Warning : Speculation in Real Estate Can Be A Potentional Trainwreck

How To Invest In Real Estate

In discussing exit strategies with clients, one of the topics that comes up over and over again is investing in real estate. Real estate is one of my favorite investments simply because it is difficult to get the return of 20% or more in any other investment. In particular, that includes the stock market which looks sexy but usually does not provide the returns for most of my clients.

Many people think that investing in real estate is buying raw land and holding. That method is pure speculation but not a bad way to go if you have the excess funds already. Another way to do it is to buy and flip houses. But you had better be very good at it and know your market and your houses. I have seen more people burned than succeed.

1. Rent to Own. An alternate method is called Rent to Own. The profit per transaction can average over $20,000 per sale. This method reduces your exposure and works even better in a down market like we are experiencing in 2008 due to the lack of financing available for homebuyers for first homes.

2. Use Houses in Good Condition. This method buys homes in good condition, which are then rented to a potential buyer who pays a down payment that may be forfeited if they do not complete the transaction. The purchase must occur in two years or less.

3. Give Credit Toward Down Payment. The transaction is arranged to give the renter credit for some portion of the rent against the down payment of the house. The renter builds their credit during the time they are renting and at the end of the period should qualify for a new loan. The best idea is to have a mortgage broker/credit counselor working with them from the beginning.

The house is priced to sell at a profit during the two-year period and the rent is set higher than a normal rental in the area. The higher rent allows for the credit against the down payment. The renter would be renting at normal rent and attempting to save a down payment otherwise.

This method places the investor in a position of being at a risk to find a rent to own buyer. But if the house does not sell, the benefit is the ability to do the transaction all over again. The best part is that both the investor and the renter win.