Real Estate Investment Strategy

Real estate investing is serious business and can provide you with substantial returns to support a lavish lifestyle. However, you need to develop an investment strategy suitable to your individual budget and situation in order to maximize the return on your investment. You must examine and decide what strategy to pursue before you actually make a foray into the real estate investment arena. Among several possible strategies for real estate investors selectively employing any one of following three may prove worthwhile in all cases of real estate investments.

The first is locating and buying bargain real estate. A real estate purchase is known as a bargain purchase when you are able to buy it for a price that is at least 20% lower than its present market value.

The second can by using an increase value strategy. Using this strategy you buy property at the prevailing market rate but buy only that type which you decide has got some unrealized value appreciation potential.  Once the purchase is complete you go about making whatever changes need to be done to realize that potential i.e. for increasing the value of your bargain property. However, for this strategy to be worthwhile you must be able to affect a minimum 20% increase in value within six months of your purchase.

Thirdly you can choose to buy for taking advantage of a double digit cap rate. This means buying the property on conditions that it has a 10% or more capitalization rate. In simpler terms capitalization rate refers to the net operating income from the property. You derive the net operating income when you deduct all operating expenses related to the property, not including costs of debt servicing, from the total annual rent received from the property. This amounts to the cash you will have in your hand at the end of the year when you rent out  free and clear property. However, other than in the case of bargain purchases double digit cap rates are extremely difficult to find and may occur in temporarily depressed markets or in selective market segments.

In real estate investing you also need to have an exit strategy in place right at the time you enter into the investment game. There are two categories usually applicable to the holding period.

You can hold the property long term or you can flip. If you decide to hold long term it may be years before you sell it off. Long term holding is not advisable in the present times as it would require accurately predicting the state of the real estate industry quite far in the future which at best can be termed as unpredictable. In flipping you resell the property without wasting any time after acquiring it. There are ways in which you may be able to sell it even before you buy it by putting it under a contract for a very small amount and letting the ultimate buyer close the sale. Although possible this is really quite difficult and may not be worth the trouble of the whole exercise of buying and selling. Successful flipping is selling for a profit as soon as possible after buying.

Other strategies like buying foreclosure property require large cash reserves. If you have the cash buying foreclosure property can also be a good option.

Title: Real Estate Investment Strategy

Written by: John Lall

Date Written: 07/28/2008

Reviewer Assigned by: David

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