Top 5 Real Estate Investing Strategies for Beginners
It’s no secret that the real estate market has been on fire for the past several years. With record low inventory, historically low mortgage rates, and sky-high demand, properties are literally flying off the shelves. Many savvy investors have looked at these market conditions as a way to potentially cash in by purchasing properties with the idea of reselling them quickly for a significant profit.
Real estate investing itself is not a new concept, but the amount of people entering the market these days is far more than ever before. So, how do you get in on the action? Throughout this article, we will take you through some of the most common real estate investing strategies, show you what the risks are, and talk about the potential success you may find if you decide to invest in real estate.
Before you get started….
Real estate investing is not something you just decide to do on a whim. It is extremely important that you understand the risks involved and develop a personal plan of attack that includes short-term and long-term financial goals. The last thing you want to do is get in over your head and involved in something that is financially straining or something that you aren’t comfortable with. Talk to your financial advisor before making any decisions.
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Wholesaling can be a great way for beginners to get into real estate investing. What is wholesaling? Wholesaling real estate is a strategy where you (the investor) enter into a contract on a home with the intent to then turnaround and sell that contract to a new buyer/investor. Think of yourself as a middleman. Let’s look at an example…
- The owner of a distressed property is looking to sell but doesn’t have the means or time to sell it in a traditional manner. A wholesaler enters into a purchase contract with the seller for $200,000 with a 30-day close. The goal of the wholesaler is to sell the home to an interested buyer before the contract with the original homeowner closes. Let’s say that within a week, the wholesaler finds a new buyer that is willing to pay $225,000 for the home. From this, $200,000 would be used to satisfy the original contract with the homeowner and the wholesaler would keep the $25,000 difference as profit. The wholesaler never actually owns the home or puts any money down out of pocket.
In this example, the seller avoids having to pay for costly repairs or wait months on end to find a buyer the traditional route and is guaranteed a $200,000 payment for their home. The benefit to the wholesaler of course is that they are agreeing to pay the seller well below market value, allowing them to find a new buyer quickly and thus pocketing a potentially significant profit.
Wholesaling real estate is a great option for beginners because it requires very little upfront investment, leads to potentially large profits, and can be done relatively quickly.
2) House Flipping
Everyone who watches even a little bit of HGTV knows the general concept of house flipping. It seems simple enough. Buy a house that needs some work done for less than market value, perform the necessary improvements, and sell for more than what has been invested.
While it may seem simple, there are a lot of pitfalls and risks that come with flipping a house. As an investor, the cost of paying for and maintaining a property until it is flipped falls squarely on your shoulders. Financing costs, utilities, insurance, HOA fees, taxes, closing costs, and repair costs are all on you. That’s not to say that house flipping can’t be profitable, because if done right, it absolutely can be. It’s just to make you aware that it’s more than simply just buying, fixing, and selling.
Related: Realeflow Review: Everything you Need to Start Investing … Almost
There is a lot of strategy and planning that goes into house flipping, so make sure you do your research and map out as many scenarios as you can think of before diving in and purchasing a property.
3) Buy and Hold
This may be the most common form of real estate investing. The buy and hold strategy is simply the strategy of purchasing a property with the intent to own it for a long period of time while finding a tenant to provide rental income. This is a lower risk strategy then wholesaling or house flipping, but it also is far less profitable and can take years to recoup even your initial investment.
Buying and holding real estate is a great way to generate passive income while also holding onto an asset that will presumably increase in value over time.
Keep in mind that because you are holding onto the property for the long run, you are responsible for property management, maintenance, unoccupancy, and repairs. One bad tenant can be detrimental to your bottom line, so be thorough and selective in your search.
4) Lease to Own
Lease to own is essentially an offshoot of the buy and hold strategy. Instead of owning the property in perpetuity, you find a tenant who enters into a lease to own agreement that grants them the right to purchase the property at a future date. This can be beneficial in the short term because it provides the investor with reliable passive income, and it can also be beneficial in the long-term knowing that down the road, there will be someone willing to purchase the house.
5) Short Sales
A short sale is a real estate transaction where the property owner’s lender agrees to sell to a new buyer for less than what is owed by the original owner. This typically occurs when the original owner is underwater on their mortgage and the bank (or lender) is trying to offload the property before going into foreclosure.
Buying a short sale home can be a great way of purchasing a property dirt cheap. After purchasing, you have options of what to do next. You can make repairs and flip the home for market value. Or you could make it rentable and find reliable tenants to provide you with immediate passive income.
The hardest part about short sales is finding them. It’s a highly competitive market and knowing the right people and having relationships with lenders is extremely important.