About a quarter of all homes sold in the United States over the last five years were purchased as investment properties. Surprising? Not really when you consider the historical high returns and price increases. Although today’s real estate market is depressed, there are still profits to be made with investment properties.
One real estate investment strategy that has been wildly publicized in the last five years is ‘flipping’. The concept behind flipping is that you buy a property, make it look nicer, and sell it quickly for a profit. A disadvantage to flipping is that because of the short ownership period, you do not get to enjoy the tax incentives or capital appreciation. In today’s market, an investor must be very careful when buying a flip property. You need to make sure you are buying in a good neighborhood at a very attractive price. Gone are the days where you ask just about any price and get it. Today’s flippers must buy smart, renovate smart and on budget in order to turn a profit.
Another real estate investment strategy is to buy a rental property. In this case, your gains will come from tax write offs and property appreciation. When considering a rental property, you must evaluate the property’s CAP (capitalization) rate. This is obtained by dividing the annual costs from the net annual rental income. The higher the CAP rate, the better the investment.
Foreclosures are also a popular investment option. These are more risky investments and require substantial cash. When an owner is no longer able to make payments on a mortgage, the lender has the right to sell the asset i.e. property to cover the loan.
Foreclosures are often similar to flips in that the homes often need renovations and updating. In this case as well, crunching the numbers at the beginning to determine if the home is a viable investment is vital. While you can pick up a home at a discount when it is under foreclosure, be prepared for delays and some red tape.
Some real estate investors specialize in abandoned properties. The potential for good money is there but you may have to navigate through some legalities before you can become the new property owner. In the case of a foreclosure, the property title is usually clear. The title is reclaimed by the lender as part of the foreclosure process. However, with abandoned properties, title ownership may be unclear. You should factor in the additional time and money that will be involved in researching the title and the possible additional legal costs.
A final option is available to real estate investors, real estate papers. These are mortgage backed securities, Real Estate Investment Trusts (REITs), property bonds, mutual funds, etc. With the right financial advice, you could make a lot of money on real estate investment papers and not worry about owning a property outright.
Regardless of the option you choose, investing in real estate is exciting and can be very profitable. Even in today’s market. With some careful planning, good legal and financial advice and the right property, you too can become a successful real estate investor.
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