There are many strategies for investing in real estate. The whole point of real estate is to make money through appreciation or passive income or rent in the years to come. Which strategy is the right one for you?
Most beginning investors start with wholesaling and move up from there into “fix and flips” and “buy and holds” (rental properties). To help you decide where to start, here are the main types of real estate investing strategies that appeal to real estate investors.
Strategies for Investing in Real Estate
– A wholesale deal occurs when a real estate investor (wholesaler) acts as the middleman between a property seller and a property buyer. Basically, a real estate wholesaler finds and quickly sells a cheap real estate property for a profit margin. Real estate wholesalers place the investment property under a purchase contract and then sell this contract (or “assign” it) to the buyer for a small profit. This strategy is often used when rel estate investors are just starting out and don’t have a lot of capital.
– This real estate strategy results in the highest profit margins. It allows the real estate investor to sell the real estate property at full market value. It involves purchasing investment properties that need repair (below market value), renovating them, and then selling them for more than the original purchase price plus repair costs.
– This strategy is popular for real estate investors looking for passive income in a real estate property The real estate investor chooses to hold it for a period of time and rent it out to receive monthly cash flow (rental income). As appreciation and equity build up, you may sell these investment properties for a profit.
– This is an excellent strategy for exiting a real estate property while continuing to produce a profit. In this case, the seller finances the real estate investing deal and acts as a bank. The seller and the buyer exchange a promissory note, including an interest rate and a repayment schedule. This strategy benefits sellers as they are awarded monthly payments to cover the mortgage loan, and their return on investment increases through interest income.
Rent to Own (Lease Option)
– This type of strategy allows the real estate property owner to rent the investment property to a tenant, but with the option to purchase it after a set period of time. In some cases, a portion of the monthly payments is put towards the purchase price of the home.
– Prehabbing is a hybrid combination of both rehabbing and wholesaling. During a pre-hab, minimal work is done to bring the property up to selling quality, making a great option for investors who are interested in doing a little bit of “DIY,” without the full commitment required in a fix-and-flip property. Examples of ways to prehab include giving a home a new paint job on the interior and exterior, updating the landscaping, and perhaps replacing the carpet.
Foreclosures (commercial and residential)
– You may step in when the property is in danger of default or has already gone into foreclosure. You can be a problem solver by arranging a deed financing with the seller or buying the property outright usually below market value.
Short sales (commercial and residential)
– When a lender approves a short sale, at the very least, the lender agrees to remove or release the lien on the property. Because it is cheaper for the bank to sell the property quickly, than hold on to it, there’s a pretty good chance you can buy the property below market value.
– You can specialize in buying non-performing notes and tax liens at a steep discount from a bank and turning those notes into a profit. Why Do Banks Sell Their Notes? The primary reason that banks sell bad notes is to mitigate any risk that implicates the bank.
For every loan that is in default, the banks are required to have cash reserves of $7. On $1,000.000 of bad loans, $70,000 is reserved. The banks can’t make new loans on that money. Selling distressed paper takes the weight off of their shoulders, improves their investor relations, and alleviates an aspect of unpredictability. How does it improve investor relations? No longer are they in the news for foreclosing on a family and kicking them out of their house. It is bad PR to see the borrower’s belongings out on the lawn. That mean old 1st Bank is inhumane!
Investing in real estate through self-directed IRAs/401ks
– Individual Retirement Accounts (IRAs) and 401k plans are long-term savings accounts that offer tax advantages if you comply with various Internal Revenue Service (IRS) regulations. Forbes tells us that there are rules you must follow to invest in real estate through IRAs and 401k plans. “The real estate you buy must be a business property, not a personal residence, second home or occasional rental. Also, you can’t use your IRA to buy a property you already own; it has to be a new purchase directly into the IRA.
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