Most people picture real estate investors as being landlords renting out living space or people who turn rundown homes into gorgeous residences.
The truth, however, is that there are many ways to invest in real estate beyond these two choices. In fact, the field of real estate investing is so varied that you can meet two highly successful real estate investors and they could have completely different ways of investing. So, in no particular order, let’s dive into some of the ways you can profit from real estate!
Development involves buying land and building properties on it. This strategy is high risk, high reward. It is high risk because you need to acquire a lot of skills to execute this strategy successfully. You need to organize financing, organize a team to build properties, and understand the local market you are investing in. And during a downturn, developers can really suffer because they have investing a lot of capital and until their property is sold, they are not bringing in any money. On the other hand, if the market is hot, developers can make a lot of money. Overall, I would not recommend beginner real estate investors start off I’m development unless they really know what they are doing.
Fix and Flip
Fix and flip is a very well known real estate investing strategy, thanks to the popularity of TV home renovation shows. The idea behind the fix and flip strategy is to buy a home cheaply, fix it up to increase the property value, and sell it. Done right, you can make money in a short period of time. But be careful: like with any short term strategy, fix and flip is vulnerable the ups and downs of the market. So if you are going to pursue this strategy, know your local market well and focus on doing specific renovations on specific kinds of properties. The more of the same kinds of renovations you do on the same kinds of properties, the much better you will be at estimating the costs of the renovation and mitigating the risk that you will unexpectedly overshoot your renovation budget.
Single family homes
Alongside fix and flips, purchasing and renting out single family homes is another very well recognized style of real estate investing. The idea is to purchase a single family home and rent it out. This strategy is very easy to understand and probably a lot of you are thinking about doing exactly this as your first real estate investment. In fact, buying and renting a single family home is how I myself first started investing in real estate. Renting a single family home is a very simple strategy but it also requires patience. Many beginner real estate investors think that they can use the rents from their single family homes to fund their lifestyles. But don’t forget that the rent needs to be used to pay for the costs of maintaining the home like the mortgage, property tax, insurance, and repairs. So after all of those costs are paid, there will not be much rent left over. Even worse, you may even find that you don’t have enough rent to cover all of these costs. So the trick to being successful in renting single family homes is to make sure that the rents you can charge on your home is going to be more than the costs of keeping your home.
Multi family homes
Multi family properties are more expensive and less common than single family properties. But renting multi family properties produces more cash flow than single family properties. The reason is because multi family properties have better scale. Instead of just being able to rent to one family as would be the case with a single family home, you could rent to two or more families with one multi family property. Additionally, your costs per unit would be smaller because all of the units in the multi family property share the same heating, water system, and so forth.
If money was not an issue and I could choose to pick between buying a single family home and a multi family home, I would pick a multi family home. The choice is simple: you get better monthly cash flow with a multi family property.
Rent to Own
If you can only afford to purchase a single family home and want to have more monthly cash flow than you can get from simply renting it out, you could choose to make money from it using the rent to own strategy. With this strategy, you lease your home to tenants who plan on purchasing the home from you after a few years at an agreed upon price. The type of people you would rent your home to under the rent to own strategy are aspiring home owners who are unable to immediately qualify for a mortgage. Not only can you charge the tenants above market rents with the rent to own strategy, the tenants are also usually responsible for the home’s upkeep and maintenance. The tenants are motivated to maintain the home because they plan on buying the home from you.
Leasing the home from you allows these tenants to secure the home they want to own and gives them time to secure financing. To acquire the privilege of being able to purchase the home from you at a set price, the tenants pay a non refundable deposit.
There are two challenges with the rent to own strategy. The first challenge is that the tenants could decide to not purchase the property. And the second challenge is that the market may not support the purchase price that the tenants agreed to pay. If the tenants do decide to not purchase your home, they would forfeit the rents they paid for the property along with the deposit.
Thus far, we have only looked at real estate investment strategies involving purchasing residential properties. But buildings are not just places for people to live; they are also places of business.
Investing in commercial properties has several advantages over investing in residential properties. Firstly, commercial tenants tend to pay higher rents and are responsible for more of the expenses associated with the property. Unlike residential tenants, commercial tenants usually pay for all of the utilities and property taxes alongside the rent they need to pay to the owner of the commercial building. Secondly, commercial tenants also tend to pay for any improvements on the property they need for their particular businesses. And thirdly, the turnover of commercial tenants is less than that of residential tenants.
However, there are also several challenges with investing in commercial buildings. Investing in commercial properties typically requires more capital than investing in single-family homes. Commercial properties are more likely to become vacant during economic downturns, as the recent economic hardship caused by COVID-19 has shown.
Most of us are familiar with how mortgages from the bank work. In exchange for lending you the money to purchase a piece of property, the bank collects interest payments from you and also has the right to take ownership of the property away from you if you default on your mortgage payments.
What is less known to people is that you as real estate investors can also lend out money to people in the form of a mortgage. That’s right: you can act as the bank and provide mortgages to people. We typically refer to mortgages provided by individuals as private mortgages.
I personally love private mortgages because I don’t need to deal with any of the headaches of managing a property. No toilets, tenants, or trash. Moreover, you do not need a lot of capital to use this strategy. For instance, imagine a borrower who needs 30 thousand dollars but for whatever reason is unable to obtain a loan from the bank. At that point, this borrower would have no choice but to turn to alternative lenders like you. So if you have 30 thousand dollars and you are confident that this borrower has sufficient equity in his/her home, you can lend money to this borrower. And if the borrower defaults on your private mortgage, you get to take possession of his/her home just like the bank would.
Tax Deeds and Liens
Investing in tax deeds and tax lien certificates is something which is primarily done in the US. However, people from around the world are able to invest in tax deeds and liens so do not be put off by this real estate investment strategy simply because you are not an American citizen or live in the US.
Both tax deeds and liens are ways which the American municipal governments ensure that their citizens pay their property taxes. Naturally, municipal governments want to collect the delinquent property tax because property taxes are a big source of city revenue.
Suppose there is an American homeowner who has not paid property tax for a few years. If the homeowner lives in a city which belongs to a “tax deed state”, the city has the legal right to take possession of the home owner’s property and sell it in a public auction. Because the city is solely interested in getting back their property taxes, minimum bids for these properties can start as low as a few thousand dollars. Therefore, savvy real estate investors participating in these auctions could purchase real estate at huge discounts from market values. Furthermore, these auctions are very often online which means that anyone from around the world can purchase these properties.
If the homeowner instead lives in a “tax lien” state, the city can place a lien on the home, meaning that the homeowner cannot sell the home without first paying the outstanding property taxes. But issuing a lien does not usually result in the homeowner scrambling to pay off the taxes. So the municipal government auctions off the lien to investors. Bids are typically based on how much interest the investor would like to receive from purchasing the tax lien. The investor then pays the municipal government an amount equivalent to the delinquent tax in exchange for owning the tax lien. In effect, the winning investor has paid the outstanding taxes to the city in exchange for a tax lien. When the homeowner finally pays off the property tax, he or she must also pay a late interest penalty on top of the delinquent tax. Because the investor has the lien, the municipal government gives the delinquent tax plus penalties to the investor. So the investor gets back the money he/she paid to purchase the tax lien and made a profit from receiving the penalty. If the homeowner never pays the property tax, the city gives the investor ownership of the home.
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