Property Investment Strategies
There are many Property Investment Strategies and I have tried to cover the most frequently used ones on this post below.
Buy & Hold:
Buy & Hold is probably the most popular strategy and most new real estate investors start with this strategy. Why? Well it is easy to understand. You buy an investment property and you rent it out and hold the property for the long-term. Remember this is not buy, hold and pray strategy. So you have to buy well. If you don’t know how to analyse a residential property then read my post on Real Estate Investment Analysis – Residential. Investors using the buy and hold strategy typically buy multiple properties one at a time to build a portfolio.
Advantages of Buy & Hold Strategy:
- Monthly mortgage pay down
- Monthly equity increase due to mortgage pay down
- Potential for long-term price gain
- Monthly cash flow, if any
- Good tax benefits and no short-term tax impact unlike the flip strategy
Flip:
Flipping is where an experienced property investor buys a property below it’s market value and sells it for a profit in a short time period. The time period varies between 1 – 6 months depending on market conditions and weather the investor is doing any rehab or renovation. Time is critical in flipping as an investor using the Flip strategy always looks to reduce his holding costs such as monthly interest charges, taxes, utility bills and maintenance. The quicker the investor can get out of the deal the more profit he or she makes. Flipping is not passive income unlike the ‘Buy & Hold Strategy’. The day you stop flipping is the day that income stream stops. If executed well this strategy can produce large income in a short time period.
There is a rule called the 70% rule associated with flipping. Lets look at an example – lets say a property is worth $100,000 in good shape but it needs $20,000 in repairs. The 70% rule says an investor will try to buy this property for $50,000 (100,000 x 70% – 20,000) and sell it for the original market price of $100,000 after repairs. This is just an example to give you an idea of a typical flip.
Disadvantages of Flipping:
- You need experience
- Time consuming
- You need the right market conditions. Flipping is hard to do when the market is going downwards.
- Unfavourable tax impact due to short-term gains
- Risk of rehab or renovation taking longer time period or higher costs
Wholesaling:
In wholesaling an investor starts by finding a great real estate deal and putting the deal under contract. Then finding a buyer for the deal and assigning the contract to the buyer. The buyer is typically another investor. In wholesaling you don’t actually own the property so there is no holding costs or closing costs as long as a buyer is found in a timely fashion.
Advantages of Wholesaling:
- Low start-up costs
- No holding or closing costs
Disadvantages of Wholesaling:
- Lower profits compared to flipping
- If a buyer is not found on time then the investor may have to purchase the property. If there are contingency clauses in the contract then the investor may be able to avoid fulfilling his/her contractual obligations.
Tax Liens:
If home owners don’t pay their property taxes in the US the local or state government can foreclose the property in order to collect on the unpaid taxes. A property with a lien cannot be sold or refinanced until the lien is removed by paying the back taxes.
Tax lien certificates can be bought by investors from the county where the property is located. Typically tax liens are either auctioned on a physical location or online. Investors will get either the cost of the tax lien certificate plus interest (interest can be anywhere between 10% to 20%) or can foreclose the property. Tax lien certificates are typically bought for $1,000’s of dollars.
Imagine if the tax lien is not paid off you can get a $100,000 worth property for merely $1,000’s. When I first read this I jumped off my seat but hold on, the opposite is also possible. Imagine you paid $10,000 for the tax lien certificate but the property is worthless either due to where it’s located; in a slum or the property has some environmental damage such as chemicals.
There are many rules governing this process that vary from state to state. Tax lien investing requires a lot of knowledge, research and experience so watch out.
Mortgage Notes:
Typically when someone can’t get a bank loan to buy a property due to bad credit they find a private investor to provide the mortgage. The investor can provide flexibility when reviewing the borrowers credit but will typically charge a higher interest rate to compensate for the risk. The investor in this case is acting as the bank. The investor can foreclose on the property if the borrower fails the mortgage commitments. Interest rates can vary between 8% to 15%. The good thing here for the investor is that the loan is backed by a property. Mortgage note investing requires a reasonable sum of money to start with. A good example would be above $50,000. Remember you are the bank here.
Conclusion:
I hope I have shown you some good property investment possibilities. A bank account giving you 5% interest is barely enough to keep up with inflation. You need to start investing. Look at the returns, anything less than 8% is simply not good enough to escape the rate race or your 9 to 5 life.
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