Real Estate Investment Strategies
One of the first things to do before getting into RE investing is figuring out one’s RE investor ID. There are numerous ways to invest in real estate but it depends on one’s preference and personality. Does one want to invest while working full time? Does one like to deal with contractors or managing people? Does one like to have tenants? Does one like paper investing? Below are different ways of investing in Real Estate.
Buy & Hold
This is one of the most common forms of investing. This strategy works for folks who would like to purchase a property and rent it out for extended period of time. This is the most simple and purest form of real estate investing. This type of investor seeks to create wealth by renting out the property and for collecting cash flow and also experiences the benefit of appreciation over time so that he call sell it later if needed for profit. The mortgage in this case gets paid down by the tenants and one experiences the increase in equity over time. Buy and hold investments can include rental properties, commercial buildings, second homes, and/or self-directed IRA real estate investments. Another form of using a buy and hold property is via short term rentals like AirBnB. If the numbers work, this can be a very lucrative strategy. The investor needs to be very careful with evaluating deals and opportunities which is the biggest mistakes novice investors make. Common problems include buying it wrong, underestimating expenses, bad decisions on tenant selection, failing to manage properly, not understanding ebbs and flows of market that a property is located in etc. These costly mistakes can be avoided, if one simply learns the business properly and jumping in without proper education can be extremely costly financially and sometimes, legally.
As an example, if you had a stock portfolio with $100,000 in it, and it appreciated by 7% a year, at the end of the year, you would have received a $7,000 bump, or a 7% rate of return on your money.
But if you used that same $100,000 as a down payment on a real estate investment, which would enable you to buy a $500,000 property, and the property appreciated at an 8% rate, at the end of the year, you’d have $40,000 in equity, or a 40% rate of return on your money. This is in addition to cash flow ‘today’ that one would keep getting and mortgage getting paid down by tenants.
Fix & Flip
This is one of the most popular tactics for making quick money in real estate. It is a practice of buying a property (residential or commercial), fixing it up, and selling it for a profit. One of the key aspects in flipping is ‘speed’. The intention would be to buy, rehab and sell the property as quickly as possible to ensure maximum profitability and to avoid many months of expensive carrying costs. The carrying costs would include property taxes, HOA fees (if applicable), utilities, financing charges, maintenance bills to keep house in good financial standing etc. Please be aware of numerous shows on cable TV, this is not a ‘passive’ activity but instead is just like an active day job.
To succeed with a fix and flip, you need to be knowledgeable about various aspects of the real estate deal before putting in an offer, including:
Are you buying the property for less than its appraised value
How much investment (time and money) will be needed to get the property ready to be sold
How much will you be able to sell the property for, in its new, remodeled condition
How long will it take to sell the property
Do you have the right team to get the project going on time and minimize the holding time
How are you financing the property
If one is not knowledgeable in this field, it can turn out to be a very expensive mistake. These costly mistakes can be avoided, if one simply learns the business properly and jumping in without proper education can be extremely costly financially and sometimes, legally.
Here’s an example of how a fix and flip real estate investment could work: You could buy a foreclosure home for $100,000, invest three months of time and $20,000 into remodeling the house and bringing it up to “move-in” condition, then sell the house for $150,000.
This is a great strategy for folks starting out in real estate investing who don’t have loads of cash and want to get started with low startup costs. It is the process of finding great deals, writing a contract to acquire the deal, and then selling the contract to another buyer. In return they get an ‘assignment fee’ the amount of which depends on the size of the deal. Most of these deals are sold to investors who are typically cash buyers/flippers. Since the property is never owned by wholesaler/middleman, there are no loan fees, contractors, tenants, rehab costs, banks or other complications. It’s simple but not easy. One needs understand the numbers and if they will work for the flipper along with know-how of contracts and legal paperwork.
For example, if you buy 10 condos for $30,000 each, and sell them each for $35,000, you’ve made $50,000 on a $300,000 investment.
When homeowner doesn't pay their taxes, the government can foreclose and resell the property to investors for the amount of taxes owed. This happen via putting a lien on the property and sell that tax lien to private investors. This means incredibly inexpensive properties.
In the United States, tax lien sales are held in 29 states. Depending on the county, tax liens can be placed on a property as soon as 45 days after the tax is due, or up to 15 months after the tax is due. Once the lien is placed, it’s auctioned off to potential investors. The winning bidder will need to pay the past due property taxes, in exchange for an annual interest rate and the ability to gain ownership of the property if the owner doesn’t redeem the property by paying the past due taxes and interest. The interest rate on tax liens typically is 10-12% per year and can go as high as 18%, depending on the county and state.
One needs to do their due diligence and shouldn’t jump into this kind of investing unprepared. Tax lien sales are complicated transactions that require research, knowledge and experience.
Investing in notes involves the buying and selling of paper mortgages. A ‘note’ is created when a home is purchased and it provides the terms of the contract. For example, an triplex owner decides to sell his property for 600k. He offers to carry the full note (allowing the investor to avoid using conventional loan), and the investor agrees to make payment of 7% per year for thirty years until the full 600k is paid off.
With time, the owner realizes that he no longer wants to be involved, he can choose to sell that mortgage to a ‘note buyer’. The note can be sold for a discount when the seller is motivated to sell. The note buyer would then begin collecting the monthly mortgage payments and will have the right to keep the note or sell it again in the future.