More than One Way to Skin a Cat: Real Estate Investing Strategy
There are as many strategies to make money in Real Estate as there are fish in the sea. From this ocean of possibility, I have found success concentrating on a small handful of tried-and-true methods. These Real Estate investing strategies offer countless avenues to generate revenue and build wealth.
The first battle any investor faces is finding discounted properties. Marketing for motivated seller leads is the foundation of every successful investment blueprint.
This is the step where many new investors fail. Generating leads for discounted properties can be as simple as working with a good Realtor or as complex as a multifaceted marketing plan that saturates a targeted area. Regardless of your strategy, the key to success is consistency.
Eliminate “Small Pipeline Syndrome.” Get more leads. More leads equals more options. More options equals better deals.
Once the marketing machine is humming, the next step in the process is separating the wheat from the chaff. This begins when the leads start coming in.
If you are taking calls directly from a seller, get to the point as quickly as possible. Gather information about the seller’s situation (why are they selling?) and the property data you need to evaluate the property. You won’t have time to chit-chat about the weather if your marketing is working properly.
At this point it’s time to evaluate the properties themselves. Leads from Realtors and other lead sources are then added to the screened seller calls. Property evaluation includes pulling comparable sales, estimating construction costs and determining an exit strategy. Each piece of the evaluation is vital to determine the offer price.
“If you want to increase your success rate, double your failure rate.”
– Tom Watson, Professional Golfer
Make offers. Make a lot of offers, and make them low.
After you’ve determined your offer price, meet with the seller to make the offer. Remember that most offers will be declined. If you want more deals, make more offers. Do your best to meet the needs of the seller while still keeping to your numbers. You make money when you buy, not when you sell.
An exit strategy is a group of predetermined steps and processes prepared to generate a desired outcome. In the context of Real Estate investing, our desired outcome is income generation. When I am looking at a lead, my exit strategies include bird dogging, wholesaling, retailing and renting. It is very important to plan an exit strategy prior to moving into an investment. Each strategy carries different benefits and detriments.
Bird dogging is the process of finding a property and then handing the lead off to another investor. This strategy is used by a lot of new investors who have little or no money to invest. The benefits are a short compensation period (the time between finding the deal and getting paid) and low upfront expense. But the pay-off for bird dogging a deal will be much lower than other strategies. Typically the compensation will range from a few hundred to a thousand dollars.
Wholesaling is probably the most famous and attractive exit strategy for people getting started in Real Estate. To wholesale a property is to sign a contract to purchase with a seller at a negotiated price, and then to sell that contract to another investor. The process is an exchange of paper, not property. Wholesalers often never take ownership of the houses they contract, and they frequently do not have any money in the deal. The benefits of wholesaling are a fairly short compensation period of between 2-10 weeks. The wholesale fee for each transaction varies from a few to several thousand dollars (My first wholesale fee was over $30,000). The majority of the profits are forfeit in exchange for the shorter compensation period and lower risk.
Retailing deals yields the largest upfront profits. When retailing a property, a Real Estate investor will buy a property at a discount. They will often (but not always) make repairs and improvements to the house and then sell it to an end buyer planning to move into the property. While the rewards are larger when retailing, so are the risks. Incompetent contractors, soft markets or unforeseen costs can eat through profits. This strategy is for experienced investors.
I love rentals! They are great for long-term stability and building real wealth. I believe rentals should be part of every Real Estate investor’s portfolio. The benefits are many. First there’s the instant equity. If you buy right, your net worth will jump with every purchase. Second, there’s monthly cash flow. Even after paying the mortgage, budgeting for repairs and management, every month there’s money to put in your pocket. Third, there’s appreciation. The value of your asset will increase over time. As it does, there’s a tenant paying off the mortgage. Last, there are the tax advantages. From depreciation to write-off’s, rental properties offer the opportunity to decrease your tax rate.
Real Estate investing is a great way to generate income and build wealth. Like everything else in life, there’s more than one way to skin a cat. These tried-and-true strategies have stood the test of time. They’ve worked for me, and I’m sure they’ll work for you.
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