|Buy Rent and Hold
||Introduction: The most popular real estate investment is a rental, or a buy rent and hold, as it is often referred to. These types of investments are considered a long term investment. On the surface, it may look like you are making money but they are not a good income alternative for the short term.
If you have a rental and you have a positive cash flow of $200 a door, that’s only $2,400 a year profit. It only takes 1 major repair or 1 bad tenant to wipe away the profits.
Approach: The best approach to take when buying rentals is to buy a bunch of properties and hold them for the long term, say 10 years, until you can pay off half of your mortgage. After the 10 years, sell off half your portfolio and pay down the mortgage on the half of the properties you are keeping. You now have a portfolio with minimal expense and good cash flow, since you aren’t paying any mortgage.
Risk: Those first years can be troublesome too if you have any kind of tenant problems and maintenance costs. Also, if the properties are older you may have some major repairs such as a roof or a furnace or windows.
Summary: The long term nature of rentals requires management and care and there is always the risk of vacancies and repairs and just general maintenance. The real value in rentals is appreciation and mortgage pay down.
|Fix and Flip
||Introduction: The next most common investment strategy is fix and flips. This strategy has been made very popular with all the fix and flip TV shows that are showing people how they can get rich quick. The big difference with this strategy is that it can generate some quick cash, depending on how long it takes to do the renovation.
Approach: Fix and flip investments are to earn money fairly quickly. They are a short to medium term investment. The best approach is to buy undervalued properties at a great discount and fix them up to sell.
Risk: The risk with these renovation projects is that you may not make any money, or worse, you may even lose money. A lot of people underestimate a lot of the expenses that go into fixing up a property.
A fix and flip has several expenses that an inexperienced fix and flipper may not consider. There are costs:
- to purchase the property.
- to fix / renovate the property.
- to carry the property which could include interest payments, utilities, taxes, etc.
- to sell the property which includes the realtor fees and any additional costs to carry the property if it doesn’t sell right away. The longer you have the property the more it costs you. The way to offset this risk is to price the property well below market value. Don’t be greedy.
- The other big cost is the unexpected renovation costs. Most renovation projects cost more than what was originally estimated. There are always unexpected costs that were never factored into the original estimate. This is another big risk.
Summary: Use fix and flip if you are looking for a short to medium term investment. This investment is best for someone who is looking to replace their income. Be aware of the risks and manage these risk carefully. Don’t let the job drag on and sell it as fast as you can.
||Introduction: A third option is a lease option investment or rent to own, as they are commonly known as. This investment is very similar to a rental investment because you have a tenant. Lease options have the cash benefits of both a rental investment and a fix and flip investment.
Approach: With a standard lease option investment, you usually get an upfront cash payment, monthly cash flow and another payment when you sell.
The big advantage of a lease option is that
- your tenants are usually responsible for the maintenance and repairs.
- your tenants are paying above market rents which provides a nice cash flow.
- you already have a built in buyer that is set to buy at the end of the lease option term.
Risk: The big risk with lease options is that the tenant may not be able to purchase the property at the end of the lease option term. Which can actually be a benefit if handled properly. Another bigger risk is that the property is not worth what the tenant is supposed to purchase the property for at the end of the term.
Summary: Lease options can make you money 3 ways. Upfront, monthly and at closing. It’s good for anyone who needs to make money fast and is looking to replace their long term income. Make sure you monitor the tenant buyer and that you are preparing them to be able to purchase the property. You also want to keep an eye on the market to make sure the property will appreciate as required.
||There are many other investment options with different types of income and different types of risk. Some of these are wholesaling, mortgages, birddogging, foreclosures, etc. what the tenant is supposed to purchase the property for at the end of the term.
Before entering into real estate, it’s important to understand what the different types of investment strategies there are and what makes the most sense to you based on your risk and income requirements