Whether you’re looking to buy your first investment property, or your tenth, it’s always a great time to expand your portfolio and invest in your future! Right now we’re experiencing interest rates near historic lows, there’s lots of capital available to investors, and our local economy continues to perform extremely well. All of these factors create a tremendous opportunity for you, the real estate investor. For those that are unfamiliar with real estate investing, we’re going to give you a quick breakdown of the three basic strategies that most investors use.
Before diving in, there’s one thing we want to emphasize: This is an INVESTMENT property, not a personal home for your family. This is not a purchase that should have much, if any, emotional element – it should be driven by your goals and the numbers. Try to remove as much emotion, and personal style/preference, as possible and you’re far more likely to make a wise investment.
Now that we’ve defined our mission, let’s discuss those three basic investing strategies. The main strategies we’ll discuss today are “Buy and Hold”, “Fix and Flip” and “Private Lending”. Each option has pros and cons – there’s no right answer – but hopefully we can give you some insight to help choose which is best for you and your goals.
Buy and Hold
Did you know that over 50% of millionaires made their fortune through real estate? And most others have real estate holdings in their portfolio. Many of these millionaire investors are everyday people that realized the opportunity that real estate presents. It’s very tough to find another investment vehicle that, over the long term, provides the benefits and return on investment that real estate can offer.
Buying and holding onto a property long-term as a rental is the ultimate “get rich slow” scheme. Many investors only look at one aspect of rental properties – cash flow – but there are a number of other advantages as well.
- Income – As mentioned above, many investors are looking for a property to produce cash flow (money in their pocket) every month. While it’s important your properties don’t lose money, this shouldn’t always be the #1 criteria to look at.
- Appreciation – This is the property’s value increasing over time. The real estate market in Northern VA (and DC Metro in general) has seen great appreciation for decades and looks to continue that trend.
- Leverage – Unless you buy stocks on margin (very risky gamble!), no other investment allows you to leverage like real estate. For example, you can put 25% down payment, borrow 75% from the bank, and own 100% of the asset and benefits.
- Equity Paydown – That monthly mortgage payment partially goes towards paying down the loan balance. Your tenants will actually pay down your mortgage over time so you have more equity in the property every month.
- Depreciation – The government wants you to buy property! There are numerous tax advantages, but a big one is depreciation. Every year, you can actually write off a percentage of the property value as a loss on your taxes. Other tax benefits include writing off interest payments and repairs. Consult your tax advisor to see how these affect you!
Try to determine which of these benefits is most important to you and prioritize those when searching for your investment property. While you don’t want a property to “lose” money every month, it might actually still make sense depending on your tax situation. If you want a “safe” investment, maybe you won’t use much or any leverage (loans). Maybe a long term appreciation play makes sense so you might pay a little more in an area that’s experiencing strong growth.
There are a lot of advantages to buying and holding property long-term, and some pitfalls, so make sure you do your research and talk to a few professionals (Realtor, tax advisor, property manager, etc) before fully jumping in.
Fix and Flip
This investment strategy is what most people think of real estate investors doing, thanks to HGTV and other “home makeover” shows. Using this strategy, the investor buys a rundown or outdated house for a good price, renovates the property and then resells it immediately. This is a much more active and involved investment strategy, but can lead to greater short term gains than a rental property.
A quick word of caution: this is NOT a passive real estate investing method. You’ll need to find and purchase the property, coordinate and handle contractors, pay bills and draws, and likely be involved in the property on a nearly day to day basis. This is also a much riskier strategy than a long-term hold and usually not the best starting point for a complete novice.
If you have the money, and the time, for a fix and flip property then the first thing you’ll need to do is determine where to invest and the property criteria you want to focus on.
For this strategy you don’t only need a great agent experienced working with investors on your side, but also a dependable and high-quality contractor. So much of your success hinges on your contractor, that finding the right one is just as important as finding the right property. Don’t be afraid to interview multiple contractors and get multiple bids. And if you don’t know a good contractor, our team can provide you with some recommendations that we use and trust on a regular basis.
This investment strategy, in essence, is that you become the bank. Instead of purchasing real estate yourself, you lend money to other investors and it’s secured by the underlying real estate asset. While most private lending is short-term, you can also find buy and hold investors that can offer a steady return over time.
This strategy is for investors that have a lot of cash on hand and want steady/reliable returns, but don’t want the hassle of buying, selling, renovating or managing real estate investments on an active basis. Private lending is about as passively as you can invest, but you can also make some very strong, safe and guaranteed returns.
If you’re interested in exploring this strategy, feel free to reach out and we can offer some guidance or even connect you with local investors to work with directly.
Hopefully this quick guide showed you that real estate investing can be extremely lucrative, no matter which strategy fits best with your lifestyle and goals. If you’re thinking about investing in real estate – or already are and want to expand your network – please don’t hesitate to reach out to our team of experienced agents. We’ll help you through the entire process!