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Here’s the deal: if you are a new investor and you want to go into the business of buying, selling and renting out homes, you are pretty ambitious.
If you are a newbie in the business, you might get an overload of real estate investing strategies to choose from. Choices like flip, buy and hold, go commercial, go for REITs, partnership, and many other different options. The good news is, we have chosen and evaluated the top real estate investing strategies for beginners.
Developing Your Strategy
Let’s get one thing straight. It would be difficult to choose the strategy that is right for you just by reading the short introductions. The right strategy would always depend on your profile and your situation. There are long-term strategies that would require a lot of time, money, education or experience. Some would not be as extensive. Do you love working with your hands? Are you a D-I-Y person? Would you rather be talking to people than fixing a door?
The best technique would be to get a big picture of what each strategy requires then zero in on what seems best given your skills and abilities set. If you’re bent on making it big on the real estate frontier, our definitive real estate beginners guide can walk you through your decisions and help you close your first deals.
What Are Your Goals?
Before entering into any real estate deal, you should be crystal clear about what your goals are. At this point, there’s still no need to be an expert in the terms, investment practices, computations, negotiations and other specifics.
The point is this: you just have to know what you want to accomplish. What do you want the end result of your investment to be? Don’t settle for the general goal of making money.
Would you want to make that money as a very prolific hands-on property manager? Would you rather close the kind of deals that will require little of your time? Do you want real estate investing as something to do on the side while you continue with your regular career?
Many investors who plunged right in without knowing why ended up failing. The excited newcomer usually bites more than they can chew and end up shouting for help. Circumstances often force them to spend money in having to pay for professional managers, repairs, and maintenance. In many cases, they witness how their cash investments have vanished and they frantically search for a buyer to get themselves out of the hole they’ve dug and fallen into.
Most Common Real Estate Investing Strategies
The real estate industry is so gigantic that it presents a lot of possibilities to aspiring investors. When it comes to property investing, a first timer needs to be familiar with the many real estate investment strategies. This way, he can avoid losses by minimizing risk as much as possible.
To help you learn how to invest in property, here is 5 common real estate investment strategies to think about. You can find one that will be suitable for you in terms of budget, time and long-term goals.
Strategy #1 – Rental Properties
Investors often call this as ‘Buy and Hold’ strategy. It is a traditional investing approach that can help you build passive, regular income for the rest of your life. This approach involves looking for properties, repairing them to a rentable condition, leasing the property to tenants and simply collecting the rents. If you can buy properties at a low cost, then you stand to make good money in the long term.
You might need a reliable source of financing such as a conventional loan, personal money or funds from a partner. To lessen your legal risk and minimize your taxes, you can form a legal entity such as a Limited Liability Company (LLC) or Corporation.
If you live in the property area and have the time, you may opt to manage it yourself. If you don’t, it may be more cost-efficient to hire a personable and professional property manager to take care of the nitty-gritty involved in the business operations.
He can handle maintenance requests, supervise repairs, screen tenants, do the bookkeeping and of course, collect rents.
If you can buy properties below market value (a huge advantage in the business), you’re actually going to have an income as soon as you buy the property. Be also on the lookout for properties that need work or are poorly managed. You can buy, improve and make money off them. I wouldn’t just wait for the property values to go up to generate income – if they do appreciate, that would be a nice bonus.
What are the different types of real estate property you can invest in?
- Single-family homes
- Multi-family homes
- College rentals
- Vacation homes
- Commercial real estate
Advantages of Buy and Hold
Among all the real estate investment strategies, buy and hold is one that effectively builds up your wealth. It is a great source of passive income and passive income is really the goal of most investors. Potentially, the high demand for property nationwide can cause inflation forces to move up.
Inflation generally affects rent prices by causing them to go up. This would mean higher cash flows for the investor. Another advantage of the buy and hold strategy is value appreciation. As long as inventory is low and supply is short, home prices in many state and cities will probably continue to increase. The rise in property values will build your equity, giving you a higher potential for growth.
Disadvantages of Buy and Hold
It may be true that buy and hold is one of the better real estate investing strategies around. However, there are still some concerns that you need to pay attention to regarding the strategy. First off, you have to carefully screen and select the people who will rent your place. It is always prudent to try and choose considerate and cooperative tenants to avoid problems in dealing with them later.
One other remote possibility is that the market can still crash. Although it may be unlikely at this time, it is not outright impossible. Real estate markets have been doing consistently well across the United States. Analysts are in agreement that they do not foresee a market crash coming in the few years ahead.
Strategy #2 – Flipping Houses
Perhaps you’ve seen some of those TV shows about flipping houses or ran into some ads that say “We buy ugly houses”. The people behind these are investors who will buy houses that most regular homebuyers won’t even consider buying. These houses are either unappealing or have taken some abuse. The investors will buy them up, do some fixing (or a lot) and then sell them quickly for a profit.
The idea is pretty basic. Buy a house, fix it up and sell it for a profit. However, executing a profitable flip is a little difficult. An investor has to keep the expenses under control and there are many of them. You have financing cost, carrying costs such as utilities, insurance, taxes, HOA fees, buying costs, and selling costs. The repairs expenses are a mere part of the cost of a flip. Finding the right houses for such a purpose is not an easy thing altogether. Competition is tough for flips but you can find good deals through MLS, auctions, wholesalers, for-sale-by-owners, referrals and direct marketing.
Doing the necessary repairs like fixing holes in drywall, replacing an old carpet or repainting the house will set you back a few hundred dollars. However, these repairs will increase the value of a house by several thousand. Some investors who fix and flip houses will see a $200K house with problems, buy it for #170K, sink in about $15K to fix it up and then sell it for $220K. Easily, they can make a good $35,000 for just one flip.
Strategy #3: Wholesaling Real Estate
This is one of the real “no money down” deals in real estate; wholesaling is where many investors can start.
Wholesaling property is basically buying a house or getting it under a contract then, instead of keeping or fixing it up, immediately selling it to another investor. It is actually possible to wholesale properties without spending your own funds to pay for the property. One way is to get the house under a contract then subsequently assign that contract to another investor who will be the real buyer of the house.
Another way is by way of double closing the sale. In this method, the investor will buy the house on the same day that he will sell it to another investor. Some companies will let the first investor make use of the proceeds from the second sale to pay the original seller. Wholesaling may be an easy way to make money in real estate without using your own funds but it is not easy. In many cases, you will still need some money upfront.
If the house needs some aesthetics work, you can sell it to a ‘rehabber’. If it’s in good shape, you can offer it to an investor who wants to keep it for a rental income. The point is, as long as you can find another investor who would be willing to buy the house, you don’t have to fix it up or look for tenants.
Sometimes, you don’t even need to come up with money to buy the house yourself. You have to simply offer to buy the house from the owner, write up a contract to get an authority to pass the house to someone else and then sell the contract to another investor. It is not very complicated. Many wholesalers manage several deals a month and easily make 5 to 20 grand per deal.
Strategy #4 – Short Sales
The fourth strategy in real estate investing is short sales. A real estate short sale is a strategy that investors commonly use in place of a foreclosure. This is because it helps the seller recover faster and affects them less severely than a foreclosure.
Occasionally, there would be borrowers who will have an outstanding debt that is more than the value of the security for the loan – in our case, the house. This happens because they have probably availed of a combination of home equity loans, second mortgages, interest-only mortgages, or other liens against their house. If you owe $115K on a house that is worth only $100K, you can bet there’s no rational buyer will pay $115K for it. Likewise, no realtor worth his salt will sell it for you because they can’t get their commission from the gain on the sale. The remaining options are foreclosure and a short sale investor.
In the given scenario, the only party who wants the house less than you is your banker or mortgagor. The bank knows that they lose a lot more when they have to take a foreclosed house because it will decrease the funds they can lend out. What about the home equity loan and the second mortgage? Or maybe the contractor who also put a lien on the house because he has not been paid for the swimming pool he has put in the backyard? If a property goes to foreclosure, all these parties get zilch.
Hone Your Bizdev Skills
A short sale investor would know how to talk to banks, lenders, and anyone who wants money from the house’s owner. Short sale investors can explain to all of them that the house is probably going to foreclosure soon. He must convince them that if they want to get anything at all, they’ll have to settle for less than the full amount they’re claiming from the owner.
A short sale investor might be able to persuade a home equity lender into accepting $4,000 for their $20,000 loan and the second mortgage lender $5,000 for their $40,000 loan. The contractor might just settle for $1,000 for their $10,000 receivable. That’s a lot better for these people than getting nothing should the house go into foreclosure. Now, the house that was previously $15,000 in the red can now fetch $170K and avoid foreclosure.
Take note though, that a short sale is a very lengthy and meticulous process. There’s no sure way of telling how long or how fast it may take. We’re talking about a month or a year. So, if your timetable requires you to purchase a property quickly, this is not the best strategy for you. Additionally, there is an opportunity cost that goes along the extended sales process. You may end up missing out on some good opportunities while waiting for someone to buy the house.
The investor may have great negotiation skills or bargaining chip but at the end of the day, it will still depend on the lender. The lender has the final say because he will eventually approve of the sale. Consequently, it is more difficult when it comes to the lender. And should there be multiple liens on the property, the sale may be more difficult to get a nod from the lender (See how to find the good mortgage lender).
Strategy #5 – Lease Options
Many investors frequently overlook lease options as a real estate investing strategy. The truth is, it has the potential to generate big profits and it’s a good strategy for beginners in real estate investing. In a lease option, you rent out your property to a tenant but you grant him the right to buy the property when a previously agreed upon lease is up.
Here is an example of a creative deal you can put together. Let’s say a person is having a hard time selling his home. It’s been on the market for months and the longer it stays, the more that they need to get rid of it.
What if you came along with this offer: You won’t buy it immediately but you buy some time in the next couple of years. Along with it, you will offer to pay all their mortgage payments for them until you actually buy the house. And that is not all. You’ll also offer to give them a couple of hundred thousand dollars as well. Wouldn’t that sound catchy to the homeowner? Sure, that’s about music to their ears but, how would you, as the investor, make money on this?
For this to work, the investor will have to ask the owner to move out of the house (if they haven’t done so already) and finds someone else to move in.
The new occupants are not renters but people who are looking to purchase the house. You call them as a ‘lease-option buyers’ because, instead of an outright purchase, the buyer gets to live in the house for a year then decide later whether to buy or pass.
This arrangement is great for buyers who would like to own their house but want to ‘test’ it out first, so to speak. They may want to see if they will feel comfortable in the house, in the neighborhood or if they need time to improve their credit or for some other reasons. The nice thing about this is that a prospective buyer who is thinking of buying the house he is living in would take much better care of it than a mere renter.
Consider The Different Scenarios
Let’s say that for whatever reason, the lease-option buyer decides not to buy the house, what happens then? The investor just moves on and finds another potential buyer, collects another lease option fee, and makes money every month on anything over the mortgage payment. Here’s something really interesting: the investor will get two years’ worth of value appreciation for the house instead of just one when it finally sells.
However, here ’s the rub:
the renter may end up deciding to not buying the house at all. You will need to find another potential buyer and start the whole process of lease option all over again.
Another thing is, if your contract already locked in the price, you will be technically selling the house below market value should there be any increase in property value. In case the home value decreases and the renter skips your deal, your house will be left unsold. In this situation, you would have made a better deal if you’ve sold it a year or two without resorting to leasing options.