Generally speaking, traditional real estate investment strategies break down into two areas:
The Cash Strategy and The Cash Flow and Equity Strategy
If you are an experienced investor, you no doubt know this information like the back of your hand. However, I wanted to provide a short description of each “traditional strategy” below for those that might be new to the industry.
The Cash Strategy
With this strategy, the goal is to generate cash immediately. An investor can then use that money as earned income or invest it back into more properties. There are four options to employ in pursuing a cash strategy:
Find & Refer
If an investor’s objective is simply cash and not investment, he or she can become a “bird dog.” Bird dogs find good investment properties for investors. In doing so, they earn a “finder’s fee.” It’s the fastest way to earn cash.
Control & Assign
With this method, the investor gains an option or an assignable contract on an investment property and then finds someone else to acquire it. It gives the investor considerable negotiation strength and a good margin. The volume is low, however.
Buy & Sell
This is the method of acquiring a property, making no improvements, and then putting it back on the market at a higher price. The profit margin is better than with a control & assign strategy. But the investor will need to spend more time seeing these deals through. Finally, the volume is lower than with the next method.
Buy, Improve & Sell
This is the “rehab” method. The investor buys the property, fixes it up, and then sells it for a profit. It offers investors even better margins than the buy and sell strategy. Naturally, rehabbing requires considerably more time and money, and it’s possible there’ll be fewer deals to do.
The Cash Flow & Equity Strategy
This strategy is a long-term one. That is, the investor is looking to create cash flow and build equity for the future. There are three basic options:
Lease Option
This method has the great advantage of requiring little or no money. Within this method, the investor has several alternatives for cash flow: Lease Option In, Lease Option Out, or both.
Lease Option In occurs when an investor negotiates to lease a property (usually 2-5 years) and includes an option to buy at the end of the period at a pre-negotiated price. Once the investor has the right to lease the property, he or she then leases it at a higher payment to a lease-to-own buyer. The difference between the lease payment and the occupant rent creates the cash flow. Note: Investors should be sure to have a renter lined up before they agree to lease option any property. This ensures that cash flow will be coming in!
Lease Option Out happens when investors rent a property they own to a tenant with the option to buy at the end of the lease period. With this method, they gain increased cash flow during the lease period and equity as well (depending on the pre-negotiated price).
Buy & Hold
With this method, investors buy a property and lease it out. This is a less complicated strategy than the “Lease Option In” mentioned above. However, the investor is now the actual owner, and, with ownership, comes both reward and risk. Buy & Hold brings investors more flexibility than with the methods listed above. They have the option of selling at any time they like, or they can hold the property for the cash flow and equity buildup for as long as they care to do so.
Buy, Improve & Hold
Overall, this is perhaps the best method to build cash flow and equity. Despite the current market, properties tend to appreciate over time. Also, when investors make improvements, they have the potential for higher rents (more cash flow!) and greater equity buildup. In addition, they may also have the opportunity to improve a property’s potential by getting it re-zoned into a more profitable use. Finally, when improvements are made, some of them are classified as capital improvements by the Internal Revenue Service, so there’s the potential for reducing taxes paid on the cash flow earned from the property.
Of course, there’s more to these strategies than can be adequately described in this article. And it’s taken me decades to perfect my approach to each situation.
What these traditional investment strategies lack is the flexibility to turn around a profit quickly, and again, many of these methods require a large amount of cash to purchase the property.
More creative real estate strategies such as short sales, flipping properties, rehabbing and selling, pre foreclosures and other “non-traditional” methods are in danger of being restricted with the introduction of the new Uniform Closing Instructions.
These new regulations about to go into affect will limit real estate investors to using the traditional methods, thereby shutting down the opportunity to invest in more creative strategies.
