Real Estate Investing Basics

    For those who are looking for something a little more concrete than other investment products, real estate investing can be a fun, fascinating, and wealth-building option. However, you can’t become a real estate investor just because you’ve watched a lot of HGTV or even because you know the local market well. It’s one thing to find a bargain when looking for your personal residence. It’s quite another to find one that makes financial sense when factoring in renovation and carrying costs.

    There are a number of options for real estate investing that can provide you with the opportunity to invest the way you want to. Whether you’re looking for a hands-on option with opportunities to manage the details or whether you are looking to parlay your real estate smarts into a broader, more collective investment opportunity, there is a branch of real estate investment that will work for you.

    Fix and Flip: This is probably the real estate investment track you are familiar with if you watch a lot of television. Find a fixer upper, bring in a crew, make some improvements to add value (usually with one major surprise repair before the second commercial), hold an open house and sell for profit. Lather, rinse, repeat.

    Fix and Flip can be a great option, but the biggest thing to consider with this type of investment is the budgetary bottom line. If you don’t get a great deal on your purchase, or if you get a little crazy during the renovation, you can end up eating up your profit very quickly. Carrying costs can get out of hand if you have construction delays or if you don’t price right on the resale. If you are just starting out in fix and flip, it pays to work with a mentor in order to have some help staying on track and flipping quickly.

    Note: Some Flippers do not renovate for added value at all, but rely on predicting market movement or buying significantly under-valued properties and depending on the market to eventually come through with a Buyer. The profit margin in this case is entirely dependent on the quality of the initial deal and the length of time it takes to sell.

    Buy and Hold: This is the opposite of Fix and Flip, where instead of renovating for quick sale you hold the property and rent it out. If you have landlord dreams (or know a good property manager) Buy and Hold might be right for you.

    Buy and Hold’s biggest challenge comes with long-term cost vs. profit margin. You have to make sure that you are charging rent sufficient to cover your monthly mortgage, property management, and expenses which could include HOA fees and some utilities, depending on the practice of your local market. In addition, you are on the hook for repairs and upkeep, so you have to make sure you have sufficient insurance and affordable repair options. Finally, your budget can be blown if you have a few months without a tenant or if you have someone damage the property.

    How do you know whether a property is better for Fix and Flip or Buy and Hold? Generally, a Fix and Flip is great in a market where you can ensure a quick renovation and a hot market with enough demand to ensure a fast resale. Buy and Hold is great for markets with long-term built-in value and a large pool of reliable renters. Areas near universities and military bases tend to be particularly valuable for Buy and Hold investors.

    Real Estate Investment Groups: If you are looking to get into real estate investment without the responsibility falling on you alone, you might enjoy participating in an investment group. Such groups pool their resources and buy a block of apartments or condos. The company running the group maintains the property and the financial responsibility falls on the group as a whole. This way, financial setbacks are shared, just as profits are, and you don’t get middle of the night plumbing emergency calls. Keep in mind, however, your financial upside is only as good as the company running the group, so get good references before investing.

    Is real estate investing part of your long-term financial plan, or maybe even a hobby you’d like to explore? Let us help with deep market knowledge, up-to-the-minute listings, assistance with property management and more. Sign in at our website and let one of our Eng Garcia Grant Realtors help you get started on your investor-friendly home search. We’re here to help you meet your goals!

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