Real Estate Investment Strategies
Real estate investors have a choice to buy raw land, commercial building, or invest in residential real estate. Raw land is a long term investment strategy for those that are either planning on developing the land into either commercial or residential real estate, or for those that are betting on future community sprawl. Either way, raw land is a long term investing strategy that produces zero cash flow during your hold time. Commercial real estate investing is obviously “sexy”, but identifying good commercial opportunities can be difficult for new investors. Plus the amount of due diligence and capital that is required to acquire commercial buildings makes investing in commercial really difficult to do when your a beginner.
Single family houses is what we focus on teaching here at CleverInvestor.com. Single family houses are the easiest for new investors to wrap their brains around, more affordable than commercial or raw land (in most cases), and appreciate the most historically. There are many different real estate investing strategies uses by new and experienced real estate investors trying to acquire single family houses. Below is a quick overview of each real estate investing strategy with links to more detailed pages that break down the “technical side” of implementing each strategy in your local market.
Wholesale Real Estate Investing
One of the easiest real estate investing strategies to learn and master is wholesaling real estate. The concept goes like this...you (the wholesaler) work with a motivated seller (distressed person or distressed property) and put their single family house under contract at a significant discount. Your contract will have special terminology that states you have the right to buy the property or assign your rights to buy the property to someone else! By contracting to buy a piece of real estate using either a Purchase & Sale Agreement, or an Option Agreement, you become a principal or party to the transaction. You immediately gain what is called “equitable rights” giving you the ability to re-market the property even though you are not a licensed real estate agent. At this point you simply market the property to other cash investors willing to buy the property at a discount. The difference between significant discount and discount is your profit as a wholesaler. Click here to learn more about Wholesale Real Estate Investing.
Many new and experienced real estate investors love to wholesale real estate because they can earn quick profits without taking on any risk or needing any money.
Creative Real Estate Investing
Buying or controlling houses using creative real estate investing strategies can be fun and most of all profitable. There are many ways to “skin a cat” and you are only limited by your creativity and local real estate laws when structuring deals. No money down real estate investing is absolutely possible by becoming a master at manipulating your real estate contract terms. Many investors purchase properties “subject to” the existing loan(s) which stay in the sellers name. In other words if a motivated seller has decent financing already in place, and they are extremely motivated to move, there is a way to structure a “terms” offer where you take over control of the property but leave the motivated sellers loan in place. You simply step in and start making payments. This technique is called Subject To investing or sometimes spelled Subject Too.
Other creative investors control real estate using Option Agreements. An Option agreement is simply an agreement that gives someone the right to buy a piece of real estate for a pre-determined price at some point in the future. Once a savvy investor records their Option it clouds title making it impossible for a seller to sell without first dealing with the investor that has the Option. Pair an Option with a Rental Agreement and you have a Lease Option. Lease Options are a great way to “arbitrage” a sellers situation and local market rents. Lease Options allow you to rent with an option to buy if the market value of the property increases in value.
Take this concept on step further. Imagine working with a motivated seller that allows you to rent their property below normal market rental rates plus gives you an Option to purchase the property within the next few years for less than current market value of the property. At this point you would have a Lease with an Option! Couldn’t you simply go out into the world and find someone else willing to rent the property for normal market rental rates and Option the property from
you for more than the Option you have with the original motivated seller? This is called a “Sandwich Lease Option” and you get to keep the difference between the rents you promised the original motivated seller, and your new tenants plus you get to keep the profit once your tenants exercise their Option and buy the property for more than you promised to pay the original motivated seller!
Let’s now forget about Wrap Around Mortgages. According to Wikipedia.com, a wrap-around mortgage, more-commonly known as a "wrap", is a form of secondary financing for the purchase of real property. The seller extends to the buyer a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property.
Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing
Another form of creative real estate investing is the formation of real estate notes. If you have a lot of capital, and do not want to deal with tenants and toilets, a great way to earn passive income from real estate is by becoming the bank. This is done when a savvy investor creates a real estate note secured by a property. This can be done when lending private money to another investor, or when you “carry the paper” and do some seller financing to a qualified buyer. Also, many investors buy and sell notes just like a wholesaler buys and sells properties. Notes can be controlled by a contract and purchased at a significant discount. You could simply control the note, re-market it to another note buyer and earn a nice little fee for “bird dogging” and finding a good deal.
Buying, Fixing, & Flipping Houses For Profit
Buy, Fix, & Flip, if don properly, can be one of the most fun ways to invest in real estate. Seeing a property transform from “dud” to “stud” is rewarding, but even more importantly, buying low, fixing a property up, and selling high can make an investor a lot of quick profits. Systems are the key to becoming a successful flipper so having the right education can help you avoid many costly mistakes. This is one investing strategy where having a good mentor really comes in handy. You don’t need to know anything about construction to become a successful fix and flipper, but you do need to have the right power team members in place that understand and can align themselves with an investors viewpoint.
Buying, Fixing, and Keeping Properties As Rentals
Want to build real wealth? Owning rentals is the quintessential example of what most people think of when they think of investing in real estate. If done properly, a good landlord can earn solid monthly cash flow while taking advantage of someone else paying down their financing. Plus if the market appreciates they can make even more money over time. Buy, Fix, and Hold can even be done with little to none of your own money if you structure a partnership with someone that is willing to put up the money but does not want to do any of the work. A savvy investor can put in “sweat equity” and earn their portion of the deal overtime. Also many smart investors raise private money which allows them to buy discounted properties quickly, fix them up, and turn them into rentals. The private money lender earns a nice guaranteed return just like a banker would, has their money secured by the property itself, and you the investor get to own a rental property using little to none of your own money!
No matter what real estate investing strategy you choose to focus on, with the right power team in your corner, you CAN become financially free through investing in real estate!