Becoming a great investor isn’t something that happens overnight. Unless you are willing to pay for an expensive money manager (whose value is still questionable in many respects), you need to learn the markets yourself. The more you understand, the more likely you are to be profitable with your investments.
If you talk to any financial expert they will tell you that one of the keys to being successful is to keep your portfolio diversified and to hold investments in several different industries.
Spread yourself out within different assets. Part of your portfolio could be in stocks, bonds, and commodities, while another could be in one of my favorite sectors, real estate.
Beyond diversification, great real estate investors possess a few key, common characteristics:
They Buy Based on Facts, Not Emotion
If you were looking for a house to buy for your family, you wouldn’t buy it just because you loved the swimming pool. Instead you would go through a rigorous vetting process before you sat down at the closing table.
You would have the home inspected to make sure that there were no major defects that could cost you money down the road and you would hire an appraiser to make sure the appraised price justifies price of your contract.
The same goes if you are buying real estate through a REIT, an online marketplace like Fundrise, or a commercial or residential property on your own. Do your research to make sure the investment makes sense for you and your goals. Step back from big, shiny numbers to make sure this is something you can stand behind for the long haul.
They Understand Risk
No matter if you invest in common shares of General Electric stock, gold, or a residential development across town, there are always going to be risks involved. As we have witnessed over the past decade, the real estate market is cyclical—either booming or struggling to stay above water.
Particularly with real estate, it’s important to be aware of the different types of risk that your investment may be susceptible to—a downward turn in the market, a call for additional capital, or oversupply, just to name a few. No investor wants to experience these setbacks, but they are real risks that we all face.
By understanding the risks and using different techniques to lower that risk, you will be much more protected before you invest thousands or even millions of dollars.
They Focus on Diversification
Earlier I mentioned that diversification is key to being a profitable investor. Having a diversified real estate portfolio means that you hold assets from different classes and with different terms. Offset riskier ground-up investments with stabilized, lower yielding ones.
Diversified portfolios offer investors protection against downside risks. Imagine if you put everything into one property and the value went down. You could spend years just trying to get yourself back to even.
Diversification also includes geography. Real estate is highly local, despite being driven by capital markets. Demographics, employment, and migration patterns matter.
They Keep Great Records
Keeping great records is an absolute must.
The nice thing about record keeping today compared to 10 years ago is that it can all be done online. Personally, I am a fan of using Personal Capital, which allows me to track my purchases, sales, and financial information in one secure location. Not to mention they offer easy-to-follow analyses, which are particularly useful when contemplating a big investment or beginning the income tax filing process.