We’ve all heard the term real estate investing at some point or the other. It is a business venture which has made many people wealthy. Multiple strategies have been created throughout the development of property investment as a business.
What is Real Estate Investing?
It is the process of purchasing, owning, and managing rental properties or real estate to earn a profit. A sub specialty of this venture is sometimes referred to real estate development. This is the process of buying less than ideal properties to fix them up for resale. The benefits of real estate as an investment are numerous. It does have limited equity, but this equity is sound and reliable. That is why so many people choose this type of investing over others. To be successful in this type of business ownership, a person must have a thorough understanding of cash flow, leverage, and capital involved with purchasing these properties. It is considered by some to be a risky investment. The amount of risk involved depends upon many factors. If the property is acquired as a foreclosure or short sale, the risk is far more minimal. By applying effective strategies, real estate investing can be a low risk and lucrative process which does not require large amounts of upfront capital or leverage. An investor’s goal should be to pick a strategy that offers the highest possible appreciation at the lowest amount of risk.
Foreclosure Investment
Mortgages do not automatically foreclose. There is a default period where the owner still has an opportunity to either sell the property or make up the missed payments. After a period of time, the lender will initiate the foreclosure procedure. Properties in this status may be bought before or during a public sale. Foreclosure investment involves locating money making foreclosures which can be purchased for resale or as rental property. Default is the fist phase of foreclosure. It is during this time that a short sale may be performed to avoid the rest of the process. After that point, the foreclosed property can be purchased through the bank or in a public auction. Most lenders do not want to sit on the property and will ask for the remainder of the loan or an even lower discounted amount. With the right properties, this can be a low risk and promising way to invest.
Short Sales
Short sales are one of the most minimal risk strategies available to real estate investors. A short sale occurs when the property is in default but has not yet foreclosed. It is during this time period that an investor can negotiate a discounted price with the lender. The price is typically lower than what is owed on the property. Short sales allow both lenders and owners to bypass the foreclosure process. Instead the lender can take a small loss to get rid of the debt. Investors may facilitate this process to assist the debt ridden owner and acquire the property at an undervalue price. They then sell the property at market value or higher to get their investment return. Short sales are low risk. Credit and down payments are not required. Competition is very low due to the abundance of homeowners currently struggling to make their payments. Profits can be very high. The increased number of foreclosures makes this strategy very worthwhile. With a little training, an investor can be well on their way to making unimaginable profits.
Buy and Hold
Buying and holding property can be a good investment when done correctly. This particular strategy involves buying when the property is undervalued and then holding onto it in the form of rental property. Real estate itself is a stable investment that retains its value fairly well even during economy fluctuations. Cash flow from held property can be consistent and reliable. Remember that your capital will be invested in a specific property. This will prevent quick access to equity. Expenses are included. If they are not accounted for properly, then the property could quickly become a burden. This method does add the additional work of being a landlord. It may be too time consuming to perform maintenance, repairs, handle taxes, insurance, and screen possible tenants. These factors should be taken into consideration before choosing this type of investment strategy.
Real Estate Wholesaling
Real estate wholesaling is the practice of purchasing homes or properties currently below market value. The mortgage note is assumed to be under contract and the property is sold “as-is.” You can sell the property for what it would be valued minus the repair costs. Then the new owner makes the repairs using their own funds. Wholesaling involves four steps. First, sellers who need to rid themselves of the property quickly are located. These sellers could be facing foreclosure, be starting bankruptcy, or relocating. Second, a price is negotiated for the property. Once a price agreement is reached, a contract is drafted and put in place until the property can be sold to a buyer. The objective is to flip the investment as quickly as possible. It works well with distressed real estate such as foreclosed homes or real estate owned properties. “For Sale by Owner” is often one of the prime targets. Finally, the property is sold and the investment is complete. There are fewer costs than with traditional flipping. This is due to the investor not having to pay for repairs or locate buyers who qualify.
Fix and Flip
This is one of the most common investment strategies. The largest problem with fixing and flipping homes is the entailed costs. Repairs can get expensive. An investor must have enough capital to perform these repairs quickly and sell the property. Current market standings, available capital, and risk tolerance are all factors in determining if this strategy is appealing. Many investors choose a specific area of a neighborhood or price range. This alleviates some of the risk and makes it easier to get results faster. These types of properties are quite often purchased at trustee auctions or through a listing service. Trustee sales allow you to acquire the property quickly. It is not well known as opposed to one that is listed. This provides more sale price flexibility. The largest drawback of a trustee sale is the need for having a large amount of cash on hand. Listed properties have more options as far as payment. The purpose of this strategy is to buy at a very low price, make necessary repairs quickly, and then sell at the highest price possible based on the area and the property.
Buying Notes
Buying notes can be rewarding when the time is taken to invest wisely. A mortgage note is drafted when private money lenders are used for the sale. The current homeowner acts as the banker to the party buying the home. This may seem odd but there are many reasons why this type of transaction would occur for real estate. If they are not hurting by having the home, they can finance it to earn money the same as a banker would. A down payment is given. Then a monthly payment which includes interest is paid to the homeowner every month. Owners may do this to avoid the trouble of meeting lender standards. Other times the buyer can provide asking price but is having difficulty obtaining the financing. After a while, the homeowner might decide they want to sell the note on the secondary market. An investor can buy the original note at a discounted rate. Notes are guaranteed as far as default and backed by the value of the home. They may be bought and sold very quickly.
Tax Lien Investing
When a person cannot pay their real estate taxes, the deed can be purchased by individuals. States that go by the tax lien process, do not sell the actual property. Instead the lien for unpaid taxes is sold. It is a county right which does not give the buyer full rights to the property. Two specific rights are given to the investor. You can obtain interest penalty charges if the property owner pays the lien. An investor may also foreclose on the lien if it is not paid thus acquiring the property title. Purchase price is only a fraction of the properties market value. This makes the investment very secure. There are no land owner liabilities since the property owner remains in possession. Tax liens are typically sold at public auction. The purchasing investor receives all the rights previously held by the county or state on the lien. A delinquent owner has a specific period of time to buy the property back by paying the certificate price along with the interest rate. How does this affect an investment? If the owner should redeem the property, the investor gets an interest penalty charge that can be as much as fifty percent of what was paid at the auction. In the case of no redemption, an investor can receive a high valued property for a minimal price. For example, they may have only paid ten grand for the certificate and acquire a property worth one hundred grand.
Tax Deed Investing
The rights sold with a tax deed purchase are different. Some states sell liens while others sell deeds. Full ownership and possession of the property is given to the investor when the deed is purchased. At that point, the property is owned by the investor and cannot be redeemed by the current property owner.
Auctions
Auctions occur for many reasons. Typically, these scenarios are more profitable when multiple properties are being auctioned off. Single property occurrences have the tendency to involve emotional bidding. This can increase the cost of the property to a point where it is no longer profitable. Research is required before bidding. Investors do better if they determine the properties worth and their maximum bid before the auction takes place. Absolute auctions have more flexibility. There is no reserve to be met by the holding lender.