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Posted almost 5 years ago

The Three Most Common Ways to Invest in Real Estate

Investing in Real Estate is one of the best ways you can accumulate wealth. After all, most millionaires have become so through owning real estate. If you want to invest in real estate, you should know what your options are to get started. In this article you will learn the three most common ways investors make a TON of money in real estate. The Buy and Hold method can provide cash flow each month but it may not fund your next deal if you do not own a mid-to-large sized portfolio. The Fix and Flip and Wholesaling methods can provide you with a lump sum of cash but if you are not working, you are not making money. Utilizing a combination of the methods below is the best way to build your wealth.

Buy and Hold (Passive Investing)

Buy and Hold investing is the purchase of rental property to hold for a period of time to receive monthly cash flow. This method of investing is known as passive investing because you do not have to actively do anything to get cash flow besides pay the cost associated with the acquisition of the property. The bottom line is that monthly income should exceed monthly expenses to get any sort of return on your initial investment.

Advantages:

  • High Returns – Higher return potential and easier to analyze than stocks and bonds.
  • Appreciation – Over time real estate value will always go up (Areas with lower home values and increasing populations tend to appreciate more than those in sought after area).
  • Tax Benefits - Provides the most tax advantages of all real estate investing methods (Many tax deductions and write-offs) and you pay the lowest tax percentage because it is passive income.

Disadvantages:

  • Rent Collection – Horrible renters can discourage first-time investors. You may have to evict a tenant which can potentially cost you thousands (Unpaid rent, legal fees, court fees, etc.).
  • Poor Property Management Company – Your property manager may not live up to your expectations and can cost you as much money as a horrible tenant if they do not show diligence and care for your property.
  • Maintenance Cost – You may occur a huge capital expenditure expense (Roof, HVAC, electrical, plumbing, foundation issue).

Fix and Flip (Active Investing)

Fix and Flip investing will provide you with a large sum of cash to build your capital (cash) to fund your next deal. This method requires you to purchase a property for x amount then rehabilitating the property to sell it for a higher amount than the money you invested. To be successful you need to know how to analyze properties, create a scope of work, maintain a great team, estimate rehab cost, etc.

Advantages:

  • Fast Money – Potential for huge profits in a short amount of time (A few weeks to a couple months).
  • Forced Appreciation – This can occur by rehabilitating the property, also know as value add, where improvements on the property can force the values up (Adding additional bedrooms, updating kitchen, updating bathrooms, adding square footage to the property, etc).
  • Gain Experience – You will always be learning; real estate investing contains many variables and moving parts.

Disadvantages:

  • High Tax – Highest tax percentage of all real estate investing methods due to capital gains
  • Unanticipated Expenses and Outcomes – Fix and flip investing is complicated; you need to know what you are doing so you do not lose money.
  • Stress – This can come from a combination of things associated with acquiring the property, disposition, anticipating cost, dealing with contractors, meeting deadlines, etc.

Wholesaling

Wholesaling is similar to the Fix and Flip method except you are not purchasing the property for value-add opportunities to make a profit. You are simply either buying a property for x amount then reselling for an amount higher than what you initially purchased the property for or you are assigning the contract to someone else for a fee. Many people may argue that wholesaling real estate is both illegal and unethical because wholesalers can take advantage of uniformed sellers. This is a great way to get started in real estate investing with little to no capital.

Advantages:

  • Less Resources Needed – Credit is not involved and cash is not required
  • Fast Money – Potential for huge profits in a short amount of time (You generally get a fee for assigning your contract with the sellers to another individual).
  • Education – Allows you to immerse yourself in the industry and learn without needing monetary resources.

Disadvantages:

  • No Guaranteed Income – You are your own boss so you are responsible for finding wholesale leads off-market. Finding these properties are difficult so many wholesalers do not make money.
  • Lack of Organization – Great organization skills are a necessary for staying on top of solid lists of contracts and potential buyers; You need to maintain a database of contacts and documents.
  • Inability to Find a Buyer – The key to being successful as a wholesaler is to find potential buyers. These buyers will either purchase the property from you or pay you a fee for assigning the contract over to them.


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