The Real Estate Investment Strategies
Real Estate Investment Strategies
- Buying and Holding
- Types of Buy and Hold Real Estate
- Best Buy And Hold Real Estate Markets
- 80/20 Rule
- Fixing and Flipping
- THE ART OF FLIPPING
- Live-in and flip
- The 70 Percent Rule
- FOUR RULES FOR A SUCCESSFUL FIX-AND-FLIP
- THE ART OF FLIPPING
These exit strategies apply to every type of real estate asset class (residential, multifamily, apartments, commercial office space, industrial, and land). While your interest is presumably in fixing and flipping, I think it’s important to have a basic understanding of all three.
1. Buying and Holding
This is one of the most common real estate investment strategies, and it is widely considered one of the best ways to diversify any investment portfolio. The buy and hold real estate investment strategy is exactly what the name says; it is the strategy of buying an investment property with the intention of holding it for a long period of time- typically five years or more. So you’re not just purchasing, flipping, and immediately selling an investment property for a quick profit.
Types of Buy and Hold Real Estate
Rental properties come in all different shapes, sizes, and purposes. To make sure you’re making the most from your buy and hold real estate investment strategy, you should identify which type of property/ rental strategy you want.
Here are a couple of different types of income generating assets you can invest in using the buy and hold real estate investment strategy:
Multi Family Home
If you’re looking for more, a multifamily home is a great option for the buy and hold real estate investment strategy. A multifamily property is a building with more than one housing unit (2-4 units). They are pricier than a single family home, but because you’re renting multiple units to multiple tenants, you’ll be generating higher rental income. It’s great for strong cash flow and quickly building your investment portfolio.
Turnkey Real Estate
Investing in turnkey real estate is when you buy a move-in ready property, which already has professional property management and also usually has tenants already living in it. So everything is basically taken care of. You simply “turn the key” and have before you a strong investment property.
Commercial Real Estate
The buy and hold real estate investment strategy isn’t just about residential real estate. Investors can also purchase a property used for business purposes like an office building or retail store. However, commercial real estate investing could be a bit more complex, especially for beginners so research this strategy well.
Single Family Home
This is usually used with the traditional long term rental strategy; you invest in a normal house and rent it out to a tenant. Many beginners choose single family homes as a way to get a feel of the real estate investing industry. One rental unit and one tenant keep things simple.
Vacation Rental Property
The vacation rental market has been very strong recently. Investing in short term rentals is a great rental strategy if you choose the right market at the right time.
Best Buy And Hold Real Estate Markets
A key component to buy and hold real estate lies in an investor’s ability to choose the right market area. In order for a buy and hold property to be successful, investors must identify an area with a promising rental market and property appreciation. This will help minimize risks that could undermine the profitability of a given investment (namely, vacancy rates or property depreciation). Anyone considering buy and hold real estate should conduct a thorough market analysis before committing to one area.
According to a study published by RealWealth Network, there are a number of markets that present the above qualities. Here are some cities expected to offer promising opportunities for buy and hold investors:
Located in the “sun belt” of Florida, Orlando has numerous perks that have caused the population to grow in recent years. Even more importantly: these new residents are looking to rent and not buy. A recent study showed that the rental rate has risen over six percent in the last year, a climb that is projected to continue. The median sale price of a property is currently around $230,000, with an average monthly rent of about $1480.
Jacksonville, FL: With low property taxes, no state income tax, and a growing healthcare industry it’s no wonder three Florida cities made the list. Jacksonville is yet another destination for job seekers, tourists and retirees—making this a highly attractive option for buy and hold investors. The average home price is currently 15 percent below the national average, at around $189,000. The average monthly rent is between $1,200 and $1480, signalling potentially high profit margins to those who choose the right property.
Pittsburgh is currently seeing an increase in employment thanks to gains made in education, health, and STEM sectors of the local economy. Investors will be happy to know these increases have translated positively into the real estate industry. The median home price is around $141,000, with an average monthly rent of $1,100. Savvy investors may find this equates to sizable profit margins, in a short period of time.
This southern city has a median home price of around $158,000 and an average monthly rent of $1,075. Money Magazine recently named it one of the most affordable cities in the nation, making it attractive to both renters and investors. The Huntsville economy is most known for its space, defense and tech industries; each of which are contributing to a growing population.
Houston is yet another city on this list as a result of job growth and affordability. The median house price is 21 percent below the national average, at around $175,000; and the average monthly rental price is about $1,500. This signals a highly profitable market for buy and hold investors. Add in the 2.59 percent projected job growth, and Houston will likely remain a desirable market for the near future.
In recent years Cleveland has undergone what many researchers call a “brain gain.” That is, the city has seen an increase in residents with bachelor’s degrees. The impact this has had on the area reaches the job market and consequently the real estate market. Cleveland has seen population increases and an increase in job growth. The median home value is currently around $138,000; and the average monthly rent is right around $1,143.
Cincinnati is seeing big changes as a result of incoming millennial residents. The city is known for its manufacturing, retail and transportation industries, which have each contributed to the 2.06% job growth rate. The median home price is currently around $165,000. Buy and hold investors will find that these properties have high chances of appreciation as the metro area continues to grow.
The median home price in the Windy City is currently at $210,000, whereas average rents hover between $1,400 and $1,700. Many real estate investors find larger markets hard to break into—after all they can be known for low inventory and high competition. However, those who are able to do so in Chicago may find properties for sale as low as $130,000. Securing the right property could enable buy and hold investors to turn over large profits in this market area.
Believe it or not, Indianapolis is the second largest city in the midwest (after Chicago of course). The growing population is a result of a strong job market and an established education system. In fact, the Indianapolis job market is only projected to grow stronger as new technology and bioscience companies move and expand in the area. Investors will find the median price for a property is around $165,000 and the average rent hovers at .71 percent of the purchase price.
Tampa is the second most populated city in Florida and is expected to keep growing as the financial and healthcare industries expand in the area. Economists speculate that the job rate could increase to 42 percent over the next ten years. Not only is Tampa currently attracting new job seekers, but it also remains to be a popular tourist destination. Investors should know the median sale price is around $225,000, with some ideal investment properties coming in right around $150,000.
Kansas City, MO:
Kansas City is a strong pillar in the healthcare, manufacturing and automotive industries—with a job growth rate of around 1.67 percent. The city has seen an increase in rental demand as new talent moves to the area. The median home price is currently $162,000, with an average monthly rent of about $1,200.
In the late 1940s, quality control manager Dr. Joseph M. Juran documented a life-changing universal principle that he called the “vital few and trivial many.” The idea was that a relatively small percentage of your efforts lead to the vast majority of your results. He attributed some of his findings to the statistical work of the Italian economist Vilfredo Pareto, who had observed that 80 percent of the wealth in his country was owned by 20 percent of the population. As fate would have it, that broadly embraced principle came to be known not as Juran’s Law but as Pareto’s Principle. These days we simply call it the 80:20 Rule.
The idea that 20 percent of your actions lead to 80 percent of your results may be one of the most powerful principles you can apply to your life. It’s about getting the most from your time and effort. It’s about maximizing your results. It’s about having focus.
2. Fixing and Flipping
Finally, I made it to the good part. Here’s what a fix-and-flipper does:
- Buys low.
- Markets the property.
- Sells high
Easy right? Wrong. I believe that fixing and flipping is the most difficult of the three exit strategies. It requires the most cash, technical expertise, and market knowledge. Fix-and-flippers make their money when they buy, not when they sell. Buying low is the key.
TWO WAYS TO FLIP
You buy a low-priced fixer-upper, make some key improvements, and sell it for a profit.
- Live-in and flip:
You buy an underpriced property in good structural shape, spruce it up over time while you live there, and sell when the property value has increased.
Most investors go for the straight fix-and-flip—it’s what all the shows are about—and this chapter will focus mainly on this strategy. This is not an arena to enter casually (especially with gargantuan dogs like Zillow joining in), but it is possible to collect big profits with the right approach.
If you’re not in a rush, and the property you choose doesn’t have any issues that make it uninhabitable, the live-in and flip strategy may work better for you. Both strategies come with profit and loss potential, but you can tilt the odds in your favor by doing your homework before you buy.
The 70 Percent Rule
To limit the financial downside while maximizing your profit potential when you flip a house, you need to know your costs before you buy a property. To start, you need to know how much the property is really worth so you don’t end up overpaying. Then, you need a realistic estimate of the repairs and renovations the property needs to be attractive for buyers. Armed with that information, you can calculate the perfect price for your flip property by using the 70 percent rule.
The 70 percent rule is a guideline to help real estate investors make the best deals. According to this rule, the purchase price shouldn’t be more than 70 percent of the after-repair value (ARV, how much the house should sell for after all the repairs are made) minus the total cost of those repairs.
Buy low, sell low—that’s what real estate wholesalers do. I got my start as a wholesaler in 2002. Armed with a list of homeowners in foreclosure, I would knock on 60–80 doors a weekend. If I found a distressed seller willing to sell me their house at a steep discount, I would get it under contract. Before the deal closed, I would find a cash buyer for the house.
Then I would do what is known in the business as a “double closing” or “simultaneous closing.” The distressed seller, my buyer, and I would all sign on the same day. Therefore, I didn’t need any of my own money. This technique allowed me to sell multiple homes at a time for a modest profit (around $3–$5K per deal) without much cash.