Real estate investing offers so much potential to investors. Why not take advantage of all that real estate has to offer you? Learn how to “stack” the odds of real estate success in your favor.
Many real estate investors fall into the trap of latching onto just one strategy of investing. As a result, they never reach their potential. Typically, these investors only use the “buy and hold” strategy.
Now don’t get me wrong. This is a great strategy that will make you money when done correctly. However, it’s rarely a good stand-alone strategy. Here’s why…
The “buy and hold” strategy is a long-term strategy. Any type of financial gratification is pushed into the future. You may experience (or believe you’re experiencing) some degree of positive cash flow. But the real benefits of this strategy are amortization of your debt, hopefully coupled with a gradual increase in cash flow and value.
Some people may even say that there are tax benefits to this strategy. But the real profit center is achieved years down the road when you harvest your crop (sell). While a great wealth-building strategy, this method comes up short in terms of present benefits.
The real weakness in this strategy surfaces when there is a cash call because of maintenance, vacancies, lower rents, taxes and insurance, balloon notes, etc. Typically, the investor borrows on all or part of his equity to meet this demand, thus increasing his liability and associated risk.
If lending sources dry up or the investor becomes over extended, the whole house of cards comes tumbling down. This can happen after many years of ownership. It’s sad.
Give me the benefits, baby!
In addition to the standard benefits of real estate ownership such as appreciation, amortization, equity buildup, positive cash flow, leverage, depreciation, etc., other benefits need to be considered. Cash generation is always at the top of my list.
As an investor, you should be constantly striving to increase your odds for real estate investing success. Learning to generate cash and ever increasing cash flow is essential. It will not only accelerate your investment program and improve your lifestyle, it will help insure your holding power as well.
Different strokes for different folks
The “buy and hold” strategy is only one of five basic strategies you have at your disposal. Everyone pretty much knows the benefits of this strategy. Let’s take a look at the others.
Buy Low / Sell High Strategy: This is a high-powered, cash generating strategy. With this approach, you purchase a house located in a neighborhood with sales activity. Generally speaking, these houses will be in need of cosmetic and/or structural repair. Your purchase price must be low enough to allow you room to cover your repair costs, holding costs, and resale costs, plus leave room for a healthy profit.
The benefit of this method is cash generation. This is a great way to increase your income dramatically with just two or three deals a year. There is also some benefit knowing you are putting people to work, bringing a property back up to neighborhood standards, and helping a family purchase a nice home. These projects can take up to 180 days or more, but are a great way to generate large lump sums of cash without a great deal of effort.
Buy Low / Sell Low Strategy: Often referred to as “flipping” or “wholesaling,” this is a very easy way to generate cash fast! The key is to not become greedy. Here, you purchase (or contract to purchase) a property at a price below which another investor would be willing to purchase. Your can either a) purchase and resell; b) assign your position in the purchase contract; or c) close your purchase and sale simultaneously.
The benefit of this method is quick cash generation. The per transaction potential is not as great as the “buy low / sell high” strategy, but–these deals can be done in a matter of days (sometimes hours) and require little, if any, of your own cash. This is good stuff.
Leasing Strategy: Sometimes we fail to see the forest for the trees. This cash flow method, hopefully, will help you overcome that. Rights of use, enjoyment, and occupancy are controlled by a lease. Here, you are looking for property you can lease under favorable terms, allowing you to sublease the premises for a higher price.
You become sandwiched in the middle of the two leases in a position of profit. The longer the term of the favorable underlying lease, the more valuable your position. This is a form of control without ownership. (Your position can also be sold for cash.)
The main benefit of this method is cash flow, but it can also be used to generate cash. Look at leasing as a low-cost financing tool for controlling property without actual ownership. This can be an extremely powerful tool for you because it doesn’t require much up-front cash.
Options: Options, to me, are unquestionably the highest leveraged, lowest risk investment tool available. They take up where leases leave off. They control not only appreciation, but so much more.
An option is the unilateral right to buy (or sell) and is a low cost way to control property without the headaches associated with maintenance, management, income or expenses. Here, you look for a way to unilaterally control ownership while you wait for your profit to develop. This can be a very high powered cash generating tool.
The main benefit of this method is control with limited risk. That spells cash profits. Options can also be an outstanding way to build wealth (equity).
“Stacking” the odds in your favor
“Stacking” means using more than one strategy at the same time. You maximize your profit potential when you stack. Lease options are a prime example. Stacking an option on top of a lease allows you to control both cash flow and appreciation. Both are powerful tools in their own right. But when used together, they’re incredible.
Strive to use as many of the profitable strategies simultaneously as possible. Stacking allows you to access the full profit potential real estate has to offer. Incorporating more than one strategy into your investment program has many benefits. It gives you the ability to maximize your efforts, to see more possibilities, and to make more money on your same prospecting efforts.
The goal is to become more effective, to open your eyes to the possibilities that present themselves, to expand your comfort zone, and to take advantage of the other benefits that are right under your nose. While real estate can help you build wealth in the future, it can also help you improve your life and lifestyle today.
Why not add another strategy or two to your investment program? Learn them one at a time. Add a new strategy a year. All it takes is a little knowledge, the proper guidance and the desire to succeed. By so doing, you will be stacking the odds of real estate success in your favor.