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July 13th, 2010 1:58 PM by David W. Welch
As I see it, there are basically three strategies for investing in real estate. There are many different variations, and tactics for employing these strategies, but they all boil down to these three. The first, is the bread and butter of real estate investment and in some ways has less risk and somewhat lower returns. The buy and hold for the income stream strategy is somewhat like purchasing bonds as an investment. You buy solid properties in good areas that will produce a somewhat predictable income stream. A lot of residential investment properties can work with this strategy, so you don't have to narrow your search as much. I generally recommend this tried and true approach to new real estate investors. You basically look for the same type of properties you may look for in a home. The key is to have a good expectation of what the rents will be for they type of property you are looking for. You should also have a good idea what type of return you expect from your investment.
The second strategy for investing in real estate focuses more on the potential for capital appreciation. I equate this to purchasing value stocks and investments. You have to be a lot more particular about the properties you consider for this strategy, because you are making your money by purchasing at the right price. This particular strategy, I believe involves a bit more risk although it tends to be a shorter term strategy than the buy and hold. In this particular strategy, the investor may feel like a particular property or area is undervalued. They may feel like values in a particular area may go up faster than others because of some changes in the area. The key with this strategy is to at least try to cover your holding costs with the rent, otherwise any potential appreciation could be eaten up.
The third strategy is probably closest to the leverage buyout or hostile takeover in the stock market. This is usually the shortest term, highest potential for returns and highest risk of the three. Flips and rehabs fall into this strategy. The keys to success here involve knowing what the property will be worth after the rehab, and understanding what your costs are going to be. If you know what the home will cost and what you can realistically re-sell it for, then the difference will be your profit. This is the most common misstep of would be investors. They know what the costs a going to be, then they add the profit they want to make on top of those costs to come up with a price. I have seen homes in $80,000 neighborhoods for sale for $100,000 with new carpet, paint and appliances being sold by investors that purchased the properties last month for $50,000 to $60,000. They are into these properties for $65,000 to $75,000 and trying to make a killing on them. Even if they get them under contract, and many do, the likelihood of them appraising is slim. Know what your costs are and what the likely sales price will be, then decide if the return is worth the risk.
David Welch Real Estate Optimist, Orlando Real Estate