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Real Estate Investing
Real estate investing tends to get a reputation for being a rather perilous way of making money. The housing market has indeed had its fair share of ups and downs over the years, and the Great Recession has certainly left many fearing another crash.
Yet, Americans will always need a roof over their heads and with the right strategy, investing in real estate can be a great source of passive income. They key is to focus on the long term, establish realistic goals, and identify truly valuable opportunities that can generate wealth over time.
Generating wealth with real estate
Rehabbing properties and retailing them at a profit may provide a relatively quick influx of cash, but the ultimate goal of serious investors is to passively generate wealth over the long term.
To achieve this objective, it’s important to find the right strategy for you. How well do you know and understand the housing market? Are you planning to invest your personal savings into this property, or would you need to secure a loan? Have you ever owned a property before? Do you plan on building an inventory of rental properties, or would you rather buy and flip (wholesale), or buy, fix, and retail (rehabbing)?
The questions are virtually endless because there is more to real estate investing than finding properties that are “priced right”. If you’re investing for the long term, you must ensure that your finances can sustain market fluctuations and that your investment can provide you with positive cash flow and inflation protection through the years.
Let’s take a look at three real estate investment strategies:
1. Deriving income from a rental property
Landlording is a very well-known real estate investment strategy and while it may appear simple in itself, there are many factors to consider before choosing this avenue as your wealth-building tactic.
First, it is critical to understand that when you invest in a rental property, you are tying up money that could be invested into other revenue-generating investments. You must therefore ensure that the net income you will be deriving from your rental property exceeds other potential investment yields by calculating the cost of your missed opportunities.
When evaluating the cash flow potential of a property, consider the rent collected minus payments for principal, interest, taxes, insurance, repairs, management fees, and reserves for maintenance plus vacancy, which should approximate 20% of gross monthly rent. In addition, consider the trends of the micro market where the property is being acquired.
Properties that can generate good cash flow and carry a minimum of risks are out there, but it takes hard work to find them and to acquire them at the right price. You need to be prepared to do the research, ask for expert advice, and stay abreast of economic developments in order to make informed decisions.
Often times, purchasing a rental property as an owner occupant can be a less risky way to get started when the other financial benefits, such as smaller down-payments and renovation grants, are factored in. What’s more, by living in the home – even for a short period of time – you will gain a better sense of the issues that may affect future revenue or resale value.
Remember that when investing in real estate, your wealth will be in part generated by cash flow, in part by value appreciation and market trends, and in part by your ability to maintain and manage the property.
2. Real estate IOUs: Promissory notes
Real estate promissory notes are secured, marketable financial instruments used to generate cash flow without the headaches of home ownership or property management.
They are a form of real estate loan, and may be described as a buyer’s promise to pay the seller (or lender) over a predetermined period of time.
A real estate note is a marketable instrument because it can be sold to another person at any time. This provides instant cash to the original noteholder, and affords the note buyer (or investor) the opportunity to generate periodic income over the remaining years of the note terms.
The advantage to the real estate note investor is that promissory notes are sold at a discount to account for future inflation. In other words, you could purchase a $1,000 note for $800 – meaning you would pay the noteholder $800 in today’s dollars for the right to collect $1,000 over time.
The market is poised for promissory notes to become a great opportunity for real estate investors, and even more so for cash investors, because the inventory of non-performing notes exceeds the inventory of foreclosure properties. This translates into a greater discount, higher yields and higher potential capital gains.
Evidently, the key to successful promissory note investing lies in sourcing the most marketable deals, while realistically accounting for inflation trends, interest rates, personal liabilities, and other such financial variables.
As with any type of investment, the buying and selling of promissory notes has its share of benefits and risks. You can read more about this investment strategy on our Cash Flow Investing page.
3. Investing in real estate through transactional funding
If you don’t want to invest in long-term buy-and-holds, or don’t want to be in the position of the banker as a secured promissory note investor, then you may want to consider transactional funding.
Wholesalers locate properties that can be purchased at prices below the market rate, and then resell them to another buyer for a higher price. Transactional funding refers to the strategy by which you can earn a fee for either funding the secured short-term loan for the wholesaler/investor, or for funding the purchase of a promissory note for an investor who has an end buyer for a partial. It is often called same-day funds or flash funding because some of these loans are paid back within days of obtaining it.
Wholesaling properties has grown in popularity, particularly in Nashville, and as such, it has created a demand for transactional funds. Transactional funding lenders will charge a fee based on a percentage of the amount borrowed. This fee typically amounts to between 1.5 percent and 3 percent of the loan amount, and is paid to the lender at closing.
Transactional funding therefore allows you to capitalize on great real estate deals without needing a large bank account. For many real estate investors, without this loan, there would be no profit.
We have recently published an e-book discussing the ins and outs of transactional funding. You may read it online or download your copy here.
The secret to successful real estate investments?
There’s really no secret to passively generating wealth through real estate investing. However, to succeed, you need to focus on what really matters for your bottom line: market trends, due diligence, risk and financial goals.
We invite you to join our network of real estate investors to gain access to a wealth of tools and expert advice to help you in achieving your objectives. Also, feel free to call us to discuss your particular situation or to find Nashville properties that match your investment criteria.
If you are just starting out in the field of real estate investing, you will want to follow us on social media and browse our blog articles for additional information on this long-term wealth-building strategy.