Leverage: Most investors finance their real estate through mortgage leverage where a substantial portion of the finance needed to purchase a property is borrowed from a mortgage bank with the property serving as the collateral. The amount borrowed is referred to as the leverage, while the smaller portion financed by the investor with his cash is called equity.
This is one of the most unique features of real estate market that gives investors the boldness to engage in the business. Unlike in other investment markets where you have to pay the full price of the stock value, in real estate, you can leverage your investment capital with as little as 5% down payment.
Rental properties: This is the oldest strategy of real estate investing. It involves the purchase, management and rental of real estate to tenants who will be paying the investor a monthly rent. The investor is responsible for the maintenance and payments of taxes and mortgages for the property. After offsetting the mortgage, most of the rent becomes profit and the value of the property will continue to appreciate.
The downside of this type of real estate investing is that you may be unlucky to end up with a bad tenant who damages your property or is unable to pay the monthly rent. This will make it difficult for you to pay off your mortgage on time and may eventually leaves you with a negative monthly cash flow.
Real estate flipping: This is the real estate version of stock trading. Flipping a real estate is the purchase of a property with the intention of selling it for profit within the possible shortest time. The holding period is sometimes less than five months. Real estate flippers don’t rent out and they don’t maintain a property. What this means is that they should be able to sell their real estate as soon as they are purchased in order to realize enough money to pay off their mortgage and to make profit as well. This group of investors doesn’t usually have enough cash at hand to offset their mortgage loan unless they sell their property.
The practice here is to buy an undervalued property or a high – in – demand property so as to sell fast and make a maximum profit. In some cases, an investor can add more value to the property to attract more buyers or he can leave it the way it is, depending on the type of property. Some properties, if modified lose their value and therefore cannot be sold easily while others, modification enhance their value.
The downside of this type of real estate investment however is that when an investor finds it difficult to get buyers, offsetting the mortgage loan becomes a big problem and this may lead to litigation and eventual seizure of the property by the mortgage bank. The investor loses money at the end.
Real estate investment group: This strategy is suitable for those investors that don’t want the hassles of everyday management of their properties. Real estate investment group serves as a mutual fund company where they will build blocks of apartments and sell them to investors who will in turn rent them out to tenants; one investor can buy more than one apartment. The REIG will be responsible for the management and maintenance of the property, including advertising for vacancies and admitting tenants. They make their money by collecting a certain percentage of the monthly rent of the tenants.
This strategy may be considered the safest way to invest in real estate.
