The best investment strategy is one that balances the risks with the rewards, and the degree of risk-taking would depend on the investors’ endgame. Real estate is one of the more stable investment vehicles regardless of your goals because it is backed by real property. Property values may fluctuate due to different factors, but there are distinct advantages of investing in real estate that show why every investment portfolio should include real estate assets and bank owned properties.
Advantages of Investing in Real Estate
Property values appreciate
According to the National Association of Realtors, property values appreciated by an average of 6.4 percent from 1968 up to 2004 when the recession started. The growth of property values flattened and declined in the succeeding years but have since recovered to meet or exceed pre-recession levels.
Easy access to credit using the property as collateral
Mortgage loans allow home buyers to use borrowed funds to finance their purchases and renovation projects.
Equity buildup increases portfolio value
Property improvements and rising property values in general builds equity that can be leveraged to access more funds to use on new investments.
Profits on real estate transactions may be deferred
A 1031 exchange allows real estate investors to defer any tax payments on profits from a property being sold by transferring said profits to a new property being purchased.
Investment Strategies for Real Estate Investors
There are various investment channels when it comes to real estate, but two strategies are most popular among beginners and experienced investors regardless. The first strategy is buy and hold, which is the traditional system familiar to all of us. This is a long-term investment strategy where you purchase a property at the best price possible and immediately undertake the necessary improvements to ensure that the property meets or exceeds building codes and leasing standards. The primary goals of buy-and-hold investors include:
- Generating consistent rental income from the property
- Maximizing net profit through efficient property management
- Ensuring property appreciation through judicious maintenance and management
- Identifying an optimal exit strategy where the investment can be liquidated to access accrued equity, the proceeds of which can be rolled over to a new asset.
The second investment strategy is referred to as fix and flip, which is one that has become more popular as various television shows have capitalized on public interest in this short-term strategy. The best properties to consider for a fix-and-flip are often sold for less due to being in some stage of foreclosure and for being in a less-than perfect condition. These are the main considerations to ensure maximum profitability as a house flipper:
- Access to cash or quick financing as foreclosure properties may be cash-only transactions requiring quick closing.
- Immediate access to cash, construction loans and other resources needed to complete a rehab project at the shortest time possible. Properties requiring extensive renovations may be excluded from your shortlist of potential fix and flip targets.
- Access to a marketing network to ensure quick disposition as soon as the property is ready to sell.
Rewards and Challenges of a Buy-and-hold Investor
When it comes to your real estate portfolio, a long-term strategy is considered a surefire way to build wealth. Buy-and-hold investors gain rent income while holding on to a property that could be appreciating in value due to improvements, effective management and external factors that contribute to rising property values. There may also be tax advantages to owning income-generating property, including business expense deductions for most maintenance costs and other operational expenses. Additionally, real estate is something that can be left to heirs or deeded to a good cause to create a lasting legacy.
The biggest drawback of the buy-and-hold strategy would be property management. Not everyone has the time or the patience to be a landlord. Marketing, tenant selection and retention while ensuring efficient property maintenance requires full-time commitment especially under the following circumstances:
- Investor does not live near the property.
- The multi-unit property requires the attention of a property manager at all hours.
- The tenant turnover rate is high, which may be the case for student and faculty housing.
- The property is used as a legal short-term rental, which may be the case for vacation homes and similar rentals.
Rewards and Challenges for a Fix-and-flip Investor
Fix and flip investors thrive in a fast-paced environment. The target properties for flippers are typically deeply discounted, which means that under the best circumstances, investors can expect significant profits from the transaction. Furthermore, these profits will be realized as soon as the property is sold, which may be within a year from purchase for some properties. This gives investors a chance to reinvest in new properties and realign investment goals as necessary.
Holding real estate assets for a short period is a disadvantage if your investment plan counts on building up equity as property values increase over the years. Short-term increases in property values are not usually as significant as long-term appreciation, and it is impossible to time the market to sell at the highest point. As a flipper, you need to have your financial resources in a row to cover acquisition, renovation and marketing costs. Traditional loans are not usually available for buying distressed properties, and applying for construction loans will take time, which will increase holding costs for investors.
Market Influences to Consider
Opting for a long-term or short-term strategy in building your investment portfolio is a personal decision. You should consider your investment goals, capital availability, your risk tolerance level and flexibility as it applies to your exit strategy.
It is also important to consider market influences and other factors that are out of your control.
- Real estate assets are not liquid especially when compared to stocks and bonds that can be disposed quickly.
- Real estate transactions are subject to the local demand and supply situation as well as availability of similar properties in the same price range.
- On the upside, housing market trends move more slowly, making it possible for short-term investors to take advantage of buying opportunities when prices trend downward and selling opportunities when prices are trending up.
- Finding properties that are suitable for flipping is not an easy task. How quickly you can complete a transaction will depend on price, condition of the property and type of ownership especially for distressed properties.
Auction.com is the largest online marketplace for distressed properties that are either bank-owned or in some stage of foreclosure. Whether you intend to hold the property as an income-generating asset or you plan to fix it for a quick flip, you will find a wealth of resources and listings that will help you establish and grow your investment portfolio. Find your next investment property by entering your preferred location here.
