Believe it or not, real estate is one of the best investments to be made. Rarely is there any other solid investment that increases (historically) on average 3 to 5% per year; which may not sound like much, but if you consider the volatility of other investments (such as stocks, hedge funds, etc.), real estate on average is a pretty safe bet.
“But wait!” You are thinking out loud. “My home lost X amount of dollars in the past few years. WHADDYA MEAN it’s a safe bet?”
Again, go back to the 3-5% increase module. In the past decade (Especially the first half of the last decade) real estate prices were inflated through a series of speculative deals made between lenders and the stock market as well as certain lenders unscrupulously practicing bad business by giving money to unqualified buyers through sub-prime loans. This is a simplified explanation, and only a part of the overall problem that led to economic woes a few years ago, but you get the idea. Basically, some people found out what was perceived to be an easy way to make lots of money, and unfortunately too many people didn’t see the warning signs.
Understandably, if your home isn’t worth what it was a few years ago, this is simply the market correcting itself.
So now let’s talk investment properties. There are many facets to investment properties and ways to make money from the purchase of real estate. Here are a few:
Purchase a second home and rent it out.
Many property owners do this, and it’s one of the most common ways to work toward building your portfolio. You purchase a home, rent it at a price that will cover your costs as well as provide you with positive cash flow, no problem. There are pros and cons to this method. Pros, of course, are that while you are renting your property and (hopefully) making positive cash flow, over time your property will increase in equity. The cons may lie in finding and keeping qualified renters. Another issue to consider is that interest rates for properties that you will not be occupying (IE: You’re not living there, you’ll be renting it out) may be higher than in a conventional mortgage loan. Contact me with questions about non-owner-occupied property loans.
Purchase a house, and “flip” it.
To “flip” a property means that you are purchasing a property for a certain price, and as soon as possible after escrow closes, you’re selling it (hopefully) at a higher price. A few years ago when home prices were increasing as much as 50% per year in some parts of the country (I know, CRAZY, huh?) this was an easy way to make lots of money fast. In many cases, the home increased substantially in value even before escrow closed, so the buyer could turn around and sell the property before their first mortgage payment was due.
It’s not quite that easy in today’s market, although there are still opportunities to make a profit from turning around a property that you just purchased. In some cases, short sale or bank-owned properties may be offered at less than Fair Market Value, although in most cases, not by much.
Usually if you’re going to find a “deal” it means finding a home that is discounted for a specific reason. Mostly, homes are discounted substantially due to deferred maintenance or they are flat out in dire need of serious rehabilitation. If you’re considering this route, you need to know the numbers PRIOR to making any offer on a property. This means evaluating the property’s damage and accurately estimating the cost of repair and rehabilitation AND making sure there is still a profit left over once you sell the house. This method of profiting from an investment property is something you should only try after you gain as much insight as possible. It means networking with other investors to learn the potential pitfalls of such an investment, and knowing which contractors to trust to get any repairs and rehabilitation done in a timely fashion. Yes, time IS money in this case, and the longer your house is sitting waiting for repairs before you can list it, the more money you’re losing through mortgage payments, etc.
If you have questions about investment properties, I have the answers. Contact me at any time for a free, no obligation investment property consultation.
Keller Williams VIP Properties
25124 Springfield Court Suite 100
Valencia CA 91355
Toll Free: 800-891-6415