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How does Real Estate Investment Work?

How Does Real Estate Investment Work for Quick and Long Term Profit?

Real estate investment is a financial strategy that uses the management, ownership, purchase, rental, and/or sale of property for profit. There are several ways to invest in real estate, but they all rely on similar economic factors to earn profit. The first is that the property must increase in value. The second is that the cost of owning and maintaining the property must not be greater than the increase in the property’s value.

There are different types of investment property, and good investors choose their investment strategy based on the type of profit (quick or long term) that interests them. Quick turn investing means buying property with the intention of selling it quickly (often called “flipping”). Long term investing means buying property to rent or lease over a long period of time, gaining both the rent and the increasing value of the property over time.

Quick Turn Investing

Quick turn investors must be savvy about local property values, local property trends, and the demand for various types of property. Quick turn investors must also be able to act quickly. There are two main strategies for quick turn investing: wholesale and retail.

Wholesale quick turn investors act a little bit like brokers. They find good a property deal, sign a contract without putting any money down, and then find a buyer who is willing to pay more for the property. The wholesale investor then assigns the contract with the seller to the new buyer, and attaches a fee (which is usually the difference between the price the wholesaler agreed to and the price the new buyer is willing to pay). That fee is the profit.

Retail quick turn investors find a property that is listed well below its market value, improve it to get it ready for sale on the market, and sell it to a homeowner or someone who is going to use the building. This is the practice people normally think of when they hear of “flipping houses.” Usually, such properties need work to make them more desirable. The original selling price and the amount of work needed to make it marketable must be calculated into the ultimate selling price if the investor wants to make a profit.

Long Term Investing

Long-term investors rely on rental income and gradual increase in property values over a number of years. While usually safer and more profitable over the long term, long term investors are unlikely a quick return on their property investment.

Ideally, a long term investor is able to use monthly rent on the house or building to pay the mortgage. The investors usually adds a little to the rent above the mortgage payment amount in order to pay for repairs, maintenance, and a small monthly profit. But the real profit to be made in long term investing comes the fact that the building pays its own mortgage and maintenance through the rent charged to tenants. In effect, the building pays for itself, and if the investor adds a cushion to the rent, the building will also generate a monthly cash flow. If real estate values remain relatively stable over a number of years, the building will increase in value. And when the investor may make a substantial profit when the building is eventually sold.

Long Term Investing Techniques

In order to meet their goals, long-term investors usually decide between direct and indirect ownership.

Direct Ownership

Direct ownership means that the connection between the owner and the tenant is direct. The owner is responsible for collecting rent, solving problems between different tenants in the same building, and all maintenance and repair of the building. Direct ownership has the advantage of not having to pay for a building manager or superintendent to handle upkeep. On the other hand, direct ownership places the total burden of property maintenance on the owner (who may not have the skills required for upkeep).

Indirect Ownership

Indirect ownership means that an investor decides either to hire a property manager or joins an investor group that has a team of property managers. Investors who own only one rental property and want to manage it indirectly usually hire a professional manager. An alternative is to join a Real Estate Investment Group or a Real Estate Investment Trust. Both of these investment vehicles involve groups of investors who usually want to invest in multiple properties but who want all aspects of management handled by a central team of professionals. Often these groups and trusts are formed when new apartment or multi-use commercial building are being built. There is a  difference between a Group and a Trust.

A Real Estate Investment Group usually operates with a small number of investors who invest in a company that owns and runs apartment or commercial buildings. The company handles all the ownership aspects of the building and the Group is the investment team behind the company.

A Real Estate Investment Trust is similar except that it is usually bigger, it deals with very large properties like malls, and is traded on national stock exchanges like any other corporation. People who invest in Real Estate Groups are usually interested in local and regional properties, like to see their money in action, and are willing to stay in the investment for the long haul. Investors who like the idea of major property projects (which may be in different areas), and who are used to investing in the stock market (which keeps their investment more liquid) join Real Estate Trusts.

Some investors concentrate on one type of real estate investment, while others use a range of investing techniques to reach their goals. There are many ways that real estate investment can work very well for quick and long term profit.

  • Real estate investment uses property for profit.
  • Investors usually chose “quick turn” or “long term” profit strategies depending on their profit desires.
  • Quick turn investing means buying and selling quickly (usually for small profit).
  • Long term investing profits come from rental income and gradual increase in property values over a number of years.
  • Direct long-term investors buy properties, rent them to tenants, and handle all aspects of property maintenance.
  • Indirect long-term investors buy properties and hire third parties to handle property maintenance for them.
  • Indirect long-term investors often join Real Estate Investment Groups, which act like mutual funds or investing clubs to buy and maintain investment property.
  • Indirect long-term investors can also choose join Real Estate Investment Trusts, which are publicly traded corporations that usually own many and maintain properties.

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