Real estate investing is an attractive wealth-building strategy for many people. There are many different directions that you can go in, from fix and flip to buy and hold. With so many investment strategies, it can be difficult for new investors to know what direction is right for them. In this article, we will explore some of the more popular real estate investment strategies that may be right for investors just starting out.
BUY AND HOLD:
With a buy and hold strategy, the investor finds a property to purchase and hold for rental income and long-term appreciation. This allows for a steady cash flow (assuming the property is rented out) and passive income. There may also be some tax benefits associated with the buy and hold strategy. Mortgage interest, property tax, insurance, depreciation, and other property related expenses can be deducted.
However, you would have to take on the role of landlord and would be responsible for property management responsibilities. This would include property maintenance, tenant management, and rent collection, and you would be subject to additional legal and regulatory requirements. With any investment strategy, there are always market risks to keep in mind. Changes in supply and demand or local market conditions can impact property values and rental demand.
For vacation rentals, the investor rents out owned properties on a short-term basis for vacations and temporary stays. There is potential for a higher income compared to long-term rentals due to higher average nightly rates. Seasonal demand in tourist markets may also result in higher-than-average rates during peak vacation season. You also have more control over minimum and maximum stays, allowing you to better control occupancy. Rates can be adjusted according to market demand, meaning you can optimize your revenue and adapt to recent market trends. Long-term, you may also be able to make gains when it’s time for you to sell the property due to the desirable location and a strong tourism market.
But you can’t rely on the income to be there 12 months out of the year. Expect seasonal fluctuations and demand that varies year to year or season to season. There may also be additional operating expenses (think cleaning expenses and more maintenance requirements). You should also be aware of regulatory restrictions since zoning requirements and definitions may vary by location.
FIX AND FLIP:
Fix and flip is a good strategy for those who are hands-on and like a project. The process involves finding a property that needs updates and fixing, doing the necessary repairs, and selling at a profit. There is the opportunity for large profits to be made since the property is being bought at a discounted price, improvements are completed on the property, and then selling the property at a higher price point than purchased. If you are a more creative/hands on person, it is an opportunity for you to use your skills, knowledge, and creativity for a fulfilling and engaging investment. It will also be a short holding period, meaning quick turnaround and quick profit.
But you should be aware that as you start getting into the project you may start uncovering bigger issues that need more work and time to complete, leaving you with a higher-than-expected renovation cost, and resulting in less profit. The market also has the potential to be unpredictable, meaning you could be guaranteed a quick sale when you buy it, but by the time the project is done, it could be sitting on the market for a little while, costing you more and cutting into your profit.
REAL ESTATE DEVELOPMENT:
Real estate development involves the purchase of land or existing properties to build, renovate, or convert into new projects with the intention to sell or lease completed properties. Projects that meet market demand and are well executed have the potential to result in high financial returns and high profits. You also have control of the entire project, from acquisition to renovation/conversion, design, and marketing. Through this process, you will also be able to create value through improvements and functionality of properties.
However, there is the requirement for significant upfront capital, and it will be necessary to secure financing for land, construction, and permit costs. It can also be a complex and time-consuming process, and the project’s success is dependent on being able to sell or lease the property when done. Market risks should also be considered. Supply, demand, competition, and change in the economy and market shifts can all impact the project and result in less financial gains.
With portfolio building, the investor acquires and builds a portfolio of properties over time. The properties may vary in location or type of real estate. Overall, the goal is to build a collection of properties that provide cash flow, value appreciation, and long-term wealth accumulation. You will be able to easily diversify investments across various locations, properties, and market segments. There is also the benefit of some protection against inflation. As inflation increases, property values and rent increase.
Before you decide on building your portfolio out, be aware that this strategy requires significant capital, can be expensive, and you will need funds for closing costs, own payments, and any renovations. It may also be necessary for you to take on management responsibilities, which would take time and resources. There is also a risk with financing and interest rates. Interest rates may fluctuate, costing you more money in the long run.
For wholesaling, investors identify properties to secure under contract and assign or sell the property to another investor without taking ownership of the property. With this strategy, there are minimal capital requirements with little to no upfront capital investments. It’s a good opportunity for new investors to learn the ropes and understand market dynamics, develop negotiating and deal finding skills without significant financial commitment.
However, potential profit is very limited since you act as the middleman in the deal. The process requires marketing and lead generation to find the properties and potential buyers. Wholesaling may also have complex legal and contractual requirements. This means you need to understand local regulations and be able to draft appropriate contracts for the property. Failure to do so may result in disputes with the sellers, buyers, or any other parties involved in the process.
Determining which investment strategy is right for you is an important step in achieving financial goals and building your long-term wealth. Remember that there is no one size fits all strategy, so what works for someone else might not necessarily be right for you, and that’s okay. Be sure to weigh all the pros and cons of each strategy you are considering, and you’ll find the one that’s right for you.
When you decide on your perfect real estate investment strategy, Bridge Loan Network’s software is available to help you keep all your lending files and information organized and secure. If you are interested in learning more, sign up for a demo today!