The real estate market has been quite lively in the last few of years, creating profitable opportunities along several fronts. In this article, we’ll address three of the hottest vehicles for investment. The biggest difference among the three is the time you wish to spend in direct involvement with the investment.
1. Fix and Flip
This strategy involves purchasing a rundown home at a good price, renovating it and then selling it, all within a year. For hands-on rehabbers, this requires knowledge, hard work, and funding. The extent of the work is directly tied to the state of the property you buy. Dilapidated properties cost less and provide the best profit potential, but they also are the riskiest and require the most time. Fix-and-flip projects are usually time intensive, in that desirable properties often pop up with little notice, and longer projects require longer funding, meaning more interest cost. Because of these characteristics, rehabbers favor hard-money loans, which can be secured rapidly, as compared to bank mortgages that can take weeks or months to effect. This strategy appeals to folks who want to invest sweat equity in short-term projects.
2. Rental
This is a long-term investment that often resembles fix-and-flip, except the property is rented out instead of flipped. If the rental property needs rehab, investors might start with a bridge loan so that work can begin immediately, and then eventually replace the hard-money loan with a long-term loan or a mortgage. Whereas the aim of fix-and-flip is to earn a short-term capital gain, the rental strategy aims to earn a steady stream of rental income. Rental property usually needs initial renovation plus ongoing maintenance, so rental investors are landlords who either personally manage the properties (find tenants, collect rent, maintain the property, perform accounting, etc.) or hire out the task to property managers for a fee. The choice depends on several factors, including number of units, your availability, skills and interest, and geographic location of units.
3. Real Estate Investment Trust
Unlike the first two strategies, investing in a REIT is a passive long-term investment. A REIT is like a mutual fund made up of real estate properties rather than stocks and bonds. You purchase shares in a REIT to own a prorated portion of the revenues generated by the underlying portfolio of properties. REITs are professionally managed and require no participation from investors except for buying and selling their shares. REITs returns are made up of rental income and, if any properties are sold, capital gains. REIT portfolios contain properties that are residential, commercial or a mix of both. The advantage of a REIT is that it provides instant diversification over a number of properties. However, REIT investors have no control over the portfolio or its management, and annual returns on REITs are usually significantly lower than those on fix-and-flip investments. Investors normally fund their REIT investments with their own cash, though margin loans may be available from brokers for those who want to leverage their returns (and risks).
Contact Specialty Lending Group for more information about funding real estate investments.