Mike Swenson - Choosing Your Real Estate Investing Strategy

00:00:05
Welcome to the Real Freedom Show, where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some real freedom together.

00:00:20
Welcome, everybody, to another episode of Real Freedom. We're talking about building time and financial freedom through opportunities in real estate. And today's episode is a very special one because we're going to help guide your decisions on choosing your real estate investing strategy. I have to say, in my role, working with investors, being an investor myself, and then running a mastermind group where we help real estate agents and investors build wealth through real estate, one of the things that I always hear is, what strategy should I choose? I've got a friend or a buddy who's done this.

00:00:58
I've thought about this strategy, but I don't really know what to do. And so we're going to help you guys and make sure that you guys pick an amazing strategy that's going to be the best fit for you. So today's episode is all about that. How do I narrow down my real estate investing strategy? One of the things that I always start with is what are your goals?

00:01:18
I understand if you guys are new in real estate investing, you don't really know what's possible out there. It's hard to build out what my goals might be, but a couple of things to think about. So first, what do I want this to accomplish? Am I looking to build a little bit of passive income? Am I looking for this to be my retirement account?

00:01:36
Am I looking for this to lead to something in the future? And I don't really know what that's going to be. That's going to help you guys decide what happens in the present. So understanding your goals is really important. And so maybe there's a cash flow number that you're looking to hit.

00:01:50
It may not happen with this first property, but I'm looking to build up cash flow so that I can make $1,000 a month. $5,000 a month. $10,000 a month, $50,000 a month. We know that it's not going to happen on the first property, but what is that start going to be? And so typically with real estate, you've got two main buckets.

00:02:10
You've got your cash flow and you've got your appreciation. And so I've talked about this in the past. There's kind of a sliding scale. On the left is maybe a ton of cash flow, but no appreciation. And on the right, it's a ton of appreciation but no cash flow.

00:02:23
Probably negative cash flow. You're going to land somewhere in the middle. So you want to think about that. What am I looking for on that sliding scale? And then in the middle, we know you're going to be paying down your mortgage.

00:02:35
We know that you're going to be gaining some equity from that. We know you're going to have some sort of value add as well. So there's other things that you're looking for, but what do I want out of this? And that's going to help you decide which of these opportunities is going to help to fill that bucket. And so the other thing to think about is how active are you going to be in terms of your goals?

00:02:56
Are you going to have time dedicated to research properties, investing in the properties, managing the properties, or are you going to be more passive? And so if you're going to be more passive, then you've got to find people to help you. Is it going to be a real estate agent? Is it going to be a property manager? Is it going to be a business partner?

00:03:16
Is it going to be vendors that are going to help with plumbing, electric repairs, that sort of thing? You want to figure out, do I know those people or is there gaps? And then I have to go meet those people and build relationships with those people. And that takes time too. As you're thinking about that, your goals, your cash flow, your appreciation, and then your active versus passive strategy, that's going to help you really determine what strategy is going to be your fit.

00:03:42
And the thing that I'm going to say about this too, is your strategy might change. You can adapt over time. My first dose into real estate investing was a townhouse that went underwater, not literally, but went underwater because the market crashed and I had to turn it into a rental. And so I had no equity because the value was less than what my mortgage was. I was completely underwater on it.

00:04:04
But I started to build some cash flow and I started to see some benefits. So I went from townhouse to I bought a short sale, I flipped properties. Now we're moving more into apartments and we have short term rentals. And so my strategy has changed over time, so yours can too. So just because you pick something today doesn't mean it can't change.

00:04:23
But you want to think about how do I get into this industry? How do I get a start so that I can learn and I can get better and scale this. That's where you're thinking about your goal. And then active versus passive. And if it's a little bit more passive, who do I know that can help me?

00:04:38
So that's step one, understanding your goals. Step two. Now you're going to explore some investment strategies. What strategies are out there? Well, I tried to come up with a little bit of a list for you guys to think about.

00:04:49
So we've got flips. So a flip is I buy a property, I fix it up, and then I sell it in a short period of time and hopefully make money off of it. So I'm going to flip that property. Buy and hold is you're going to buy the property and hold it for a while. Now you might update it, you might add some value or you might just buy it a little bit more.

00:05:09
Turnkey where I'm going to keep the lights on, keep doing the thing that was already making it successful and just bank on appreciation and not necessarily add a ton of value. So there's different things within buy and hold. The type of tenant you might have might be a long term rental strategy where we're looking for six months to a year, more leases. And so you've got a tenant that's going to stay there for a while. You might have a short term rental strategy.

00:05:33
So these are rentals less than 30 days, maybe a couple of days a week. You're going to list it on some sort of short term rental website. You're going to furnish the property. There's kind of a hybrid in the middle, which is a midterm rental strategy that's kind of a month or more, maybe one to three months, one to six months. Maybe furnishing that property depending on who your target is.

00:05:52
So you've got that to think about. And then the type of property, single family home, maybe we've got multifamily home, a Duplex or a fourplex. Then we can get into commercial properties. Commercial properties are typically five plus units. An apartment building maybe.

00:06:06
You've got commercial spaces where you have business tenants that you're renting out to. Maybe you've got mobile home parks or you've got self storage. So there's a lot of different options within that. And I say that not to overwhelm you. I think so many people spend so much time thinking about, thinking about, thinking about starting that they don't actually get started.

00:06:25
And so don't overthink that decision. Pick something that excites you and move forward with that because it's going to take some time to research things. So you want to be thinking about what can I take action on? So there's a lot of different strategies out there and that's what holds people up is that they spend time deciding the best strategy. The best strategy is the one that you start with and that's not going to necessarily be the one you end with, but you're going to get better over time.

00:06:49
So you need to be thinking about those different strategies. What I encourage is if you've got some knowledge in an area, if you've maybe got some connections in an area, you know somebody that's successful in that space, somebody that can get you deals or you can partner on deals with somebody probably start there first. Start where you're excited, start where you've got hopefully the easiest in, and then run some numbers. And this is what I really encourage people to do is running numbers of the profit potentials of these different opportunities is really important because if your goal is $200 a month in cash flow on one door, well then you've got to find out, can I find a property that's actually going to hit that. If you have a longer term view, maybe you don't need as much cash flow in the short term, but you've got to run numbers.

00:07:33
So there's some sort of deal calculator out there. If you don't have a deal calculator, you can go to Freedom through real estate that'll bring you to our website, and then you can click on Freebies and get to a deal calculator that's going to work for you, at least to get started. We also have deal calculators for burr strategies and short term rental strategies. But if you don't have something where you can put pen to paper, otherwise you're just making a decision based on it. Looks kind of nice, and I kind of think the mortgage might work, but you're not factoring in property taxes and insurance and vacancy rates and different things like that.

00:08:06
So there's a lot that happens when you run numbers. Now, this is coming from a financial analyst myself in my past life, and I love spreadsheets, so I love doing that. I know for some of you that's not natural, but one of the most foundational things you can do when vetting out opportunities is to be able to run numbers. And so when you're thinking about these different strategies, you've got to find a way to run numbers on those properties to figure out is that going to get me closer to my goal or further away from my goal. So that's number two, exploring investment strategies, being able to run numbers, thinking about what excites you about those opportunities.

00:08:42
Number three, assessing your resources as you start to think about what that strategy is, and I think about this as a target. You've got a big target out there, and you're slowly trying to work your way towards the bullseye. That's really more of how you're going to approach this situation. It's not, I'm sitting at a fork in a road and there's six different paths, and I don't know which one to take, but I look at it as like a bullseye. You're really trying to narrow down to that bullseye to move forward, versus I go down this other path, fork in the road, and then I meander back, and then I go to this other fork in the road.

00:09:14
That's not the right way to approach this, so I'm going to assess my resources. So what do I currently have to give towards the strategy that I think I'm going to move forward with? This is typically in three different areas. You've got time, you've got money, and you've got expertise. And so on a scale of one to ten, think about how much time do I have available to dedicate towards this?

00:09:38
How much money do I have available to dedicate towards this? If I don't have a lot of money and I don't have people or know people that have money, then I'm probably going to start with something less expensive to get my foot in the door to get started. I'm not going to go buy 100 unit apartment building if I only have a little bit of money set aside. So you've got to assess yourself, what money do I have? And then the other thing is, what do you have in the area of expertise?

00:10:01
If you're new at this, you probably don't have much for expertise. And so the way to look at this, this is I call this the value triangle. So three sides, right? Time, money, expertise. You're taking a self assessment of where am I at on those three levels.

00:10:16
Then what you want to do is look at who do I know or what relationships do I have that can hopefully help fill out those things. So if I don't have time, I hopefully have some money then, because if I don't have time and expertise, I don't really know how to get started. Most people, it's the sweat equity strategy, right? I don't have a lot of money. I don't have a lot of expertise.

00:10:38
But what I do have is I have a lot of time. So I'm going to dedicate my time to learning to get expertise so that eventually I can make money. That's a strategy that a lot of people start out with. That's what I started out with. When I was flipping homes, we bought a property.

00:10:52
We bought it pretty inexpensive. Now, this is when the market had kind of bottomed out, so we got a good deal in that regard. I had some skills. I had done construction in college. I had framed some properties.

00:11:03
And so I had some of those skills. So I put a lot of time in there. My wife was going through grad school at the time. We didn't have kids. Our first property, our first flip property was literally on the way home from when I went to work to where our house was.

00:11:17
So within two blocks of my route, that's where that first property was. So I would drive past there on my way home from work. I'd spend a couple of hours working on the property. I'd come home and go to bed. I'd get up in the morning and go to work, pack my clothes, pack my tools, drive past the property, work on it on my way home.

00:11:34
And so I had the time to give to learn some of those things. And then on the weekends, obviously, I spent a lot more time there as well. So I assessed my resource. I didn't have a lot of money. I didn't have a lot of expertise.

00:11:45
So I put some time into it. So then, yeah, you're looking for some partners, whether it's a real estate agent, right, might have some expertise. They might not have a lot of time to help you, but maybe they could help you pick a property. Maybe you've got some great vendors that, you know, some plumbers, some electricians that can add value to the property. And so you're going to leverage their expertise and hopefully some of their time.

00:12:07
And then if you don't have money, you can go find people with money. And in this market with these interest rates, there's good deals to be had out there still. And so it might take some time to develop some relationships with some people that have money. But I want to encourage you that's out there, it may not happen today, it may not happen in your first week or six months, but spend some time trying to find people that maybe have money and don't have the time and maybe have some expertise or little expertise that can help you. So you're taking a self assessment of your resources, what's out there.

00:12:40
A lot of times you'll hear they talk about building your team. So what does your team look like? Your team is somebody that helps you acquire the property, whether it's an agent or a broker or some sort of lead source, a lender or a money partner, a private lender that's going to provide the funds for it, the property manager who's going to take that asset and maintain it and hopefully help add more value to that. Now this could be yourself as well. So you could choose to play all these roles.

00:13:06
You could find the property yourself. You're essentially playing that agent. You're putting up your own money. If you have that money, you're essentially playing your own lender. And you can choose to put up your own time to manage that asset and be your own property manager.

00:13:18
Eventually you might find some people that fill those shoes for you and then vendors and tradespeople. So like I said, these are the people that are going to help you add value, fix things when they're broken, maintain the lawn, shovel the snow if you need to as well. Those are other people that you can reach out to. So those are your resources. You want to find those people and it's going to change over time.

00:13:37
You might have a great property manager and you go to get an additional property and that property is not a fit for that property manager. So it will change over time. But assess your resources, pull out a sheet of paper, write down the people you know, take that assessment in time, money and expertise and find who might be a fit or who could add value in the places that you're maybe a little bit low. Have you ever heard the phrase you're the average of the top five people that you hang around? Well, real estate agents, I'm excited to increase your five with you.

00:14:06
We're launching the Real Freedom Investor, Agent Tribe to help you get educated and connect with others, to build your real estate investing journey and also to help you along the way as you're working with real estate investors. So come check it out on our website, realfriedom.com. Go to the store. We have a membership. We have a mastermind group and private coaching to help you stay accountable to your real estate investing goals and to make sure that you connect with like minded people to accelerate your progress and to cheer you on along the way.

00:14:37
Check it out. Realfreedom.com. Click on the store. All right. The fourth thing to think about is risk tolerance and the market conditions.

00:14:45
Not everybody is a big gambler. They might want to play things a little bit more safe. And so you've got to think about, what are the risks associated with my investment strategy? If we go back to the examples that I gave before, some examples of risks flipping a home. You purchase that property, you add value to it, and you find some things that you didn't know about.

00:15:05
You can't see behind walls. Maybe there's a plumbing leak. Maybe there's an electrical problem. Maybe the market's changed from the time you buy it to the time you go to sell it. That's a risk in and of itself.

00:15:17
You have to decide, is that strategy something that I can live with? Time tends to heal some wounds as it relates to real estate. If you're doing a flip, you either have to buy it, fix it up, and sell it in a quick time. If something changes there, maybe you have to adjust. Maybe you turn a flip into a buy and hold.

00:15:35
But if the market changes drastically from when you buy it to when you sell it, you might not make as money as you projected. So that's a risk there. If I have a short term rental property, I'm running the risk that the city, the county that I have that property in might change their requirements on short term rentals, and I might no longer be able to utilize that strategy. So does this property work as a midterm rental? Does this property work as a long term rental, or am I going to have to sell it?

00:16:02
I have to think a couple of steps ahead. Think about that strategy out there. If I have a self storage facility, I have to think about security of that property. What if somebody breaks into a storage unit? What if somebody vandalizes that?

00:16:16
That's pretty true of most real estate. Somebody could come in and vandalize stuff or wreck stuff. And so you have to decide, is that a risk that's worth taking? Right now, with where I'm at, the market's constantly changing. You have high interest rates.

00:16:30
What happens if interest rates drop and values start to go through the roof? Can I sell my property? So you've got to take an assessment of your risk tolerance personally. What are you willing to stomach, and what are you willing to learn from? I often tell people, your first deal, you might want to plan on not making any money out of it.

00:16:49
I know we have these grand expectations that I'm going to do a flip, make a ton of money and retire after my first property, and you can strike gold, you can hit the lottery and make that happen on that first dream deal. That's not likely to happen. Think about your first deal as probably your education, your learning experience, and so you're not going to necessarily retire after that first deal, but can I learn enough to get better and make the second one be a big money maker for me? And so having realistic expectations about that first deal is, look, I'm not coming into this to make a bunch of money. I'm coming in this to get an education.

00:17:24
You're willing to shell out $50,000 a year, $100,000 a year on a college education? If we want real estate to be the thing that's going to make us a ton of money in the future, we probably have to be willing to take some lumps in terms of education expense. That's really what it is. If you lose money on your first flip, that's an education expense, right? If you don't make what you thought you were going to make on that first deal, it's an education expense.

00:17:46
So think about it that way. What's my risk tolerance? How is the market going to change? And once again, if I don't have a lot of expertise in that area, let's go find some people that have expertise in that area. Admittedly, I don't know a lot about mobile home investing.

00:18:00
It's an area I'm intrigued about. I've heard of people that have made pretty good money in terms of cash on cash returns. It tends to produce pretty well if you get a good deal. I'm not your go to person on that today. Now, we had a past podcast episode with Derek Vickers.

00:18:15
He's a mobile home guy. He's got 38 mobile home parks and at the time of this recording, over 1900 units. Go talk to him. If you're interested in mobile home investing, if you're interested in multifamily investing, talk to me. That's what I do.

00:18:28
Well, apartments, you can talk to me. I have experience in that. So you want to get a sense of people who have done that. What are the risks, what are the market conditions that I need to know about? And just like that bullseye example I talked about, after having conversations with those people in this strategy, am I getting a little bit closer to feeling like this is a bullseye on target, or is there just too much out there that I don't feel comfortable?

00:18:52
So risk tolerance, market conditions, number five consideration is doing your due diligence and research. Now that we've looked at, what are our financial goals, what's maybe the strategy I'm thinking about, that I'm excited about, I've assessed my resources. Who do I know? I've looked at risk tolerance in the market. Now I'm going to do some research in that area.

00:19:12
So it might be analyzing ten different deals, 15 deals, 20 deals in that strategy to see, okay, what would this look like if I did buy this property? So if it was a single family home, I'm going to put together a due diligence checklist and a research checklist of taking that from here's a deal I think I might want to buy all the way through closing to then what's going to happen after closing? And so you're kind of practicing this is your practice test of, if I bought this property, what would I do with it? What would the numbers look like? Am I comfortable with those numbers?

00:19:46
Could I get a loan on this property? What would I do with it if I could sell it? What would I sell it for? So you're going to move through the lifecycle of that investment strategy to see what would happen on the other side and project that to see if that's going to be something that's a fit for you or not. A great example of this is going back to past deals.

00:20:04
I may not necessarily have a deal that fits right now. So what's something in the past? I love doing this on apartments. We're talking about investing in more apartments. And so if I'm talking to somebody in a new market and saying, hey, what does an apartment deal look like in your market?

00:20:18
I'm going to say, why don't you just send me something that sold in the last three months? I just want to get a sense of what the numbers look like. So that's what I'm doing to help figure out is this going to provide a future deal? If the cash on cash returns or the projected returns aren't anywhere close to what I'm seeing in my market, I probably won't consider investing there, at least in the short term. But go show me something that's happened in the past.

00:20:41
And so maybe you find, if I'm going to do a flip, what would something have sold for that's in top condition that I would have probably fixed up? Well, that's going to sell for $400,000. Okay. Well, what would I potentially could have bought that property for six months ago? Well, $200,000.

00:20:58
Okay. How much would I have invested in that to get it to look that nice? Well, $100,000. Okay. So if I buy it for two, fix it up for one, sell it for four.

00:21:08
Now, I made $100,000, so that'll help me decide. Do I think I can go find that deal? Because I've done due diligence and investigated that in the past. You want to look at insurance cost? You want to look at holding cost?

00:21:20
If I'm flipping a property, I still have to pay my debt every month. I still have to pay for utilities on that until I sell it. And so those holding costs might be something we don't consider. We might look at purchase price renovations and sale and forget, well, I actually have to hold that or if I sell it, I'm going to have to pay a fee to an agent, hopefully to help sell that property. And that starts to eat up some of that profit.

00:21:43
So you want to make sure there's enough cushion there that you're excited about it. So spend time looking at past deals that have closed, future deals out there, project them in the future and decide, does this feel good for me? Do I feel like I can hit my goals that I put together on step one? And then the 6th thing, the last thing here is you have to be flexible and adapt and ultimately get started. And so I kind of lumped all those things in together because stuff's not going to go the way that you think.

00:22:12
You're going to have to think on your feet. There's going to be some problems that come up that you didn't think about, so what are you going to do to adapt? But you can't let that keep you from getting started. Like I said, think about that first property as an education expense. You've got to figure out, how do I jump in and get better?

00:22:29
I'm not where I'm at today because I decided not to rent out my townhouse. That gave me lessons on how to think about do I want to be a property manager, how do I find tenants, how do I run numbers to see the profit that I might make on a deal? Those lessons still help me today, almost 17 years later. 15 years later, because I went through that, I did some flips and to be honest, I wasn't great at the one, the first one that I did, I did well. Another one that I did didn't turn out that great.

00:23:00
And I decided that flipping, at least for now, for me, wasn't a fit. That doesn't mean that somebody can't do a great job at flipping properties. That means for me, it's not quite my thing. I'm looking at spending my time looking at apartment properties and short term rentals because those help me hit my goals for different reasons. I've got to jump in.

00:23:20
When we found our first apartment deal, we knew that we didn't have all the answers, we didn't know everything, but we weren't going to learn until we jumped in. That's the key that I want you guys to take away from this is we've got our goals, we're looking at the strategies, we're doing our due diligence, we're running numbers. But you're really not going to get better unless you start on one property and move forward. So you've got to take a calculated risk on that first property and that's really going to help you decide, do I want to do another one like this or do I want to switch to something else? So you've got to be flexible, you've got to adapt, but ultimately, you've got to jump in and get going on it.

00:23:55
So you didn't have. Your first short term rental until you had your first short term rental. So you went from zero to 100. So jump in, get moving on something. But hopefully that helped you guys figure out what can I do.

00:24:08
Here resources for you. So if you're still looking for some education, if you're still looking to help guide you, I really want to encourage you. Check out our website, realfreedom.com. That's re l freedom. Re l freedom.

00:24:23
And then there's a Learn button on the top of the header. Click on learn. I've purposefully picked out some of those topics that I found that hang people up, that keep people from jumping in and investing, and I helped guide you through that process. But ultimately, if you want to reach out to me, my contact information [email protected], reach out to me. I can help you filter some of your thoughts, help point you in the path that might be helpful for you, so that ultimately you can get started with your first strategy to hopefully get to what's going to be your next strategy and your best strategy as you hone in and hit that bullseye on the target.

00:25:00
So I'm super excited to help you guys. Hopefully this information was helpful to you so that you guys can go pick out a great rental property. Good luck on your journey and excited to see where you go along the way.