Fixing and flipping a property is not true investing any more than buying a car and fixing it up for resale would be. If you are buying properties and doing the work yourself, you are not an investor in the true sense of the word; you are simply a remodeler. A stock market investor buys stock in the hope that the stock will appreciate and produce dividends. A Real Estate investor purchases property with the hope that it will appreciate and cash flow. The advantage of investing in real estate instead of stock is that you can get someone else to pay off the initial investment by means of rental income. Also, unlike stocks, you have the ability to increase the value of your investment through fix up.
Buy and Hold: Purchasing a property to hold for rental or rent-to-own that requires only maintenance or minor upgrades would fall into this category. There will be more people vying for these properties so the challenge is finding a good deal to insure you have enough margin. Make sure you spend more time developing your exit strategy especially if you don’t have the margin for a traditional sale.
Fix-n-Flip: Though not a true investment scheme in terms of passive income; fix-n-flips can generate cash to work with. To be considered a fix up, only cosmetic work, like paint and carpet is required. You build additional equity through kitchen and bath remodels, basement finishing, adding a deck, etc. See Considering a Fixer-Upper for more information.
Fix-n-Rent: Purchasing a property to fix up and rent is a great strategy for building wealth. If you have the skills and contacts to fix up your properties inexpensively, your success will be greatly enhanced by increasing your cash flow as well as building additional equity into the property.
Live-n-Fix: This is a great way for an inexperienced investor or someone with limited capital to get into the game. Since everyone has to live somewhere, why not live in your future investment property? For a much lower interest rate, you can get into a home and start building equity with very little risk. The downside: putting up with the mess on a daily basis. The upside: no worry about holding costs of a second mortgage.
Key Home Team has a unique step by step plan to own 5 homes and be 300,000 ahead in 10 years simply by following our easy Live-n-Fix strategy. Call (800) 716-7334 x 7504 today to find out how you can begin this process.
When investors do not properly map out their exit strategies they can end up with multiple foreclosures. This is the most important step an investor needs to develop. A minimum of two exit strategies need to be in place. If you are in a weak or declining market, you will need multiple strategies. Following is a brief summary of top strategies. Many variations and options can be utilized. Always consult an Investment Specialist and make sure you get legal advice from a qualified Real Estate Attorney. It is also prudent to consult a CPA who has Real Estate investment experience to consider the tax consequences of each specific strategy.
Traditional Sales: For a sale to be an effective exit strategy, you must buy at the right price with the right terms. The purchase price must take into consideration your fix-up costs, holding costs, selling costs and buffer for a surprise or two. After all is said and done, you should be at least 10% below the comparable sale prices so that if necessary you can unload the house quickly. In a declining or unstable market your percentage should be greater than 10%.
Non-Traditional Sales: Owner Financing: This is where you finance all or part of the sale of the property. For example, you could carry the second deed of trust or mortgage for a portion of the purchase price. The buyer would get a first mortgage for the balance. Risk: If buyer fails to make payments on first or on your second loan, you will need to begin foreclosure process which can take months.
Wrap: This is where you resell the property without paying off your existing loan. The buyer will pay you a predetermined payment each month and then you pay your mortgage on the property. Risk: If the buyer ceases to make their payments you will need to foreclose to get them out of the property while you continue to make payments to the bank.
Installment Land Contract (ILC): This is similar to the Wrap, but instead of completing the closing transition, the closing documents are held in escrow rather than recording the documents with the county. In other words, the buyer has equitable title allowing them to claim the interest payments on tax return. They do not have legal title, since the documents have not been recorded with the county government. This is similar to the way we purchase a car: the bank holds the title. Risk: If the buyer ceases to make their payments you will need to foreclose or evict (depending on how you draw up the contract) to get them out of the property while you continue to make payments to the bank.
Non-Traditional Rental or Rent-to-Own:
Lease Option: This is actually two contracts, a traditional lease and Option to Purchase. The option is often used in land deals, where a buyer pays a non-refundable option fee while agreeing to purchase a particular property within a certain time period and price. Risk: You cannot sell the property to another purchase during the option period. If property significantly appreciates, the buyer will exercise their option and you will have lost the increased appreciation. But, if property significantly decreases then the buyer can walk away and you have a property worth less. You do: however, get to keep the option fee.
Lease Purchase: This is also two contracts, a traditional lease and a Purchase Contract. The purchase contract would be similar to the one you would sign if you were just buying the property, the difference would be the closing date which would be set to somewhere in a more distant future (usually 6 – 36 months away) Risk: Like the Lease Option you cannot sell the property to another purchaser during the contract period. If property significantly appreciates the buyer will close on the property and you have lost the increased appreciation. But, it property significantly decreases then buyer may walk away and you have a property worth less. You should: however, be able to keep any earnest money put down on the property.
Traditional Rental: For renting to be a valid exit strategy, you need to be at least cash flowing after taxes. If not you should initiate one of the exit strategies above, even if it means taking a loss. It should be your goal to be cash flowing before taxes, that way if the rental market goes down you have a buffer to weather the storm.