Posted by ray@lcorn on August 08, 2011 at 12:43:02:
Greg,
Hindsight is such an easy game… I can say it would have been easier with a well thought out plan, but the I probably wouldn’t have followed it. Like Will Rogers said, “Some people just have to pee on the electric fence for themselves.”
Each step of my career would not have happened without the lessons learned from preceding one, and especially the mistakes. If I ever write my autobiography I’m going to title it “One Thing Led to Another”. 
Truth is, I didn’t learn to plan strategically until the pain of not doing so exceeded the sporadic rewards of impulse decisions.
That said, the biggest benefits of the lessons I’ve learned (and paid dearly for) have come from sharing my experience with others. The old adage, “We teach best what we most need to learn” is so true for me. Writing and teaching have made me a much, much better investor.
Developing a strategy to build a profitable real estate investment portfolio requires knowledge of how the game is played.
There are only four ways to make money in real estate:
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Appreciation (both forced and natural market appreciation); e.g. buy low, sell high
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Cash flow: positive cash flow comes from more coming in than going out.
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Equity growth: the amortization of debt with income generated from the property
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Tax benefits: using the tax code to minimize the gains from 1 - 3 above.
Your rehab/wholesale biz should be producing #1, forced appreciation that can be realized with short-term flips. But while that will generate the funds necessary to keep playing, it’s a lot like a job in that you have to always be working on present projects and finding the next deal.
It doesn’t produce the recurring income (cash flow) or equity growth, and there are also zero tax breaks for dealer-properties. Staying here can be profitable for as long as you want to do it, but it isn’t the way to build wealth.
(BTW, I’d stay away from luxury flips unless you’re very, very knowledgeable about your market. The housing bust and economic weakness will prevent any rapid appreciation in high-end houses any time soon, except perhaps on the coasts, and then only 3-5 years from now.)
So as you supposed, the next step is to convert some of the profits from your flips into income-producing properties for long-term hold. This produces #1, #2 & #3, and how to build a wealth-producing machine that will feed on itself.
Depending on your lifestyle and talents you can pick and choose from various income-producing property types and deal structures to keep you as active, or passive, in the investment as you desire.
Many choose multi-family as their first long-term property because they are fairly simple to operate and a build on the skill-sets of SFR deals. Everyone understands housing.
Office and retail properties generally take some degree of experience in how to acquire and retain tenants, but also offer long-term leased properties with little to no management. Returns will be less, but so will the risk and effort.
#4, tax benefits, flow mainly from the tax-favored status of long-term hold properties. This element also becomes the centerpiece of how to pyramid your wealth via structured ownership entities, equity extraction, and Sec. 1031 exchanges to grow your investments. Side benefits include asset protection and estate planning, the endgame of how to get out of the business without leaving it all to the gov’t, but that’s another post.
To maximize tax efficiency you will need to find an accountant who specializes in real estate investment. It’s well worth the cost, and over the long run will pay you many times over due to the ability to manage your tax exposure with certainty.
So in summary, this would be (and is) is my strategy. Maximize all four methods of making money. Create and capture the synergies between all four. Pyramid the gains as they occur. Rinse and repeat.
ray
p.s. I wrote an article on this exact topic. See “How to Get Started in Commercial Real Estate” at