What is Real Estate Investment Strategy Best Suited for YOU?
There are many real estate strategies and there is no one-size-fits-all. It all depends on your goals and objectives, what stage you are in life, risk tolerance and where you are financially.
Let me explain in a detail each of the most common strategies and then you can determine which fits best in your specific situation. Below are the strategies and you can be as creative as your mind will take you once you’re in the real estate investment business.
Wholesale – Real estate wholesalers
This is the most common type for new real estate investors who have limited funding and use this strategy to earn income. It’s also a good strategy that you can use to learn about the real estate investment business with a minimum of cost and minimum risk. You will act as a middleman between distressed/motivated sellers and buyers, who pay little extra on top of the seller’s agreed upon price and this is the assignment fee which the wholesaler gets to keep.
Seller price offer: $130K
Buyer price: $140K
A wholesaler will make a difference of $10K.
The wholesaler will spend a lot of time to find motivated sellers or distressed sellers by doing his own marketing and will incur the marketing cost up front. Assuming he spent $3,000/month marketing cost, but if he gets $10K assignment fee then he still earns $7,000 for that month. He will pay taxes for his income and he will not have any tax advantages because he does not own the real estate project. He is acting a middleman to earn the assignment fee, which is considered a 'normal' income and is taxed as such.
Buy & Flip Investor
You can buy your buy and flip projects from wholesalers or do your own marketing to get leads and keep the project to flip them up and then sell them to other buyers to make profits. The biggest risk is you must know how to calculate the fix-up cost, holding cost, purchase cost and selling cost and make sure there is still enough profits at the time of sale. Buy and flip investors must spend a lot of time doing the necessary due diligence to make sure all the numbers work out at the end. Most of these investors do not have money to purchase the projects with cash; therefore, they will borrow from hard money lenders or private money lenders to acquire this type of projects. The cost to borrow can be high plus the holding cost, mainly the interest of any outstanding loans and costs associated with maintaining the property.
If you choose to do buy and flip or fix and flip, one approach is worth considering is to find an equity partner who will put in the needed capital while you do all the work, with the agreement that you and your equity partner splitting the profits when the project is sold. You bring in the knowledge and the equity partner brings in the fund. It’s better to earn 50% of the project as you share the profit and any potential risks with a partner. As you establish your skills as a fixer-upper, you will also gain confidence in analyzing the numbers and the overall performance of a project. The knowledge is gained via actual working on projects.
Seller wants to sell a property, but could not find a buyer who can qualify to purchase his or her home with traditional financing, and so therefore sometimes he or she agrees to sell the property based on 'Subject To'. That means, a buyer agrees to make the mortgage payment on a loan still under the seller's name, or 'subject to' the seller's mortgage. The term can be negotiable between sellers and buyers. Some seller can make an addendum to have the loan is paid off in 3-5 years balloon to help with buyers getting their credit better so they can qualify for a new mortgage. This strategy is also good for a new investor to buy and hold property to gain income now, despite not being to secure his or her own loan. If you’re a buy and hold investor, then you need to make sure after the 'subject to' payment, you can still have a positive monthly cash flow. Consult with a real estate attorney about the rule and regulations in your State to protect you and the seller.
Seller/Investor want to sell their property for a higher price and at the same time want to earn better interest payment than other institution offers. This is good for a buyer who has bad credit or low income due a portion of their income earned are not reportable like tips as waiters/waitress on their tax return; therefore, they will not qualify for a mortgage. New buyers can become a homeowner quickly by taking an own financing which typically comes at a higher interest rate than traditional bank financing.
A lot of savvy investors (sellers) who are going to retire like this strategy and choose to offer owner financing because they receive steady monthly income for their investments and less headache to take care of the property maintenance. They usually do short-term loans of 20 years or some of them do 10 years loan when the amount is small. All the terms are negotiable between the seller (owner) and buyer.
Wholesale/Buy & Flip/Subject to/ Owner Finance: You will need to spend money advertising to get the leads and then negotiate with the sellers based on their motivation and needs. You can then structure the deals to find the end buyers for each project while securing a margin to keep for yourself as you’re earning.
Buy and Hold
This is my favorite strategy as it meets my family financial objectives. I now only acquire properties through wholesalers. Buying properties at wholesale prices offers me an instant equity, the difference between the wholesale and the market price for a specific property. Spend some money to make a property ready for retail rental market and then collect the monthly cash flow while building wealth for years to come. It’s an IDEAL investment!
Here is one way to apply this buy and hold strategy. If you have an active income job, you can apply this strategy to build a stream of passive incomes which over time will equal or exceed the income from your active job, at which point whether or not to work is entirely your choice because you are already financially free.
It’s also good for experienced real estate investors because once they already enough income from other strategies, they can consider the buy and hold strategy for tax advantage and wealth creation. There are a time and place for each strategy outlined above. Pick a strategy or a combination of strategies that best fit your objectives and situation, and you will be well on your way to your financial destination.
FOCUS is a key to success. Master one strategy at a time and be extremely good at one first before implementing the next strategy.
Comment what you think below.