One of the first steps you will take when you decide to begin investing in real estate is how you will choose to invest. Each vehicle has different pros and cons that may be a better fit for you. You want to choose an investment vehicle that makes sense for your financial situation and your goals. There are 3 main strategies that you will choose from when first starting out. They are rehabbing (fix & flip), wholesaling & buy and holds. When first starting out it is very important to just choose ONE strategy and learn the ins & outs and execute a plan before moving onto another strategy. In this post I am going to try and lay out the different benefits that each offers to help you choose what strategy you would like to start with.
Rehabbing
Buying a single family residence at a discount, making the necessary repairs and selling the home at market value while recouping a profit. This is a popular strategy due to the large number of tv shows out there. Once you take action in this vehicle you will find out that it is much tougher than it seems.
Pros:
Quick Cash: This strategy's greatest benefit is the amount of cash you can walk away with in a couple months. If you plan out your flips properly it is not unlikely to walk away with anywhere from 15-35 thousand dollars.
No Tenants: You don’t have to deal with tenants and managing a property
Fun: Transforming a house from nothing to something is fun. Making a home come together and turning it into a house where someone will raise a family is gratifying
Cons:
Initial investment: Even in Syracuse NY it is most likely going to cost you 100,000 to get involved with this strategy. If you don’t have the cash, you will have to get a loan (which can be difficult) or you will have to go through a private money lender
Homeowners: Homeowners can be very picky and selective when purchasing there home. Even though you fixed everything in the house and made the house perfect they will still want more out of it.
Waiting: Sometimes you don’t sell your home immediately and you will have to wait on your profits. The longer you wait, the less money you will make.
Contractors: Finding the right contractors for your job can be difficult and can take a lot of time. If you can’t find a good contractor it may be difficult to finish any job.
Managing the Flip: Even if you hire a general contractor you will still have to watch over and coordinate the project. From scheduling to budget to scope of work you will be involved.
Competition: The competition for these discounted properties can be fierce. Bringing in leads is difficult and having enough to sustain a business is even harder.
Wholesaling:
To me the most difficult vehicle to make a profit/living. The properties can be called quick flips and the process consists of finding deeply discounted properties and turning them over to investors for a small fee.
Pros:
Low Capital Requirements: Since you will not be closing on these properties, you will not need much money for this strategy. This is why this is a popular strategy among investors just starting off.
No Tenants: Once again you will not have to deal with tenants.
No Contractors: Since you won’t be closing on these properties, you will not be fixing them up. Therefore you will not have to do the repairs for these properties.
Cons:
Finding Deals: These deals are hard to come by and there is also a lot of competition out there. Who doesn’t want a property for 30-50% of market value??
Marketing: Although it won’t cost you money to purchase and rehab these properties, in order to be successful in this business you must be successful in your marketing.
Bad Leads: You will have to go through several leads until you actually find one that work
Negotiation: If you don’t like negotiations, this may be a problem for you. You will have to develop some negotiation skills in order to be successful.
Buyer List: You will have to develop a buyers list so you will be able to issue your properties to or you might just stuck with them
Buy & Hold
You buy a property and rent it out for the long term. This strategy you will try and accumulate passive income for your future.
Pros:
Monthly Income: hopefully you can purchase a rental property that will cash flow every month (if you can’t, don’t buy it) So you will be receiving checks every month for your investment.
Steady Income: You may have times when your properties go vacant (but you should have accounted for this) but for the most part you will have a steady stream of monthly income.
Tax Benefits: To me this is the biggest benefit to investing for the long term (or medium term) You will reap tax benefits and depreciation can be a wonderful thing.
Accumulating Wealth: This is a great strategy to build a plan for financial freedom. If you accumulate enough units you may just replace your income and achieve true wealth
Cons:
Tenants: No matter where you invest, tenants can be an issue. Dealing with different personalities for every property you have can become difficult
Property Management Costs: if you don’t want to deal with these tenants, you will have to hire a property manager who will take 10% of your revenue each month.
Maintenance Costs: Maintaining these properties can be expensive. If anything breaks in the home you will have to fix it.
Capital: It is hard to invest in rentals with 0% down, so you will have to have some initial capital to put a down payment down.
So there’s a quick description of the pros and cons for each of these investment strategies. Hopefully this will help you decide on which vehicle you want to pursue. Remember do your homework and educate yourself on whatever strategy you choose.