The Three Most Common Ways Investors Make Money
There are a multitude of ways to make money in real estate. Here are the three most common that I and my clients are the most familiar with:
- Buy, Fix, Rent, and Hold – Usually segmented by market.
- Buy, Fix, and Flip – Usually for short term gain.
- Buy, Fix and Sell via Land Contract or Owner Financing – A hybrid of the first two approaches.
Buy and Hold
When I started buying rental properties, I really did not have a strategy beyond purchasing what I considered middle-market properties that commanded average to above average rents at the time. My goal was to buy in established working class neighborhoods. I was not looking to buy and rent low-end properties nor was I looking to buy and rent high-end properties. I was able to finance my first few properties with 20% down at a local bank as these properties were in good condition at the time of purchase.
A short while later, when my first partner and I started buying together, we had even less of strategy. We simply bought everything we could with bank financing and as little of our own money as possible. As you already know this ended badly, but I digress. The bulk of my portfolio today consists of paid off, or soon to be paid off, properties that I rent out for the long term. I like the annuity-like cash flow these properties provide.
Buy and Flip
Around 2006, another partner and I found a sweet spot where we could buy foreclosed properties on the open market inexpensively. We would then have them repaired to the standard suitable for FHA or VA financing, and then list and sell them through my brokerage.
Our strategy here was to buy anything that we thought would yield us a profit of at least $20,000. This worked for quite a while and may be a viable strategy where you are today. When the market began to cool in 2007 and 2008, we could no longer easily sell our houses outright, so, we began offering our houses for rent.
Buy and Sell Land Contract or Offer Seller Financing
Buying a home, rehabbing it if necessary and then selling it to a willing and able buyer via land contract or seller financing is a fantastic strategy in an appreciating market. Selling houses via land contract makes less sense in a stable market or an economic environment where property values are falling. Here are the Wikipedia definitions of Seller Financing and Land Contract which give pretty good explanations.
One Way These Deals Can Be Structured
Seller financing or land contract deals are often structured so that the payments are based on a long term amortization schedule. For instance, a buyer will make monthly principle and interest payments based on a 30 year mortgage. They also generally require the balance of the loan to be paid back as a balloon payment in say two to five years. On or before the date the balloon payment is due, the buyer will presumably obtain a traditional mortgage and ‘cash’ the seller out.
In an appreciating market the likelihood of a successful cash out to the investor is very high. In a stable or depreciating market there is the chance that the property will not appraise at the agreed upon price and the sale will fall apart or at best have to be restructured.
How Everyone Involved Can Win
The advantage of selling houses this way in an appreciating market is primarily because all parties stand a great chance of coming out ahead on the deal. The investor is able to sell the home at an anticipated two or three year value based on the current appreciation trend. The buyer is able to get into a new home today even though he may not be credit worthy in the eyes of a mortgage broker.
A great deal is structured so that everybody benefits from market appreciation. A smart investor will structure a deal so that there is a good chance the buyer’s ultimate cash out price at the end of the term is somewhat below market. When that happens, everybody involved wins.
A Great Market Right Now For These Deals
I have created a business plan for investors interested in buying, rehabbing and selling houses via land contract in Melbourne and Palm Bay, Florida – The Space Coast area of Florida. The population of the Space Coast is exploding, mainly due to the growth of the aerospace industry. Values are steadily increasing, and many new arrivals need a seller financing opportunity because they are two or three years away from qualifying for a mortgage on their own.
3 Ways to Learn More
- If you would like a free download of my E-Book called Investing in the Space Coast of Florida, you can download it here:
2) For more information about the ROOST Landlord Advantage™, click here:
3) Are you interested in diving deeper into your personal mindsets and motivations as a real estate investor? Set aside 15 minutes and complete the Making Real Estate Work Mindset Scorecard. You will get instant results and insights to your own personal views about real estate investing you may not even be aware of.
As an added bonus, once you complete the scorecard you will receive a free book called Your Broker Profitability Mindset Scorecard – 8 Real Estate Career Mindsets