‘The 4 Legs’ of Real Estate Investing 

As a table needs multiple legs to provide a foundation and stability, you need to have fundamentals to ensure solid footing in your investment decisions, and investing in real estate is no exception.  You want to ensure that all 4 legs are sound, such that if one leg has a setback the other ones can support the table from toppling over. 

The 4 components are as follows: 

1. Macro economic factors – This is where the overall picture comes into play.  What are prevailing interest rates that affect the cost of borrowing? How available and how much is the cost of credit to fund investments? What are the overall prospects for jobs, and how would that affect how much and if tenants are able to pay for their rent?   
2. Market factors – As the saying goes, ‘Real Estate is Local.’  While the media likes to give an overall picture of the real estate market nationally, there is a lot of diversity between markets.  For instance, at the time of this writing, home prices nationwide were down 1.1% year-over-year in February 2023.  However, home prices in my own zip code in Charlotte, NC were up 6.7% compared to last year in that same time frame, outperforming the national average by 8%.   
3. Property factors – This is where you zoom in further and look at the things directly associated with and surrounding the property itself. This starts with the neighborhood factors (e.g.: location, school district, proximity to jobs and amenities, demographics, crime) and the condition and performance of the property. 
4. Management factors – This is the most often overlooked factor. Who is overseeing the operations of the property, and are they optimizing that property? A well-placed property in a good market and neighborhood may not be performing to its potential. Perhaps they are not charging market rents, or finding efficiencies to reduce the costs of maintaining the property. 

Many make the mistake of basing their investment decisions on only one of the four factors.  For instance, one that is entirely fearful of investing in a recession will miss out on opportunities to find good cash-flowing property in a good market and neighborhood, that they can invest in at a discount despite the overall economic picture. 

Conversely, one may fall in love with a very ‘sexy’ looking property (e.g.:  the luxury vacation rental on the beach, or the luxury class A apartment building) but find that they cannot rent it out at target rents during a recession, or have not learned themselves how to optimally manage it efficiently. 

We have talked a lot about macroeconomic factors in our discussions of interest rates, inflation, recessions, and recent bank collapses.  We will go further in the 3 other ‘legs’ of the table in the coming weeks.  Learning these will help you make better decisions in your real estate investing journey. 

If you want to talk about how you can build and preserve wealth and generate passive income like the ultra-rich, set up a time to talk with me