Dean Graziosi

There are many theories about how to succeed in real estate investment.  There are high-risk strategies, low risk strategies, new-age theories and proven strategies.  As we have advocated in numerous articles, every investor needs to define their own strategy.

We recommend one of three well-tested strategies.  If the property or properties you are considering do not fit into one of these categories, you may want to reconsider your purchase.  Again, the key to successful real estate investment is to have a plan and pursue it unemotionally and consistently.

The three most consistent strategies are:

·                     Buy-the-bargain

·                     Increase-the-value

·                     Double-digit capitalization rate

If you are purchasing in order to profit, figure out which of these options fits your personality, abilities and budget and stick with your business plan.  One purchasing concept applies to all these strategies and that is that you must always buy right. 

Buying right is the name of the game with the buy-the-bargain plan.  In today’s real estate market, this strategy has some risk because turning the property over quickly or flipping it is no easy task.  While we can find plenty of opportunities to purchase at 20% or more below fair market value, we may end up holding the property because of oversupply.  To use the buy-the-bargain strategy today, the investor needs to be confident that a tenant can be found until such time as the shadow inventory clears.  Today, buy-the-bargain investors only consider purchasing at 30-40% below market value.

Increase-the-value is a solid investment strategy, especially appetizing to the handyman or investors who can make improvements.  The idea is to buy well below value and tailor cost-effective improvements that will raise the value.  In today’s labor market, there is a plentiful supply of affordable handymen.

The double-digit-capitalization rate is all about the numbers.  The formula for success is easy.  The capitalization rate is determined by taking the net operating income, or rent minus operating expenses exclusive of debt service, and dividing that net income by the purchase price.  Experiment with this formula and you will see that achieving a double-digit cap rate is not as easy as you think.  That is exactly what makes it a great strategy.    

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Fixer uppers, sometimes known as rehabs and junkers, are common investments in today’s real estate market.  If you are wondering why they are such popular investments, there are several reasons.  First of all, there is a serious abundance, and I mean a huge abundance of distressed homes in today’s market and they are selling for pennies on the dollar.  Secondly, with the economy being so poor, the bottom line is that cheaper homes are easier to buy.  People are in need of low cost homes, and this makes fixer uppers and rehabs an easy sell.  But buyer beware, this doesn’t mean that all fixer uppers are a wise investment. 

First of all, the vast majority of fixer uppers are located in low income, economically distressed areas of town.  Most of these homes have a much higher investment risk simply because they are in less than ideal neighborhoods, and they do not appreciate in value.  If you are a newbie investor, you may be wise to at least stay out of the worst areas of town.  The reason for this is because as a newbie investor you don’t really know a good deal when you see one and overpaying for a junker will sink you!

Keep in mind that it is a buyer’s market and you can demand your terms and prices.  If you cannot negotiate the price or terms you want, it is best to walk away.  For example, if you find an owner willing to owner finance the property for you; it would be in your best interest to try to negotiate an interest free purchase.  With so many distressed homes on the market, you should NEVER settle for poor terms when you can easily find what you want elsewhere.  If the seller wants to get rid of their property badly enough, they will meet your terms!

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People usually think of buying and selling when they think of buying real estate for profit but one of the most lucrative markets to invest in is rental properties. They provide long term residual income rather than a short term windfall. In general there is far less risk involved in buying rental properties.
Management
One of the key elements you will have to decide on if you think about purchasing rental real estate is how you will manage your property. If you just have one multi-unit building you may wish to completely handle the management of the property yourself. If your building is a larger one, and you do not have a great deal of handy-man skills and do not want to be calling contractors to handle every leak, clog, or patch up you can offer one of the units as a free rent for service to a skilled handy man. Keep in mind complicated repairs will still probably require hiring a contractor, but you can have some assurance that immediate needs can be met quickly and still handle the rest of the management yourself.
If you are considering owning more than one property hiring a property manager begins to make more sense and also frees up your time for other ventures.
Cash Realities
The cash flow of a rental property is more than just the value of its available units vs. its cost. Make sure there is enough income from the property to cover the expenses of utilities, taxes, legal fees you will encounter during the transaction and while you own the building as well as insurance.
Leverage
Owning rental properties accumulates equity that can give you valuable leverage when looking for loans for other real estate investments. That makes your rental property even more valuable than the actual income it represents. Owning rental property is one of the most secure methods of starting a portfolio and gives you a solid ‘hands on’ asset that very few other forms of investment can provide.

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