Real estate is generally considered a safe investment, as people will always need homes. And although the market may have its ups and downs, buying during a downturn gives you ample opportunity to invest into renovations and sell the home for a much larger price. However, it’s not the only valid strategy for real estate investment. There exist a variety of different ways that savvy investors can create returns on a real estate investment. So how can you turn your real estate purchase into a prime investment opportunity? Here are a few strategies that work quite well in generating returns – as well as some explanations of key investment concepts you’ll need to know.
Investing in real estate can pay off if done well, but it’s not easy. There are all sorts of critical mistakes that could cause your real estate investment to sour, including failing to understand property evaluations or underestimating expenses. Many buyers also underestimate the amount of money it costs to hold a real estate investment, or they don’t manage the investment properly. But one of the biggest reasons why investors fail to get a decent return on their property is that they simply don’t understand the real estate market cycle. No matter what investment strategy you choose to pursue, not understanding the market will inevitably lead you to make poor purchases. So how does the real estate market cycle work, and how can you use it to your advantage? The cycle generally works in five stages, and real estate markets are continuously moving from one to the next. During peak real estate periods, prices are at an all-time high. A great number of buyers are seeking out highly desirable properties, and with fewer owners willing to sell, it’s common to see several offers on the same property – even offers that are above the asking price. However, a peak market can’t stay a peak market for long. Eventually, the market hits a tipping point. Sellers find that their home values are decreasing, and many find they’re not able to sell because they owe more on their home than it is worth. Prices then continue to decline, with foreclosures cropping up quite often. Market conditions make buyers more reluctant to invest in real estate, and with an increase in supply and a decline in demand, prices come down. Eventually, prices bottom out. At this point, investors start buying up properties to get a great deal. As the market warms up and buyers become more confident, prices start to increase. Then the cycle repeats itself. The key to finding a great investment is to recognize what the real estate market is doing and respond accordingly. Ideally, you’ll want to start looking for a property when the market is in decline so that you can buy a property when prices bottom out.
House flipping is most common among single-family homes. Essentially, the investor buys a low-priced property, invests money into renovations, and sells the property for a profit. The general rule when buying a house to flip is to buy a home for 70% of its value on the current market (less rehab costs), renovate it, and sell it as soon as possible. For instance, a savvy flipper might buy a home for $50,000, invest $20,000 into renovations, and sell the home for $100,000 – earning a $30,000 profit. Flipping a home is a successful strategy when it’s done quickly. It’s important to renovate and sell the home as fast as possible in order to reduce carrying costs like monthly utility bills. Flipping is also an intensive strategy that requires work. Home flippers don’t earn money from their real estate when they’re not actively flipping a property.
Wholesale investors are unique in the investment market in that they never actually own any real estate, but instead, act as middlemen who find good deals for other buyers. A wholesale investor finds a good property for sale, puts the property under a contract, and sells the contract to another buyer. Wholesalers can make anywhere from $500 to $5,000 per home. Wholesalers typically sell to house flippers because house flippers typically pay cash. Wholesaling is a low-cost strategy that has become quite popular in recent years, but successful wholesalers have to work in order to find both inventory and buyers. It also requires a certain amount of capital in order to market properties for sale.
Raw land is exactly what it sounds like – a plot of land without a structure on it. Raw land investors can add structures or other features to increase the land’s value, or they can rent or lease the land for ongoing cash flow. Land can also be divided into sub-properties and sold. If development is happening nearby, it may predict a future increase in property values – which can entire buyers to snap up land.
A single-family home is typically the best kind of real estate investment for a beginner. Compared to other investments, getting financing for a single-family home is quite easy, as is finding a buyer if you choose to sell. Single-family homes are also easy to rent, as they offer great amenities for renters. However, single-family homes typically don’t rent for much money – and the monthly income on a single-family home may only cover expenses.
If you have some experience with real estate investments, investing in a multi-family unit is a great next step. Multi-family units are easy to buy and finance, like a single-family home, but offer several key advantages. Firstly, there’s less competition from other buyers. Secondly, it’s possible to collect multiple rents. Best of all, you only need one mortgage loan to secure all of the units on the property. And if you so choose, you can live in one of the units and rent the rest for cash flow.
A small apartment building – that is, one with 5 to 50 units – offers a significant cash flow opportunity. There is also less competition for small apartment buildings, as professional investment firms prefer larger buildings and novice investors prefer single homes. However, they are also much more difficult to finance compared to smaller units, because these investments are governed by commercial lending standards. It’s ideal for an experienced private investor who is willing to act as a property manager – or hire one. Some on-site managers may work in exchange for free rent These properties are priced based on the income they bring in, not on comparable sales. That means by increasing the rent, you can increase your profits.
Large apartment buildings are those that house 51 or more units. Most large apartments are home to several hundred people, and they generally offer communal amenities like gyms, pools, and full-time staff. Most large apartment buildings are owned by investor syndications – groups of investors who jointly buy properties. A large apartment building can cost several million dollars, but can also generate stable profits without very much personal involvement.
A Real Estate Investment Trust (or REIT) is an investment company that manages property for a large number of investors. The REIT investors contribute to a single fund, which the REIT uses to buy large properties like skyscrapers, shopping malls, apartment buildings, or planned communities. The REIT pays dividends to its investors on a regular schedule. REIT investing is one of the easiest forms of real estate investment, but the returns are generally lower than self-managed investments.
Commercial real estate is a great investment for those who can afford it. Commercial real estate comes in all kinds of shapes and sizes, but the one common thread that connects all commercial properties is that they are occupied by businesses. You can choose to rent your commercial buildings out to large international brands or small mom-and-pop businesses. The great advantage of investing in commercial real estate is that it provides consistent cash flow – when you lease to a business, you can usually count on the fact that they’ll be able to make their rent payments on time and in full. However, commercial real estate also brings some challenges. When vacancies occur, they generally last longer, as moving a business into or out of a building is more difficult than moving from one private home to another. Commercial properties can sit vacant for months or even years, which means you’ll need to have ample capital in order to weather vacancies. You’ll also need to hold onto the property for a much longer period of time in order to get the most out of your investment.
Mobile home investments offer a lot of flexibility. You can choose to either buy land that already has a mobile home on it, or buy a mobile home and place it on land you already own. Mobile home investors are also few and far between, meaning there’s less competition from other investors. Mobile homes typically sell for a smaller amount of money than other kinds of real estate, and they also have smaller carrying costs. Furthermore, mobile homes are generally considered a stable investment, even during economic downturns. They don’t gain value during economic upswings, but they also don’t lose value in a poor market. The key to investing in a mobile home, though, is to ensure you can find a suitable tenant. You need to know who your target tenant is. Mobile homes are designed to appeal to a very small slice of the real estate market: senior citizens who are selling their homes and want a smaller, less expensive place to live. With your ideal tenant in mind, you’ll have no problem turning a decent profit on a mobile home. If you don’t wish to be a landlord, though, you can also apply other real estate strategies - like wholesaling – to mobile homes, making a mobile home a flexible investment.
There are lots of different ways that you can get involved in real estate investment, and depending on what your goals are, some strategies and niches may or may not be suitable for you. For instance, if you tend to travel a lot, flipping a home may not be the best investment for you, as it requires you to dedicate a large amount of time and attention to it for the short term. For those who want a safe investment with minimal effort required, a REIT is an ideal strategy. And for an absolute beginner, a single-family home is typically the simplest real estate investment strategy available. Ultimately, it’s your own personal life circumstances and preferences that will dictate what kind of investment is best for you. Investing in real estate may seem like a complicated endeavour, but the dividends are worth the effort. And with a whole array of investment options to pursue, savvy investors have lots of different strategies to work with. After a few years, you may even decide to invest in multiple properties of different types – a great way to diversify your investment portfolio. But the real estate investment process starts with identifying a great investment property. That’s why you’ll want to talk with an Edmonton real estate agent about your investment goals. An experienced real estate agent can help you to find the ideal investment property and understand how real estate investment works. Are you ready to find your new investment property? We can help. Contact us today to learn more about real estate investing and start searching for a property that will generate great returns.
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