More people have become wealthy by owning Real Estate, world-wide, then any other investment.
Because real estate is everywhere, it’s local, and because everyone uses real estate, every day, there are many different investment strategies that you can use to make yourself wealthy with real estate. Here are some brief reviews of the various strategies that investors use. This list covers most of the strategies and hopefully will get you to thinking of all the possibilities.
Real estate investors most often specialize in one area or strategy of investing, then add more areas as time, experience, or necessity dictates. For example: I started out buying rent houses for cash flow and long-term equity build up. Years later I became a mortgage lender as I sold off some of those properties. Now I buy and hold for cash flow and / or buy and sell, carrying the paper for the cash flow.
As with any investment, do the research, get some training, and/or hire professionals to assist you. Knowledge is power.
Flipping Houses: Flippers buy houses in need of repair or updating, they fix them up and sell them for quick cash. This can be done in all price ranges. You can start with houses in needing minor work and progress to major overhauls as your experience grows. There are always fixer uppers available they can be hard to find when the demand for homes is high. Marketing to find houses at a discount because of condition is the key to this business.
Deal Finder (wholesaler): Deal finders locate houses that can be purchased cheap and sell the information to flippers and other real estate investors. Many homes are sold at wholesale rates for a whole multitude of reasons, you just have to put the sellers and buyers together. Marketing to find deals is the key to Wholesaling.
Landlord: I prefer being a landlord as a real estate investor because I get the best of both worlds, Current cash flow, and home value appreciation. I learned a long time ago that living like the rich was just a matter of having enough monthly spendable cash flow coming in. It is a lot easier to get $10,000 a month coming in then it is to accumulate $1,000,000 in cash. Being a landlord makes this possible for anyone, you just have to have the desire and then get out there and do it. One nice thing about being a landlord is that it takes very little cash to get started compared to almost any other business.
- Landlord – Cash flow investor: This is the most common investor type. These investors are buying property expecting a positive monthly cash flow from renting the property. The net spendable monthly cash flow is the primary concern. Equity appreciation, tax savings and debt pay down are secondary.
- Landlord – Long term equity gains: This investor seeks well positioned properties that will appreciate in value over many years. As long as the property is paying for itself they are happy. Their profits come from tax savings on the rental income, increases in value over time, increasing equity from the rental income paying down the mortgage and rent increases over time. Returns can be 20% annualized.
- Absentee landlord: These investors buy ready to rent properties or properties already cash flowing. The properties are professionally managed by rental management companies. Cash flow is the primary goal with property value appreciation secondary.
Sub-let investor: Yes! you can be a landlord and own no real estate. You rent houses and sub-let them for more then you are paying. Now? Why didn’t I think of that? You find people who own houses, who are tired of being a landlord and relieve them of their burdens. Take a five-year lease at $100 less than the going market rent and then re-let the property to your tenet at full price. Raise the rent every year to increase profits.
Rehab Expert (Position-er), Highest and Best use: Rehab investors look for properties that need updating or repositioning. The properties are rundown and thus the rents are sub-par. The
rehab investor buys the property, paying a price that is based on the low rents and the bad condition. He then rehabs the place, changes out the tenets, and raises rents. He then either holds the property for its cash flow or sells the property based on the new higher values.
You can Re-position an re-hab office buildings, apartments buildings, mobile home parks and all manner of chimerical income property.
Commercial Real Estate: The word “commercial” covers a very broad area form a small office building to industrial complexes. Because commercial real estate can sit vacant for long periods of time I recommended it for experienced investors only. Most commercial real estate investors pick one area and they become a specialist. For example, strip centers, medical offices or mini storage.
- Landlord – Commercial: Commercial property investors tend to like the professional type of renter. Contracts are longer, dollar amounts are often larger, and the problems fewer. Vacancies tend to last longer, and new tenets may want remodeling allowances.
- Landlord – Industrial: Similar to other commercial properties investors industrial investors study the market. Because industrial properties can be hard to re-let after a tenet vacates, experience is essential to success. Potential for environmental liability further increases the risk.
Mobile homes: Mobile homes have one problem and is that it they do not appreciate in value. (I do buy, sell and rent mobile homes.) Because of the lack of appreciation it is imperative that you buy them cheap. You will make your money from the cash flow. I have purchased them, and remodeled them, and then sold the house at top dollar by carrying the note myself. I have purchased mobile homes and rented them in mobile home parks without having to buy the land. The real value is that they can be purchased cheaper then houses (used that is) and then rented based on their shelter value (rents are the same as apartment rents). The spread can make you a lot of money. Read how to make money with mobile homes.
REITS: There are two kinds of real estate investment trust. Private placements and stock market traded. The stock market traded REITS are purchased and sold just like stocks. The companies must pay a dividend (current average is around 3.5%) The values move just like stock prices. Unlike publicly traded RIETS, private REITS are illiquid at best, but often have a much higher return. Private placements are only open to accredited investors. REITS are regulated, by that I mean they must follow specific security rules, but that fact does not reduce risk. The quality of both the REIT’s managers and the underlying properties has a big effect on the risk of the investment.
Sub-Divider: A sub-divider buys a large piece of land then sells it off in smaller sections or lots. For example: you buy a farm of 800 acres and sell it off as 5 acre ranchettes. It takes a lot of cash to do this and it can take years. Often you need to finance the buyers. I have seen this done with ranches, commercial lots, residential lots and recreation land.
Developer: A developer buys land and develops it into a commercial project with the intent of selling it after it reaches positive cash flow. Examples might be a resort, motel, office, warehouse, etc. By working through all the red tape of getting a project approved, financed and constructed the developer can make very high returns. He also is taking very big risks, with no assurance that he will make money. This is a business not an investment, it becomes an investment after the property is built and cash flowing (making a profit) and the permanent financing is in place. The property’s value is then based on the cash flow not the cost of building the project.
Lender: Being a mortgage holder or lender is a way to invest in real estate without having to manage it. There are millions of note holders out there, people who have sold property and carried the notes. You could buy the notes from them (at a discount), or fund new projects (this is called hard money or private funding). Flippers use short term and long-term lenders to fund their projects. Returns can be as high as 20% per year. I would recommend using a broker to find notes and arrange the purchase, as it can get complicated.
My company Gem Rentals borrows from individuals from their savings or IRA accounts paying 8% interest, on 1st lien real estate notes. Most of the loans are interest only or 20 years amortized, 70% /30% loan to value. The notes come due every 5 years and can be renewed. Lenders making long term loans at 8% interest rates often make more money than lenders making short term loans at higher interest rates. With short term loans your money is not always at work, reducing the average rate for the year, and you have higher legal and in out custodial fees to pay.
Short term lender: Lenders who lend to flippers and for bridge loans until a longer term take out loan can be completed. Returns are typically 20% plus.
Tax lien buyer: Some states sell tax liens at auction (Florida for one such sate comes to mind). When people do not pay their property taxes on time the county places a lien on that property. As the county needs the money to operate, they sell the lien to an investor. When the property taxes are paid, or the property is sold the lien is paid off and the investor gets his money back plus accumulated interest. Returns average about 14%-25%
Tax deed Sales: When people do not pay their property taxes on time the county places a lien on that property than forecloses on that property. Some states hold tax deed sales (Texas is a tax deed sale state) where the title to property is sold to the highest bidder. Sales are held on the 1st Tuesday of the month. Sales are advertised and posted at the county courthouse. State regulations set out the sale procedures. The sales are subject to redemption (for a specified time period) by the original owners. Buyers get a Sheriffs deed subject to the redemption rules. If there is a redemption the buyer at the auction surrenders the property back to the prior owner getting their auction price back with interest. Research your counties rules and regulations prior to bidding, and always visit the properties before bidding.
Syndication: A syndication of real estate is a partnership (LP) between a general partner who assumes the liability and silent investors whose risk is limited to their invested capital. Typically returns very from 12% to 20% annualized. LP (limited partnerships) are set up and regulated under state law. The terms, conditions and payouts are governed by the Limited partnership agreement between the General Partner and the investors. The advantage to the investor of a LP is that you get the expertise of the General Partner and you limit your risk at the same time.
Partnerships: Partnerships cover a very wide area of possibilities and are unregulated. Partnerships work best when there is a clear understanding of who does what, and where the money will come from. If you do not wish to learn the ins and outs of real estate investing or you want to get instant expertise, partnering with a professional can allow you to invest will learning as you go.
Equity partner with other investors: Money is the hardest part of the equation for real estate investors. Because of this many an experienced real estate investor will partner with a inexperienced money investor. The money investor gets a return on his cash plus a participation in the deal and gains his partners experience. The experienced investor gets the needed cash to do another deal. The more cash in a deal verses borrowed money the less risk. By taking on a money partner an experienced investor reduces the risk in exchange for giving up part of the future profits.
Limited partner – in a limited partnership: A limited partner puts cash in a deal with other investors. A general partner assumes the management and borrowing risk. The cash investors risk is limited to the amount of cash invested.
General partner of a limited partnership: A general partner in a limited partnership assumes all management and liabilities of the partnership. A general partner can also be a limited partner. The terms of the partnership are governed by the limited partnership agreement.
Land holders: Some investors buy land to hold until a person comes along who needs it. Deep pockets are required because it can cost 5% to 10% a year in carrying cost to hold vacant land. These investors look to get out in front of an areas growth pattern and then wait for the city to catch up with them.
Land converters or land assemblers: These investors convert land to another use. For example; buying a ranch and sub dividing it into smaller lots. They might buy up a lot of small lots and make a larger building site available to a developer.
Jim E. Glasgow