Real estate
investment is one of the most often utilised investment vehicles. Many new
investors turn to real estate investing as a hedge against economic
uncertainty. The business of buying, selling and renting property may seem like
an ambitious endeavor, but with the right strategies, patience, as well as a willingness
to learn, it can be an investment vehicle that drives you forward toward your
goal of passive income and financial independence.
Although
buying and holding is the most common strategy used in real estate investing, a
wide variety of different strategies exist. Some create short-term value, while
other create long-term wealth. Keep in mind, however, that the appropriateness
of each strategy will depend on your own goals, risk, tolerance and the local
property market.
Today’s
guide compiles four conventional real estate investing strategies that are
worth knowing.
1.
Buy
and Hold
Buying and
holding is one of oldest strategies to generate long-term returns on
investment. Investors purchase a property and leases it to tenants for ongoing
income. This creates a steady stream of monthly cash flows and generates
long-term passive income for the investor. A buy and hold strategy also offers
minimal risk. However, flipping can involve some capital that includes
renovation costs and carrying costs.
Keep in mind
that for a buy and hold strategy to succeed, the location must be strategic for
example, cyberjaya
property, and choice of property must be undertaken with due diligence.
Besides financial security, you are also able to turn your real estate
investment into a business. You will become your own boss, and enjoy many perks
including but not limited to tax advantages.
2.
The
‘Lipstick’ Flip
Buying and
flipping is an often-used strategy to generate returns on investment
in short-term timeframes. Property flipping is the purchasing of property that
needs minimal repairs (usually RM 20K or less) and selling (or flipping) the
property with minimal cosmetic improvements and repairs. Investors generally
buy and flip to make a small, reasonable profit quickly and with little hassle.
To succeed
in this buy and flip strategy, analyse potential properties and what the
property needs in remodelling. Do a cost-benefit analysis to determine whether
or not it makes sense to do certain improvements, and to gauge what you will
get in return. For example, a house has stained and dirty flooring. Will the
house sell at a higher price with new floors or new carpets? The answer is yes.
In most markets, not only will it sell for a higher price, but it will attract
more potential buyers and increase the demand for the property. However, do be
sure not to budget too high, otherwise you will over-improve the property and
it will end up being a waste of money. Sometimes, all the property needs is a
lipstick remodel, where there are no benefits to the over improvements and
added costs.
The process:
- Investor looks for viable homes that can be easily improved for sale.
- Investor buys said property and makes minor cosmetic improvements and minimal repairs.
- Investor places the improved house is then placed back on the market and quickly resells it for a better price.
- Investor cashes out and repeats the process, thus generating returns consistently and exponentially.
Prerequisite
needed:
The investor
needs to have adequate financing lined up. Investors will also need
professional networks and contacts as well has have a good understanding of
what they are doing.
Resources
needed:
- Funding for purchase, improvement costs, 6 months of holding costs
- Contractors to complete basic construction work
- Motivated seller leads
- MLS access
- Flip formula
- Ability to manage property daily
- Knowledge of local real estate laws and regulations
- Accounting skills
- Minor construction / project management skills
- Title company
3.
Buy
and Hold
Buying and
holding is one of oldest strategies to generate long-term returns on
investment. Investors purchase a property and leases it to tenants for ongoing
income. This creates a steady stream of monthly cash flows and generates
long-term passive
income for the investor. A buy and hold strategy also offers minimal risk. However,
flipping can involve some capital that includes renovation costs and carrying
costs.
The process:
- Investor find viable property deals.
- Investor make repairs to the property to improve its demand and get it ready for tenants.
- Investor put the property on the rental market and secures a tenant.
- Investor collects rent monthly, generating passive stream of income.
Prerequisite
needed:
The investor
needs to have contacts to a pool of property sellers in order to have a more
diversified selection of properties. The investor needs to have adequate
financing to fund the purchase. Otherwise, the purchase will need to be funded
with debt (i.e. bank loans and mortgages). Investors will need knowledge and
adequate education on property laws, as well as local connections and
relationships that will help pull in tenants.
Resources
needed:
- Financing
- Motivated seller leads
- MLS access
- Buy & hold formula
- LCC/business entity
- Tenants
- Title company
- Funds for repairs and property maintenance
- Marketing budget for renters
- Property manager or time to manage property
4.
Wholesale
The
wholesale strategy is similar to flipping. However, the investor sells the
property contract to other potential buyers. In essence, the investor is the
middleman, who contracts with a property seller, markets the property to
potential buyers, and then assigns the contract to them.
Real estate
wholesaling is flipping contracts for fast cash. The investor buys at low
prices, sells at low prices and sells fast by assigning real estate contract
rights. The investors only role is thus to find a buyer for a seller and takes
a percentage off of the sale. The profit is usually the difference between the
contracted price with the seller and the final amount that is paid by the
buyer. This strategy enables investors to get in, get out, get paid fast and
can be done quickly and with minimal risk. Wholesaling involves much less
capital than other real estate
investment strategies.
Success in
this strategy will depend on the investor’s knowledge of the real estate
market, and connection to buyers for quick sales. A good idea is to add a
contingency to the purchase contract in order to allow the wholesaler to back out
of the deal if a suitable buyer cannot be found before the expected closing
date. This limits the risk involved for the investor.
The process:
- Investor finds underprice properties.
- Investor finds a buyer for the contract.
- Investor assigns the real estate contract to new buyer.
- Investor gets paid an assignment fee.
Prerequisites:
In order for
a wholesale strategy to succeed, the investor needs a pool of waiting buyers,
education on the land laws and the buying and selling process, as well as a
wide network of local connections.
Resources
needed.
- Buyers list
- Motivated seller leads
- MLS access
- Flip & Buy/Hold Formulas
- LCC/Business entity
- A few hundred dollars,
- Internet technology, phone, transportation
5.
Buy,
Renovate, Rent, Refinance, and Repeat
The BRRRR
strategy is one of the most complex in real estate investing. However, this
strategy can be used to provide returns in both the short- and long-term. This
strategy involves purchasing, rehabbing, leasing the property, recouping of the
capital by refinancing, and doing it all over again.
The goal
behind this strategy is to pull out all of the money that was put into the
property when it is refinanced, so effectively the property was bought for
nothing, and still has a 25 percent built-in equity to reduce risk. In essence,
the BRRRR method allows investors to maximise the use of their cash funds and,
essentially, acquire assets repeatedly with the original pool of funds.
Some tips
for target properties include: aim for properties in gentrifying areas,
properties with minor cosmetic repaid needs and properties where values are
rising fast.
The process:
- Investor buys a property with good potential.
- Investor renovates the property.
- Investor rents the property out to a tenant.
- Investor refinances the property to get cash out.
Prerequisites
needed:
Interested
investors will need to have a wide network of property sellers and local
connections and relationships. Investors will also need to have adequate
financing lined up to fund the whole project, as well as adequate knowledge and
education on the real estate market and property laws.
Resources
needed:
- Motivated seller leads
- Flip & Buy / Flip & Hold formulas
- LCC/Business entity
- Funds for repairs and maintenance
- Property Manager and/or time to manage property
- Tenants
- Financing
- Contractors
- MLS access
- Accounting skills
- Title company
- Ability to manage property daily
- Marketing budget for renters
- Knowledge of local real estate laws and regulations
- Minor construction/project management skills
6 Comments
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