Especially today, in real
state investment it is important to consider the various approaches and options.
Lee J Schneider reviews 6 real estate investment strategies unique for today.
1. Speculative
Purchase.
Perhaps the most common real estate investment strategy is also one with some of the most inherent risk: buying properties which the investor believes will increase in value due to market-wide appreciation. Unfortunately, this is in fact pure speculation. No one knows which areas will appreciate in value. Although many billions of dollars have been made by investors, they were simply lucky. Any many more have been unlucky and thus loose money.
Perhaps the most common real estate investment strategy is also one with some of the most inherent risk: buying properties which the investor believes will increase in value due to market-wide appreciation. Unfortunately, this is in fact pure speculation. No one knows which areas will appreciate in value. Although many billions of dollars have been made by investors, they were simply lucky. Any many more have been unlucky and thus loose money.
2. Bargain Real Estate Purchase.
Simply put, this is purchase of real estate for at least 20% or more below current market value.
Simply put, this is purchase of real estate for at least 20% or more below current market value.
3. Selective
Value Purchase.
Property using this strategy is purchased for its current market value but by selecting only ones with unrealized potential. Immediately after the purchase, any necessary changes are made to increase the value of the property. Generally, the property must increase in value by at least 20% within six months in order for the strategy to be worthwhile.
Property using this strategy is purchased for its current market value but by selecting only ones with unrealized potential. Immediately after the purchase, any necessary changes are made to increase the value of the property. Generally, the property must increase in value by at least 20% within six months in order for the strategy to be worthwhile.
4. High Yield Purchase.
Using this scenario, a building or home is purchased only if it has a capitalization rate of 10% or more. The capitalization rate is the net operating income or the rent minus operating expenses but before debt service, divided by the purchase price.
In other words, the cash-on-cash rate of return if the property was owned without a mortgage, free and clear. In the absence of a bargain purchase, double-digit rates are hard to find and generally only occur temporarily in depressed markets or in small market niches.
Using this scenario, a building or home is purchased only if it has a capitalization rate of 10% or more. The capitalization rate is the net operating income or the rent minus operating expenses but before debt service, divided by the purchase price.
In other words, the cash-on-cash rate of return if the property was owned without a mortgage, free and clear. In the absence of a bargain purchase, double-digit rates are hard to find and generally only occur temporarily in depressed markets or in small market niches.
5. Unethical
Purchase.
Unfortunately, this strategy is advocated by some. Here the goal is to find unsophisticated sellers and use a convoluted real estate transaction to take advantage of their lack of expertise.
These strategies are unethical, immoral, and often illegal. Thus, please do not use.
Unfortunately, this strategy is advocated by some. Here the goal is to find unsophisticated sellers and use a convoluted real estate transaction to take advantage of their lack of expertise.
These strategies are unethical, immoral, and often illegal. Thus, please do not use.
- Rental
Income Purchase.
Buying rental properties for the purpose of generating income, not equity, is a great option, and is explored further.
By updating and remodeling the properties, one is able to maximize rents, which in turn make the property profitable and valuable.
With rental properties, enough rent must be taken in to offset your PITI, or Principal Interest Taxes and Insurance.
It is best to buy a home that yields at least one thousand dollars in positive cash flow. Why? Because with every investment there is inherent risk.
In a rental situation, vacancies can occur at any time. Even though they are particularly low in some areas (such as Long Island, New York, and other East Coast cities), the need to find the right tenant could lead to several months of forced vacancy. This could be a great time to rehab or update the apartment or dwelling: i.e. painting, carpeting, flooring, fixtures, repairs, cleaning, landscaping etc.
Additionally, the possibility of an eviction looms large and could not only lead to several months of no income but the probability that renovation work will be needed. Pending the legality of your rental could lead to a neighbor’s rebuff of your renting and hence call the town to alert them of that fact. This in turn could lead to a larger problem suspending your tenancy indefinitely.
Regardless of the details, know that there will be some down time and that has to be calculated in any yearly profit projections.
Some landlords accept as little as $100 per month in positive cash flow in the hopes that they will capitalize on the equity they will build over the years. This was a sound strategy years ago, before the market and its players (banks, investors, Fannie Mae etc.) decided to treat real estate like a commodity. Currently, many homes are under water and to make a purchase on the hopes that you will inherit a windfall in 10 years is as risky as a stock purchase.
Perhaps once the real estate market fully corrects from the inordinate amount of foreclosures still needed to vet can we stabilize and think again of potential equity gains. Feel free to contact Lee J. Schneider for any addition information regarding these real estate investment strategies.
