Prosper Newsletter: December 2007 > Real Estate
You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.
With prices still high in many locations, what are the best strategies for real estate investing?
Although real estate prices are still higher in some places than others, with careful planning you can make money investing in real estate in any market. Thus, different strategies are more applicable to some circumstances than others are. So choose a real estate strategy that helps you achieve your real estate goals.
One of the easiest and safest ways to make a good real estate investment, but which can also be difficult in a fluctuating market, is to find a bargain purchase. Purchasing a bargain generally means finding a piece of real estate and buying it at least 20% below current market values. Finding a bargain purchase isn't much of a financial risk, but it can be a difficult task. Look for motivated sellers or structures that have been vacant for a while. Motivated sellers are often willing to overlook current market values in order to sell their property quickly. Also, this may just be the best time of year to find such deals. Most people are more worried about their holiday shopping and get-togethers than they are about closing a deal. So if you can find a seller that needs to sell, but has shifted their focus to the holidays, you may be able to strike a great deal.
Another investing strategy is the increase-value strategy. This strategy is slightly more risky than the bargain purchase strategy but it can be easier and yield greater profit. This strategy seems simple. Buy property at current market value, make some improvements, and then sell it for more than you paid. The catch is that you have to carefully select properties that have unrealized assets that will prove cost-effective to improve. Generally, for this strategy to be successful, you must sell the property for greater than 20% more than what you paid for it (within sixty days). Once again, this strategy can be productive during the holidays because this is often a slow time of the year for contractors— especially for those that may be looking for extra work to pay for their own holiday expenses. Additionally, the holiday season should keep them on your job with fewer distractions. Choose someone who is willing to work and who is not delayed by the holidays.
While there are many other types of real estate strategies, these two are typically the most popular and financially sound. Additionally, they offer a greater percentage of increase with less risk.
Holding Periods
An important part of determining a real estate strategy is deciding what type of holding period would be most beneficial to you. Holding periods are generally divided into two categories: flip and long-term. While there are certainly gray areas to each category, the mindset of each is very different and can help you determine what type of real estate investment best suits your financial situation.
To flip a property is to sell-off the property as soon as possible after you purchase it. Flipping a property can be beneficial if you have made a bargain purchase or if you are employing the increase-value strategy. However, just as you might have been able to find a better deal this time of year, buyers may be scarce. Set your new year's resolutions accordingly. You don't want to plan a flip now and end up having it sit on the market for warmer weather and more interested buyers.
Long-term property holding is where you plan to keep the property for an extended period of time, perhaps to perform extensive renovations, or even to use as a rental while increasing value. This strategy can be more risky than flipping because there are more holding costs and there are often additional hidden costs. Long-term property holdings are useful if you anticipate a market shift to more favorable economic conditions or if you plan to use the property for long-term rental purposes.
Whatever your plans, set lofty goals for the New Year, and forge ahead. You could make great things happen while others are watching from the sidelines.
When I first heard about the Prosper learning course I made a promise to myself that I would purchase at least one property a year as an investor. After completing the course, I was able to buy a duplex at the end of last year in Visalia, California. Since that time the market here in California has been a little rocky (at least for me), and I didn't really think that I could buy anything this year until I starting thinking about my promise to myself. Well, I've always wanted a houseboat, and I live in the SF bay area where there are a number of waterways and marinas. I contacted a marine in Emeryville, California and they had a slip available. I found a houseboat on Craigslist for $8,000. To be honest, it did cost me $15,000 to make her sea worthy, but I now use her as an office and tax write off. The rent at the marina is $10 a foot and my houseboat/office is 29 ft. so my rent is $290.00 per month. If I attempted to rent office space in the SF bay area I would be spending at least $750.00 per month. If I decide to sell her at anytime I will certainly earn a profit.
Susan B.
"Without continual growth and progress, such words as improvement, achievement, and success have no meaning" - Benjamin Franklin
This quote applies to all walks of life and can certainly be applied to any real estate business, no matter how successful. As an investor, you should constantly be evaluating your business and strategies, and more importantly, be making necessary changes to improve what you are already doing. Don't let your business get stuck in a rut. Think of the ways your real estate business can be improved. Is there a more effective way of finding potential deals? Is there a better way of financing deals? Is there a more accurate way of evaluating potential deals? Are there team members we need to get rid of or team members we need to utilize more effectively?
As the year ends, take some time and re-evaluate your goals, strategies, successes, failures and your overall business plan. Improve upon what you've already done to ensure that 2008 is more successful than 2007.
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