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April 10, 2007

5 Rock-Solid Real Estate Investment Strategies

Investing in real estate is more complex than simply buying and selling homes. To help new real estate investors to decide which strategy might work for them, I put together five rock-solid strategies. It is up to you which strategy you feel more comfortable with.

1. Buy and Hold

This real estate investment strategy is commonly known as rental properties. Becoming a landlord is easier than you think. You buy a property, you advertise it as “for rent,” and you sign a contract with your new tenant. That’s where the love story ends. You need to know a lot about your duties and your rights as a landlord, or you will find yourself in trouble.

Screening your prospect tenants is your first line of defense. Protecting your property from damage is your first duty. I might paint a little bit dark picture of being a landlord. But dealing with tenants can be the most frustrating job you ever had. Do yourself a favor and visit a bookstore or library and get as many books on landlording as you can get. Armed with this knowledge you will be able to create a positive cash flow and a long-term relationship with your tenants every time you put the “For Rent” sign in the yard.

With the buy and hold strategy, you have three income streams going at once.
Amortization- while paying your mortgage you also lower the amount you owe.
Appreciation- while owning the property it increases in value.
Tax incentive- as a landlord you will be able to deduct your investment cost over several years. (See you tax advisor for professional advice).

Based on this information you can easily see that even if the rent doesn’t cover 100% of your mortgage payment, you will still be able to create a positive cash flow.

2. Flipping

This is the art of “buying” and “selling” real estate investment without actually taking ownership. In a flip situation, real estate contracts get assigned, and the person who assigns the contract to someone else typically gets a commission for their services. That’s how you can make money with real estate without credit checks or no money down. Because you never take possession of the property, you don’t need to apply for a mortgage.

You only need two things to be able to flip a home. First, you need to find an attractive property that will sell very quickly. Second, you need to find a buyer within a very short period. Typically 2-3 weeks. Then you simply flip the contract to the new buyer, and you will collect your commission at a so-called “double closing.”

This sounds complicated at first, but with a little bit practice, you will be able to create a nice income from this. By the way, this is the preferred concept of most real estate “gurus” who appear in late night infomercials.

3. Rehabs

Rehabs are the riskiest form of real estate investments. You hunt for a cheap, run-down property and you hope that your preliminary remodel cost estimates will leave enough room for a nice profit. Well, that’s the theory. Most real estate investors are failing with this type of strategy.

You either didn’t get the property cheap enough to make a profit or the damages are more extensive than estimated which will offset the low purchase price. To make matters worst. If during the rehab phase of typically 3-4 months the market is going south all bets are off. Trust me, I made my share of experiences with this, and I told myself, never again.

4. Commercial Real Estate Investment

What comes to your mind first when you think of commercial real estate investment? Big factory complexes, shopping malls or maybe huge office buildings. Well, my answer is much simpler. Anything bigger than a four-unit apartment building, some call it fourplex, is considered commercial. The great thing about the commercial real estate is that the value of the property is determined by the rent income it generates and not by how crazy people are going with bidding on the residential real estate.

Theoretically, there’s no such thing as sellers or buyers market for the commercial real estate. I wrote a complete article about the pros and cons of the commercial real estate. So I keep this brief. Personally, I love commercial real estate. Of course, commercial real estate is more or less off limits for beginners, because commercial real estate lenders want to see some form of prior experience in real estate investments. However, if you got some experience, go for it. As an added benefit; the competition is far less.

5. New Construction

This is the most affordable and easiest way to real estate investment. Getting into the earliest phase possible of new development is a sure thing to make money. Keep an eye on the market, and you will be able to sell your new home before construction is finished. The construction companies don’t like this, so they limit the number of homes an individual can buy. Even so, keep one or two homes constantly under construction, and you will make some nice profits. Of course, this works only in a seller's market. Stay away from this strategy in a buyers market or when you see big changes in the local real estate market.

(Peter Dobler is a veteran in the IT business. He is an active real estate investor and a successful Internet business owner.)

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