Define your investment goals
Prior to jumping into real estate investments, you should clearly define your investment goals. There are many factors to consider and a prudent investor should carefully examine all of them. Depending on your age, your life style, your job security, and your household expenses, your goals may vary. One important question is: Is this a long commitment or short term investment? Your goal may vary from property from property, but your investment strategy should always be consistent. As investors, we are all looking for financial freedom.
Tolerance for risk
Any investor should always consider the risk factor. There is no investment without risk. A seasoned and wealthy investor may not be as risk-averse as a newcomer investor on his first purchase. On the other hand, there are some opportunities that even savvy investors will shy away from - they may be too time-consuming, too capital-intensive or too dependent on the entitlement process. Before buying, you should assess the risks and your own skills and abilities. In my career, I have seen many smart investors who got too comfortable and overextended themselves. Some of them lost their initial investments; some of them recovered and learned from their mistakes. As a general rule, itís better to be sorry that you did not buy than be sorry that you bought. Remember that not every opportunity is right for you. Before jumping in, always ask yourself: Can I handle this project? What happens if this project goes wrong? Do I have the staying power (enough capital) to hold on to it if I am not able to sell it? What portion of my assets would be at risk? Great fortunes were made in real estate by taking risks. At the same time, many other fortunes were lost because a particular investor miscalculated the risk associated with the specific project or portfolio. Try taking calculated risks and always try to address potential pitfalls before they become problems.
What type of property is right for you?
In general, residential rentals are management-intense and regulated in rent-controlled areas like Los Angeles. Commercial properties require larger down payments but provide a steady stream of income and are less management-intense. Buying a vacant land, in general, does not provide any income and is a highly speculative investment. However, it may be very profitable at certain times.
Flipping vs. Holding for the long haul
Your investments can produce short-term profits to support your income or provide additional savings. Investing in single-family homes or small income properties and renovating them for profit can be very rewarding, but it is also very time-consuming.
Building a rental property portfolio, on the other hand, requires long-term commitment and management skills. As an investor, you should analyze every property before you purchase it. You should determine from the outset why you are buying this piece of property and whether you are going to keep it or sell it immediately for profit. You should prepare a detailed plan in writing showing how you are going to improve the property and how you can increase its value as soon as possible. This process should be repeated with the purchase of every single property. Depending on the type of property and its condition, your plans may vary. Sometimes you have to be flexible and switch from flipping to holding the property, or vice versa.