos are a relatively small and liquid investment. If you need to sell it, it’s easy to find a buyer.
Learn More about Starting Your Investing Journey
Now that you know the basics about the types of investing and how to choose the right one, you’re ready to start your real estate investing journey!
If you’re interested in becoming an active investor, reach out to me for a free investing consultation.