Welcome to Week 11: What is Your Focus?
There are many ways to make money in real estate. Chris talks about the three most common methods:
- Buy, Fix, Rent, and Hold – segmented by market.
- Buy, Fix, and Flip – for short term gain.
- Buy, Fix and Sell via Land Contract or Owner Financing – A hybrid of the two.
Buy and Hold
When Chris started buying rental properties, his strategy was simply to buy middle-market properties in established working class neighborhoods earning average rents, plus. He financed his first few properties at a local bank with 20% down.
When his first partner joined him, they had even less of a strategy beyond buying everything they could with bank financing and as little of their own money as possible. This strategy proved to be very expensive, but the education was priceless….
Buy and Flip
When he first started investing with a partner, there was a sweet spot where they could buy inexpensive foreclosed properties, rehab to FHA standards, and then sell them through his brokerage, buying anything they thought would yield a profit of at least $20,000. This worked for quite a while and may be a viable strategy for you. But when the market shifted and sales slowed, they began offering those same houses for rent, moving them up into the “buy and hold” strategy.
Buy and Sell via Land Contract or Seller Financing
Selling to a willing and able buyer via seller financing or land contract is a fantastic strategy in an appreciating market, but makes far less sense in a stable or declining market.
These deals are sometimes structured to term, where the seller carries the note for the life of the loan. But more often, a balloon payment is due after two to five years. At the end of the term, the buyer will obtain a traditional mortgage and ‘cash out’ the seller. In an appreciating market, the likelihood of a successful cash out to the investor is very high. In a stable or depreciating market, the property may not appraise at the agreed upon price, causing the sale to fall apart or have to be restructured.
The advantage of using this strategy in an appreciating market is that all parties stand a great chance of coming out ahead. The investor sells at an anticipated value, two or three years in the future. The buyer gets into a new home today, even though he may not be “credit worthy” in the eyes of a mortgage broker.
When everybody benefits from market appreciation, that’s a great deal. Chris advises the smart investor to structure the deal so that the buyer’s ultimate cash out price is somewhat
below market. When that happens, everybody involved wins.
At the end of the book, Chris includes a short business plan for investors interested in buying, rehabbing and selling via land contract. The plan is specific to Melbourne and Palm Bay, Florida, where the opportunities are huge, but could be useful in any market. And that plan – plus the whole book – are both available for download right now!
We’ll be back next week, with a look into the art of acquiring properties.
For a free copy of the full book, A Real Estate Investor’s Guide to Profitability, email FreeBook@ROOSTRealEstateCo.com and we will send you one. Or download a free e-book version here: MakeRealEstateWork.com/free-book