What Is Real Estate Investing?
Real estate investing is any investment, whether it’s time or money, invested into some type of real estate or real estate transaction. The following are some common ways to invest in real estate:
- Buy, Rent, and Hold
- Fix and Flips
- Private Mortgages
- Wholesaling
- Lease Options
Buy Rent and Hold
The first type, the most popular type is where you buy a property, you rent it out and you collect rent from that property. You pay your expenses. There are several expenses associated with buy-and-hold rental properties. Over time, you should get to the point where you’re going to collect more rent and have fewer expenses. Another key component that will contribute to making money in buy-rent and hold real estate is appreciation. Meaning the property will go up in value.
There is also the principal paydown, meaning you’re going to be paying down your mortgage over time.
Okay? So that’s the most common way to get involved in real estate investing that most people start with.
Fix and Flips
Another big real estate investing strategy is fix and flips. You see this all the time. There are a lot of TV shows out there where you see people go out and buy a property.
To get started, you would invest in a property and then fix it up because it needs to be fixed up. And then you sell it.
The challenge with fix and flips is you never know what you’re buying. You never know what kind of work you’re going to end up doing. You never really know the cost. There’s, a certain amount of risk that you can reduce by having experience, but there’s still sort of the unknown with fix and flip.
The other challenge with fix and flip investing is there are so many people out there doing it. So it’s harder to find the properties that fit the model of a good fix and flip.
Money Partner
The other way you can get involved in fix and flips is not really doing the work, but you could be a money partner. So, somebody else is doing the fix and flip, but they need the money. They need the down payment. They need to find a private mortgage. You could be that person to invest with them in a joint venture type of arrangement for that real estate investing.
Private Mortgages
So, another way to invest is you could become a very passive investor in real estate by investing in mortgages. Yes, you can become a bank, just like the banks lend out mortgages. There are a lot of companies and there are a lot of people out there that specialize in what’s called private mortgages.
What that means is somebody looking for a mortgage who can’t necessarily qualify for a standard mortgage but is looking to buy a house or is looking to invest in a property as an investor, but they can’t get a mortgage for whatever reason … they can’t qualify for a traditional mortgage. They have too many mortgages. They don’t have good credit. They have seasonal work, meaning, they only work in the winter, or they only work in the summer. Banks don’t like that. It’s high risk for them. So, you, as an investor could evaluate the person that’s looking to get a mortgage and determine if you want to give that person a mortgage.
Now, the nice thing about these mortgages is usually that there’s enough equity in there, meaning there’s enough spread between what the property’s worth and what you’re willing to lend so that your risk is greatly reduced. And you also can charge a much higher return than banks are charging. Like right now, mortgage rates are 3% or 4%. But you could charge 7, 8, 9, 10%. I had one loan on one deal. I was working on, I was paying 14%, but I didn’t care because I had the investment
Wholesaling
Here are a couple of other types of real estate investing but I don’t know if you’d call them real estate investing, because they are more about investing your time and not your money.
The first one is wholesaling. Wholesaling is more of a job than real estate investing.
What wholesaling is, is going out, finding people who are motivated sellers, meaning people that are looking to sell their home, but can’t really sell it because it needs work or whatever reason.
You will go and talk to that seller and agree on a very good price from that seller because they are very motivated. And then you would put it under contract and then you would go and find an investor who is interested in doing a fix and flip. That other investor would come in, purchase the contract from you as a wholesaler.
You’re not actually buying the property from the original seller, you are assigning it to this fix and flipper who’s going to fix it up and sell it to the retail market.
Lease Options
Okay. So that’s wholesaling and then another real estate investment strategy is lease options.
Lease options is basically getting a property, putting it under contract, and then finding a tenant-buyer who’s going to lease it from you with an option to buy it.
Okay. So those are several ways in which you can get involved in real estate investing. And there’s a few more, the other big one, the other really big one is private equity investing with real estate. And I’ll go into that in later posts.
