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In this section the following topics are going to be covered.
Property Flipping
Rental Properties
If you would like to see some of the other popular strategies leave a comment below.
Property Flipping
This can be one of the most lucrative of real estate investment strategies. The goal of a property flipper is to buy a house at a discount to what they believe the true market value is. Taking in consideration the local housing market, neighborhood, and comparing sales of recent homes. They take this house that generally needs major and minor home repair work to be done to it, and spend money on fixing it up in hopes of getting a return on this investment.
Here the steps of property flipping.
Step One:
Find a property suitable for flipping in your area. This can usually be done by checking out the foreclosure markets, getting to know a few real estate agents as well as mortgage brokers. With the economy where it is at currently in 2008 there are a flood of foreclosures on the market as well as some seriously anxious and motivated home sellers.
Note: Currently many houses throughout the country are severely overpriced even when buying in foreclosure as the bank has to recoup a mortgage they never should have made.
Step Two:
This site is dedicated to young professionals, and with that in mind we are going to briefly cover how to finance your flip. If this is your first purchase and you plan on flipping it check out my tips on finance in the Owner Section. The basics on an investment property is that you generally need 10 to 20% down in order to make the purchase with all parties knowing it is a investment property. You should have this much equity in your first home that you can tap through an equity line or refinance of your current home. The tricky part is that you are going to need some cash as part of any transaction. If you have picked the right property you may be able to put a standard amount down and then instantly go after an equity loan on the new property to pay for the improvements. This is an ideal situation for an investor as you can possible take the down payment out of your current equity, then borrow against the property you are buying to pay for the improvements or get the improvements included in the loan. This is also the step where you should have as complete a list of improvements to be made as well as a budget and timeframe.
Note: It would probably be wise to take a little extra from either loan so you have enough cash to cover payments for several months in case you run into renovation problems or you are not able to sell quick enough because you really don’t want to go belly up.
Step Three:
If you have ever seen one of those Flip That House shows on television they make it look like renovating a kitchen or a bathroom is easy. It is not easy by any means. If you have are going to tackle this project you either need to have hands on experience in one of the trades or have an excellent knowledge of what is good work. Getting burned by contractors is easy if you do not know what quality work is. Read books, what shows, go to Home Depot, basically do whatever you need to do to learn as much as possible on your first house. Try your best to follow your list, budget and timeframe. Remember, the longer it takes the larger a risk you are taking.
Step Four:
Put the house on the market, hopefully you will get the offer you want within the timeframe you need to make this venture profitable. The key to becoming a successful flipper is in the planning stage and now that it is said and done the reflection stage. You really need to sit down with your accountant or tax professional and now figure out what you really made on the house after income taxes. This is the step they never talk about on television, yeah they made a $35,000 profit in four months of work but after taxes they made like $22,000 over four months and put in a ton of work.
Rental Properties
Being a young professional often makes you look at the short term rather than the long. Considering the power of owning rental properties you really need to consider the long term advantages of owning rental property.
A traditional method to building up a rental property portfolio for a young professional would go something like this.
Buy your first home that you intend to live in or rent out several years down the road.
Build up equity in your first home through paying down the mortgage and making home improvements.
Take out equity or use savings to purchase another property with the intent on renting it out.
While doing this you make sure that the house can rent for more than the mortgage and utilities that you will be responsible for. The goal is to at least break even or make some money every month. Ideally you would have equity already in the property you buy if you buy it correctly.
So you find a good tenant (good credit and a 1-2 year lease). This tenant now proceeds to build up your equity in the property by paying down the mortgage on the property.
Once this property has enough equity to borrow against, you can purchase another property and you go about the task all over again.
If you do this correctly you will start to see your income and net worth start to climb as well. For example if you purchased 1 rental property per year for the next ten years, assuming you are now in your late 30’s early 40’s maybe. Having 10 rental properties with equity you probably have just gained close to a million dollars in net worth if you average $100,000 in equity on each of the 10 properties.
Note* The major downside to owning rental properties is dealing with tenant property issues. I strongly advise you get a property manager for a fee, for example many charge 10% of the rent and cost of the repairs. It’s okay to manage the first couple yourself but the headaches and phone calls will probably drive you nuts.
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