A few words for those starting out in real estate investment.
Before you engage in real estate investment, You have some choices to make and you have to have a strategy. Get a piece of paper or start your word processor and list your objectives. What do you want to accomplish? What are your investment goals?
If you want to buy property and sell it for a short-time profit, you will look at properties differently, than if you have a buy and hold strategy. If you don’t have a real estate investment strategy, you are headed for trouble.
A person with a buy and hold strategy will pay a lot of attention to the cost to maintain the property, the interest rate of the financing and the property taxes. All these factors as well as vacancy rate and loss of rental income seriously effect the cash flow of your real estate investment.
A person with a buy and sell strategy, looks for a bargain or for a property that they can add value. If you buy a house and fix it up, you added value. You can add value by adding bathroom, bedroom or a garage. Closing costs to purchase the property and the costs to resell the property are of more concern to a buy and sell strategy person. The interest rate is of less importantence if you don't keep the property.
Make your profit when you buy the property, not when you sell!
If you are a real estate investor, you must think of yourself as if you were running a retail business. A retail business buys inventory at wholesale prices and sells or leases the inventory to the general public at retail prices for a profit. Your real estate investment business must work the same if you are going to succeed. I can not overemphasize the importance of making a good purchase.
Here is the danger. If you pay too much, (retail price) for a property, you may be able to rent it for break-even or a small monthly profit, but if you have an emergency, you can’t sell it for a profit. You are faced with a loss, because, you have no exit strategy. If you pay $80,000 for an $80,000 property and you need to sell quickly, you are stuck or you are going to take a loss. If you pay $80,000 for a property that is worth $110,000, you can sell it tomorrow for $90,000. Do you understand? It doesn’t matter if your strategy is buy and hold or buy and sell; you have to be able to make a profit immediately after the purchase. Even if your strategy is buy and hold, the $110,000 house will bring in better tenants and more cash per month.
Many times in the course of selling real estate, a buyer has asked me, is this a good house? My answer is always the same. They are all good if they are cheap enough.
Let us examine the buy and sell strategy. It is a simple strategy, just buy low and sell high. You have to talk to a lot of people and find someone that really needs to sell or owns excess property that they don’t have time to maintain. A disillusioned landlord is an excellent person to buy from as well as estates, divorces, and foreclosures, ect. Sometimes you can get a good deal at real estate auctions. Sometimes a property will sell for more than its retail value at an auction.
The buy and hold real estate investment strategy assumes that you are going to either rent the property or live in the property. A very good buy and hold strategy for the beginner is to buy a property for less than the market value, move in the property for at least two years and then sell it and purchase another at a discount. You can leverage yourself up to a very expensive house in just a few years. At the present time, if you occupy the property as your primary residence, for two years or more, you do not incur capital gains tax when you sell. After you have moved through a couple of properties, you have enough equity in your home to finance the purchase of another property to rent or sell. This is an excellent way to begin.
There are other strategies that give amazing rates of return, but this page is for the beginner, so I will just mention a few. If you purchase an option on a property, you can resell the option or the property for a profit. If you resell the property, do a simultaneous closing on your purchase from the seller and the new owner’s purchase from you.
You can make a lot of money by dividing properties in to smaller pieces or sometimes by buying small properties and selling them together. If there is a house with a large yard in your area for sale, you may be able to purchase it and sell a couple of building lots off the property. If there are a number of small houses or lots on a high traffic corner, you may be able to purchase them individually and then sell them as a whole to a business.
The most important thing to do is, go to the library and get some books. Read everything you can about real estate investment. Buy some books, if your library doesn’t have much.
Knowledge with Action is power.
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