My brother and I have been competing with one another since we were kids. We fought for our parents’ attention, attended rival colleges, and chose careers with high earning potential in an effort to beat each other to retirement. So when he told me he was quitting his corporate job to become a real estate investor like me, I was sure we were in for another bout in the ring. Instead, he surprised me when he said he was more interested in formulating a real estate investment strategy that mirrored my own. He wanted to emulate my success, not compete against it, and needed my help.
I explained that every successful investment strategy begins with the endgame in mind. Succeeding in real estate is all about the numbers. To accurately calculate those numbers, you’ve got to know your exit strategy for a property—and its projected earning power—before you buy. The plan you choose impacts the returns you can expect, as well as when to expect them. Wanting to give my brother a smooth entry into the investment game, I suggested we start with the most common exit plays.
Which Real Estate Investment Strategy is Right for You?
It’s important to understand the most common real estate investment strategies investors use because they each affect how you evaluate deals differently. Analyzing a property’s potential return on investment requires deciding if you’re in it for the short or long haul, then planning accordingly. Let’s examine these strategies closely so that you can choose what to do with a property wisely.
Wholesale. Wholesaling a property entails buying it as cheaply as possible, then assigning it to another buyer at a higher price before closing escrow. With the exception of some REO’s, as long as the terms of the contract are upheld, a new buyer—the assignee—can take over a transaction without issue. For investors inexperienced with buying and renovating a property, then renting or selling it, wholesaling is seen as a quick way to turn a profit and build capital. Aside from your initial deposit, your investment is minimal and is reimbursed by the new buyer. You don’t have to take on loans, do inspections, hire contractors, search for tenants, or anything else associated with property ownership. All you have to do is find a buyer before you close.
Wholesaling, however, is not a get rich quick scheme. Profit margins tend to be tight—typically less than $10,000—and sometimes leave no room for a real estate agent’s commission. So it takes a lot of wholesale deals to make a living. Another challenge is finding both sellers and buyers. By the time distressed homes for sale are listed, competition has skyrocketed and the chances of buying them cheap enough to wholesale have fallen. And getting the “in” on off-market properties takes time. So does building a network of other investors. Additionally, finding sellers and buyers is acting as a real estate agent in some states, which means you have to have a license. So, while wholesaling can be a short-term strategy for pocketing a few bucks fast, proceed with caution and don’t expect to make it to retirement anytime soon.
Buy-and-hold. The buy and hold strategy involves purchasing a property, making any necessary repairs, then selling it at a much later date, if at all, when the market—and the value of the house—appreciates. In the meantime, the majority of investors will rent the house out at a premium to cover the mortgage, utilities, maintenance, and any taxes, as well as to create positive cash flow. Having a reliable, steady stream of passive real estate income each month, with an eye towards reaping bigger rewards down the line, is what makes this strategy so attractive.
Keep in mind, though, that this model is based on the assumption that, all things being equal, the real estate market will be strong when you want—or need–—to sell. If the market takes a dip, as it invariably does, or crashes outright, you may lose a lot more than money. You’ll also have to take on the responsibilities of a landlord unless you can afford to outsource the management of your property. This includes knowing local tenant laws, finding good renters, handling the maintenance, dealing with evictions, and meeting monthly expenses whether it’s occupied or not. The time to appreciation can be lengthy, which is why buy-and-holds are a long-term game plan.
Buy-and-sell. Oftentimes, when investors find fixer-upper homes for sale, they’ll choose to buy, renovate, and sell quickly to take advantage of rising property values. This strategy offers the possibility of realizing relatively fast returns, but at much higher profit margins than wholesales. It’s also typically less risky than sticking with buy-and-holds because significant market shifts don’t usually occur within the short timeframe the property is owned. Additionally, there are fewer monthly bills to contend with, no tenants to worry about, and little-to-no maintenance needed while the property is in your possession. Buy-and-sells are a strong choice for building a solid real estate portfolio.
Of course, remember to buy your investment property at a price that leaves room for the rehab and a realistic ROI when you sell. It’s also imperative that you confirm there are no complications that might prevent or delay a quick and profitable sale, like structural issues, title liens, or zoning restrictions. Be prepared to budget for transaction costs on the buying and selling side, in addition to any accrued finance or interest charges, as well. Finally, rehabs can take some time to become skilled at. But as you do, you’ll probably find that the potentially fast turnarounds and higher returns will make them one of your favorite investment strategies.
Deciding on one of these exit strategies is a key component to performing a real estate investment analysis on a property and determining if it’s a good deal. So is having a great set of tools to help you accurately calculate your costs and potential ROI. Without them, your numbers may not add up. With them, and the right team behind you, you stand a chance of creating a very successful business for yourself.
The Right Strategy Every Time
Like my brother, when I entered real estate investing I realized that finding the best strategy for building my portfolio was the main goal right out of the gate. I found that strategy by becoming an independently owned and operated HomeVestors® franchisee. HomeVestors® franchisees have access to ValueChek®, a proprietary valuation tool designed to estimate renovation costs and forecast potential returns for a property that you intend to sell. In addition, the HomeVestors marketing campaign focused on its nationally-recognized trademark, “We Buy Ugly Houses®” is an unbeatable qualified lead generator. Soon after joining the HomeVestors family, my brother agreed. It’s about time.
If you’re ready to get ahead of the competition, give HomeVestors a call about a franchise opportunity today.
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