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:
· 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.