Choosing The Right Real Estate Investment Model
Phil Jackson holds the record for having won the most NBA championships as a head coach (11). He became famous for running the Triangle Offense with his Chicago Bulls and Los Angeles Lakers teams that each won multiple rings. Because of Coach Jackson’s outstanding results, the triangle offense became “a thing,” and some aspiring coaches at all levels started to look at it as the golden ticket to basketball nirvana. But, the reality is, the triangle offense is one of many effective half court offenses for coaches to choose from.
Similar to the basketball coach who has to decide which half court offense he wants to implement for his team, you as an investor, have to decide which investment model you want to roll with.
What Is Your Half Court Offense?
The growth in popularity of real estate shows on HGTV has made the fix and flip “offense” a thing. Being on mainstream TV tends to have this effect, as the narrative is guided by the platform with the largest reach.
The reality is there are a myriad ways to invest in real estate.
- You can invest with a turnkey provider or you can source properties on your own.
- You can wholesale properties.
- You can rehab properties yourself or with a team.
- You can invest in single family or you can invest in multi-family.
- You can invest passively in syndications (group investments) or you can run your own syndications.
- You can fix and flip.
- You can tear down and rebuild custom homes.
- You can do AirBnB etc…
So which one is the best?
The below chart outlines some of the general advantages and disadvantages of each model.
|Passive Investment In Syndication||Very little effort other than due diligence. Returns can vary depending upon deal provider||Lack of control. Returns can vary depending upon deal provider and often have upside limits.|
|Turnkey||Less effort/time invested. Less risk (assuming working with ethical provider).||Lower relative returns. Capital intensive to scale. Lack of control.|
|Wholesaling||Little capital needed to get started. Can do solo.||Like a job/need to continually fill the funnel. Taxes. Increasingly competitive.|
|Self Source/non BRRR||Higher return potential relative to turnkey. More choices(property/team)||More time invested. Capital intensive to scale.|
|BRRR (Buy, Rehab, Rent, Refi, Repeat)||Capital preservation – less capital intensive to scale. Returns can go to infinity||Can be time/effort intensive. Higher risk.|
|Fix & Flip||Potential for quick profits. Have control.||Like a job. Taxes.|
|AirBnB||Potential for very high ROI.||More time intensive, potentially job like. More customers (renters) = more chances of bad ones. Regulatory risk.|
|Syndicator||Capital preservation potential. Returns can go to infinity. Large deals in play. Can attract loyal investors. Can execute without risking personal funds.||Time/effort intensive. Regulatory requirements. Requires building network of investors. Reputation risk.|
So which one(s) should you focus on?
Know Your PARTS
In deciding which model to pursue, it’s helpful to evaluate your PARTS
- P – Personal Goals
- A – Availability (of time and money)
- R – Risk tolerance
- T – Time horizon
- S – Skill set (finder, analyzer, team builder, influencer, laborer/contractor)
Why are you investing in real estate and what are you hoping to achieve? Be realistic about your availability of time and access to financing. It’s always helpful to secure financing in advance of deal hunting because it allows you to avoid time/energy killing distractions and be ultra-focused on deals that are realistic. How conservative or aggressive are you? Stress and some uncertainty will be involved to some degree regardless of your chosen investing model. Are you looking for immediate financial results or results over the long haul? Importantly, what are your skills and what do you enjoy doing that supports your objective?
Gaining clarity on your PARTS will help guide you in determining which “offense” is right for you. For example, If your goal is to create streams of monthly ongoing revenue, then fix and flips aren’t the right fit. If you have limited time that you can spend on real estate initially, then becoming a syndicator would be extra challenging. If you have construction skills then perhaps the BRRRR method is right up your ally.
Additionally, gaining this clarity and periodically reassessing it will help you to know what your next move should be when the “defense” makes adjustments (market changes)
So What Offense Is Best For You?
If you talk to the best coaches they will give you a very simple answer. The best offense is the one YOU BELIEVE IN the most. It is the one you will approach with the the most purpose, passion and consistency.
I have a strong belief in the power of real estate and understand the merits of most investment methods, but I also have a full time job and other responsibilities. Investing passively in others’ syndications (because I may want to do my own at some point in the future) and acquiring long term rentals (my favorite play – stay tuned for an article explaining why) are the best fit for me at this point.
Phil Jackson was mega-successful as a basketball coach not primarily because he helped develop and chose the triangle offense. He was successful primarily because he understood himself and his strengths (His PARTS). This deep understanding gave him the clarity to know what methods (triangle offense) as well as people to associate himself with.
Your task then, is to first invest the time to make sure you understand Your Own PARTS. Then, educate yourself on the different real estate investing models to make sure you understand them and what it takes to be successful using them. How does your make up fit with the advantages/disadvantages of each model? Doing this analysis will allow you to eliminate the models that are not a fit for you at this point in your real estate journey and ultimately lead you to the one that fits best.