“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are ” — Steve Jobs
This playbook explains mental models on how to find a real estate investing strategy that works for you.
These mental models are one of the biggest reasons I avoided analysis paralysis and gained momentum to be able to buy 30 units in my first year.
In other words, you will cut right through the froth and start taking action.
What I explain in this playbook is a logical flow of making tough decisions. I am surprised how many people are not deliberate about decision making and that fact alone is going to set you apart and help you move fast without assuming too much risk.
Here is what the growth trajectory looks like when you get into REI. The bad news is most people spend a lot of time finding the trajectory. The good news is that once you find it, growth happens on a curve and you can grow really fast. Our goal is to launch into trajectory as soon as possible through the framework I explain in this playbook.
Who should read this?
➡ If you are sold on the power of real estate already to get financial freedom and not sure where to start
➡ In general, if you are indecisive like me and feel emotionally clogged up when life is at crossroads, this framework will help. I am a happier person because of this!
Why I am writing this?
Picking a strategy was one of the harder questions to answer for me starting out. Anywhere I went online, people are doing so many different things with real estate investing and doing them so well.
Strategies like multi-family investing, BRRRRs, buy and hold, flips, master leasing, and the list keeps going on.
I was like a kid in a candy store because everything looked like had potential.
Fortunately, for me I do problem-solving for a living and also had run into a shiny object syndrome when I had a startup.
So I created this mental model for myself to pick the right strategy, market, and properties just like I do for any big personal decisions where the choice is not clear, leading to confusion and emotional unrest and then lack of progress eventually leading to folding up.
A simple mental model
This is the mental model in a simple picture, which I’ll elaborate on in a minute.
⏱ Take a minute to make sense of the above picture - I apply this to everything I do in life and it has been my guiding light especially anytime I am confused.
Let’s dive in
1) First, list out all the choices/options/strategies you have come across. Example👇
Buy and hold
2)Think about your mission and vision
The mission is intangible. The why behind what you are trying to achieve - the thing that will pick you up when you are feeling low. It’s the fuel!
eg - Get my time back with enough passive income and give back to the world.
Think about the vision? It's the what? What will help you achieve this mission? It’s the engine!
eg - Get $20k/month in after-tax passive income in 3 years.
3) Think about the values - your likes and dislikes
Some questions you can ask yourself
Do you want a lot of money or just enough?
Do you want power?
Do you want fame?
Do you want the freedom to do whatever you feel like and whenever?
Do you want to work for yourself but still work and not just laze around all day?
Do you want to pursue your interests and hobbies but don’t have enough time?
Do you like working with other people or do you like being on your own?
4) Think about your strengths and constraints
Some questions to ask here
Do you have a lot of capital?
This might mean you can potentially focus on volume and not always wait for the highest return property, which comes with an opportunity cost. Ultimately, Total Return = Return per property x Volume(# of properties).
Do you live locally in the market where you can invest?
This might mean, you might not have to hire a PM and boost your return with no PM cost.
Do you have handyperson skills or know someone who does?
This could mean you can go after rehab projects as a strategy right away. Good contractors are worth their weight in gold and rehab projects are tougher to execute without a trustworthy and a competent rehab partner.
Do you have time?
In the absence of time, you would have to resort to projects that are faster and easier to execute. I fall in this bucket since I have a full time job.
Do you have business and tech skills?
These skills might translate into better automation of your workflows or better business processes, financial modeling(which you would need to analyze deals). You can also partner with someone who lacks these but can complement in other areas like brining on the handyman chops.
Do you have a strong network?
This could mean you can raise money easily.
Do you have a work ethic?
RE is arduous work and most people would rather press a button and buy a stock. If you are driven, then you are already setting yourself apart. You can easily raise money with your street cred and a couple of properties to show for.
Step 1 will help you expand your thinking and then step 2, 3, and 4 will help you narrow it down.
In other words here is the formula
Your strategy = All choices filtered through your mission, vision, values and strengths/constraints
Let’s illuminate the above sermon with an example of how I did it 😎
Step 1 - List out all the choices/options/strategies I have come across
I took a few hours and wrote down all the strategies I had in front of me when starting out. These were all the options I found online listening to podcasts, reading blog, books, etc.
And then I kept iterating on it anytime I encountered a new strategy. This was my final list exactly how I put it on paper and a couple of accompanying points to help me decide.
Buy and Hold
easier to start with
gives long term cash flow
Short Term Rentals
higher cash flow but short term
more management as people come and leave
Need good and trustworthy contractors, who are hard to find.
Immense competition for deals
Not all lenders want to lend on this.
Can make capital gains quickly but does not provide cash flow over time
Higher risk if the market turns while the project is in rehab
Again, need good and trustworthy contractors, who are hard to find.
Too much admin work through turnovers - work I would not like doing
Get Personal Loans
Lower interest rate so higher returns
Easier to find lenders
Higher risk exposure since one owns the property directly
Shows up on credit
Limit of 10 loans
Get LLC Loans
More asset protection
Easier when you have partners
Does not show up on personal credit history
Harder to find lenders
Higher interest rate so lower returns
Start a Syndication
A strong network of HNW friends will make it easier when capital is a constraint
Can scale easily with the capital
Will be more time upfront
Deal dependent so would have to do the work to find an amazing deal
More legal and operational work
Start a Private Equity Fund
Same as Syndication but lesser risk because the external capital will be deployed in many assets instead of just one deal
It will help when capital is a constraint and I do not want other people’s money
Many strategies to choose from.
Home Equity Line of Credit
Hard Money Loans
Private Loans from friends
Properties will appreciate more
Cash on cash returns are lower
High Yield/Income Market
More cash on cash returns
Older properties so more maintenance
Hybrid Markets(combo of above two)
Best types but hard to find so more time needed to find them
Markets close to me within driving distance
Easier to execute as a newbie - can just make trips and make relationships
Remote markets that are not close to me
Hard to execute in the beginning so more time is needed.
More time is needed as it would be a big project
More money is also needed to buy a bigger property
Bigger risk because all the units are in one property. Eg - If there is a fire
Harder to find
Higher returns and better tenants
Have no idea how it works so it will take time to learn
takes time to set up but means less competition because I could snatch them before they hit the market
Could easily find new properties through filters on Zillow, Redfin etc but higher competition
Risk of rowdy tenants but higher returns
Work with partners or not
Can move fast with partners helping
Returns will get divided though
Step 2 - Think about my mission and the vision
My Mission and Vision
Mission: I want freedom of time to be able to pursue my million hobbies and interests and to give back to the world
Vision: I believe getting $10k/month in completely passive income will help me achieve my mission
Timeline: I want to do this by end of 2021.
What this means
My mission drives me every day because it is written down. It gives me a sense of purpose and induces consistency in my ethic on a day-to-day basis.
My vision means I need to optimize for cash income as much as possible and I will make decisions that result in improving my revenue.
Step 3 - Think about my likes and dislikes
What are my values?
I like creating
I don't like being forced to do something even if it is making me a lot of money
I like learning things and becoming better at them
I most times do not like working with others and rather work on my own though I am flexing on it lately
I do not want a lot of money - just enough for survival needs + cushion for travel + basic entertainment
I like working but not for someone else.
I like the freedom to do whatever I like and whenever I like? (I know spoiled 🙂)
What this means
Doing real estate investing is a long-term game. If I pick a strategy, which makes me a lot of money though will prevent me from doing things I like or doing things I don't like even after I achieve financial independence. It won’t be the right strategy for me.
Eg- If I self-managed properties, it would not give me the time nor would it be something I like doing.
Step 4 - Think about my strengths and constraints
What are my strengths?
I have capital saved up around $150K-$200k
I have the tech and business chops
I have a strong network of friends
I am good at building systems
What are my constraints?
I do not have much time at hand after my W2
I will run out of capital at some point soon
What this means
The idea would be to leverage your strengths and work around your constraints.
eg - I could not go for strategies that require more time upfront since I have limited time with W2.
Filter all strategies through Step 2-4 and color code them as
🟢Green - Can pursue in the short term
🟠Orange - Can pursue in the midterm or long term
🔴Red - Discard them - They are not worthy of your attention.
See my example below
Again, all the ones highlighted in red are a no-go, for now, orange ones might be feasible in the mid-term, and green ones are the ones I can start with.
And that is really it!
It’s more about knowing what not to do than about knowing what to do
Just a simple tweak mobilized me to move fast right away- I felt fully charged to go after my financial independence.
At this point, if you want more clarity - You can now further drill down on the green strategies and again sharpen the focus.
Creative Financing could have all the below options,
You get the point!
So at the end of this exercise, you have all the green items serving as your GPS to get to your mission and vision.
To drive it home, this is how I started and my initial strategy was to optimize for speed and learning. Below it is in a nutshell:
Work with partners to move fast and spread the risk
Set up an LLC and get a loan
Look for a single-family or a duplex to learn the ropes first before going bigger
The biggest benefit to doing this exercise is it gives you focus, which helps makes progress but also makes you feel emotionally driven when you see yourself make progress.
And because all of these are written down, I do not get distracted now when I read an article for example, how people are making money through BRRRRs or flips. I maintain focus, which enables me to move fast as I did with my portfolio.
Few notes here:
Not everyone will want to be as structured as this exercise so I have found that keeping it very simple for the first try always works. You learn in the process what works and what doesn't and then you iterate on it or pivot your approach.
Use a pen and paper and set aside few hours in isolation while doing this exercise
Pen and paper give you the flexibility for your mind to flow onto paper without getting lost in the digital logistics of technology.
I also do this when I am lost about any problem in general in life - this method has never failed me.
Revisit this every 3 months
The world changes and you change. Your goals and values might change, plus with your progress, you might build some competitive advantages, that could make some oranges or even reds, green.
Case for partners
When I first started, a lot of folks discouraged me from working with partners. When I asked them why, the common answer was it does not work out and there are differences.
I reckon it’s because of two reasons
1) People tend to select partners based on who they like and not based on the alignment of individual goals. If the goals are not aligned, one or the other does not pull their weight, which will result in differences.
2) There is an overlap in responsibilities invariably resulting in friction because you are doing the same thing
Both problems are solvable simply by:
finding people with complementary skills and interests who have the same values and goals as you and divide the responsibilities in a MECE fashion.
This results in partners matching the needs of the business with their skills and desire.
My partner does completely different things than me and is also gunning for financial freedom in the very near future.
See below for the split of our work.
Together we both are able to move really fast, learn faster from each other, and most importantly we are diversifying risks because we are splitting the capital contribution.
So the net is, I would encourage you to ponder getting a partner especially when you are starting out. 😀
Hope the playbook was helpful. Please drop any comments or questions below.
Also, insights that don't make it into playbooks are shared on Twitter, so consider following me there.
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