Investing in real estate does not guarantee a profit, nor does it offer assurance that the entrepreneur, or investor, will not lose money. It does, however, offer the wise new real estate entrepreneur the opportunity to make a profit while lowering the chance of losing money. What then is the difference? Why do some new entrepreneurs experience more success than their counterparts?
The answer probably rests on two words – Investment Strategy. Far too often, new real estate investors, or newbies, begin their investment career without a clear plan on how to succeed. They hope and often pray that they are making wise decisions without a well-conceived real estate investment strategy. Rather than following a proven roadmap on real estate success, they seem to jump from one approach to another.
If your future investment strategy is going to have the highest probability of succeeding, it is vital that you educate yourself with real estate investing in general, and then choose which investment approach fits with your mindset, talents, time, experience, and perhaps most importantly – your finances. Don’t short change yourself by settling for education from unexperienced and unqualified “so called experts.” Rather, find a mentor or educator that can explain and guide you through the basic real estate investment strategies.
Your personal goals and ambitions will have a direct bearing on the best real estate investment strategy that makes personal sense for yourself. If you are interested in passive income without major time requirements, your choice might be entirely different from that selected by a hands-on handyman who loves to fix up and restore properties. When making your choice between different strategies, be realistic in matching investment criteria to your personal assets, talents, and time constraints.
Once you have done all this, consider choosing one of the four following investment strategies that entrepreneurs have used successfully across the country and across the globe.
Strategy #1 – Rental Properties
Investing in rental properties is a great way to create semi-passive cash income where your tenants “in effect” are giving you money every month to pay down or to eliminate the mortgage debt required to purchase the property. If your primary goal is to build a positive regular cash flow, then rental properties can make a great deal of sense. There are three major caveats you must consider when selecting rental properties as your investment strategy.
The first is simply “secure financing.” It is a well-documented fact that there are more and more young and middle-aged people entering the housing market. With this added influx of potential renters, it seems logical to assume that rents are going to continue to escalate over the coming few years. But, there is no guarantee that this situation will continue to exist long-term. If you enter into a financing agreement on the purchase of a rental property that locks you into extremely inflexible or high interest payment terms, it may very likely be your downfall if the housing market changes. Don’t agree to financing terms that can damage positive cash flow or lock you into unrealistic payment terms.
Second, location has always been rule #1 when investing in real estate – and that goes double for rental properties. Quality renters who will pay their rent on time and protect your property will always look for properties that show well and meet their family objectives. They may want to be near schools, shopping, or entertainment venues. Your success in keeping high occupancy rates will dramatically increase when you choose properties based on location.
Third, you are becoming a landlord with all of the responsibilities associated with it. Being a landlord may mean that you now will have major time constraints because of the management responsibilities associated with rental properties. This is especially true when the entrepreneur decides to own multiple rental properties. This management obligation can be diminished with proper management training or by engaging a qualified professional management team.
As an entrepreneur you will need to evaluate and decide if you are most interested in traditional long-term rentals or the recent success of short-term rentals. Both choices offer the potential of positive cash-flow and long-term appreciation. Short-term rentals have increased world-wide in recent years due to the success of companies like Airbnb, but there are also caveats with this option. More and more cities and local zoning authorities are blocking or even stopping short-term rentals. If you follow a well-designed plan from proven experts, you will be much more able to avoid the perils associated with this phenomenon.
Strategy #2 – Buy and Hold
The buy and hold strategy is based almost entirely on the principle of “appreciation.” Over a long period of time real estate has proven to appreciate at a rate equal to or in excess to the rate of inflation. This means that as time passes, the property will continue to increase in “real value.” There is no guarantee that this historical data will increase at any pre-determined rate, nor will it always increase in a consistent manner. There are many factors that enter into the equation of real estate appreciation. These include everything from location and access to market and zoning changes.
Yes, it appears that property will continue to increase in value, and providing you have selected the right property under the right purchase terms – you can probably expect appreciation to occur. But the buy and hold strategy is much more than just buying the right property, you also need to be able to hold the property for an extended period long enough to recover your investment and make a profit.
This means that you may be forced to cover interest and mortgage payments incurred when purchasing the property – without any income to offset the payments. Thus the “buy and hold” strategy poses the major challenge of being a long-term investment. If real estate appreciation slows or evaporates in the short-term, you will still be locked into a longer-term investment.
In order to maximize your chance of success with the buy and hold strategy, always focus on purchasing property at “below market price.” This may seem impossible, but just the opposite can be true when you search for foreclosed properties, pre-foreclosure properties, and extremely motivated sellers. When you pay close attention to the true reasons a seller is selling the property, and have adequate financing, then buy and hold strategies make a lot of sense.
Strategy #3 – Find, Fixup and Flip
The concept of finding undervalued properties in a state of disrepair and then restoring the property to a higher value through well managed repairs can lead to success if the investor is able to flip the property in a short period of time. This strategy can lead to a fairly substantial profit if a few simple guideline rules are followed.
First, the potential property must be able to be repaired without expensive total remodeling. It is critical that the entrepreneur who engages in this strategy understand building, repairing, and restoring construction. You don’t want to purchase a property without a realistic estimate of what the repairs will cost to complete. It’s always wise to get more than one estimate of bids on the repairs before the purchase is closed. Maybe you feel qualified to do the repairs, but, get some bids to protect yourself.
Second, you must have ready cash available to complete the purchase and to do the repairs. If you have cash available through savings, this is optimal, but if that is not the case, you may need to secure short-term financing. Oftentimes, this type of financing comes with higher interest rates and short-term payoffs. This being the case, you need to be able to get the repairs done as rapidly as possible in order to avoid paying all your profits toward high financing costs.
Third, curb appeal should be an overwhelming factor when rehabbing the property. Curb appeal has been shown to be one of the most important factors in attracting new buyers to a property. Chances are that many buyers may have seen your potential “fixer upper” in its present state and might not be immediately interested unless they can quickly visualize a new and different property.
Be aware, the fixing up and flipping houses is definitely not a strategy for the completely passive type real estate investor. With timing and financing so important, the real estate entrepreneur will need to be actively invested in deciding on the repairs, getting them completed, all while remarketing the property to new buyers. On the other hand, if you have the ability to find the right property, fix it up in the right manner, and flip it to a new buyer in a matter of weeks, the returns can be quite good.
Strategy #4 – Wholesaling
Wholesaling property is based on the concept of an investor getting a property under contract and then finding another buyer, all prior to actually closing on the property. In essence, the real estate wholesaler can make a profit on the property without actually owning the property. It may sound illegal, but if it’s done properly it can provide the new real estate investor with substantial profits.
In order for this strategy to work, the investor must be able to find properties that are substantially under market value. Oftentimes, these are properties that need repairs, are close to going into foreclosure, or even in foreclosure. The wholesaler must understand the local real estate market and be able to act fast.
Even beginning investors who have received quality training have found wholesaling to be a profitable way to invest in real estate – all without even owning the real estate. There are a few simple things to remember about wholesaling that make the strategy simple to understand and implement.
First, the entrepreneur or aspiring wholesaler must have the ability to search out and identify potential wholesale properties. As noted earlier, the property must be undervalued to actual market value. This requires the entrepreneur to understand the market and to be able to look beyond apparent property conditions. These properties and often identified as potential “fixer uppers”.
Second, the entrepreneur must have a buyers list. This is a “book” of individuals who invest in real estate and love to have people bring them deals. You can find such people through real estate investing clubs, title company contacts, and personal acquaintances. It may take time for you to build a buyers list, but once you have helped other people make money, then these same people will come back to you looking for more deals.
Third, the entrepreneur must leave a potential profit for the person who will actually step in to complete the purchase. Remember, a smaller percentage of a real deal is worth a lot more than a huge percentage of a deal that doesn’t close. If you always keep in mind that your end buyer must make money before you do, you will always make more yourself.
Fourth, time is of the essence. Unless you have the money and expertise to find a deal, estimate true cost of repairs, and immediately find a final buyer, wholesaling will be a hard strategy. However, if you learn from an expert or qualified mentor, the strategy can bring great rewards.
Real estate investing can bring both short and long-term profits providing the investor has the time, money, and expertise to follow proven investment strategies. The more realistic you are in determining your true goals and objectives, the higher your returns will be when choosing your favorite real estate investing strategy.