Real estate investments generally fall into three categories; short-term, mid-term and long-term. The short term investments are commonly from 1 to 24 months. The mid-term investments are often from 24 to 60 months. The long-term investments are typically five years and longer. Many real estate promoters are geared to the short-term opportunities. These deals will produce cash flow and profits for real estate entrepreneurs who are looking for short term (0 to 24 months) revenues. In these cases you are for the most part limited to looking for the following five opportunities.
1. Fix and Flip: this is the process of purchasing a property at below market, doing reasonable improvements and reselling it at a higher price.
2. Finish and Flip: this is the process of purchasing a property that is not entirely built out to achieve its highest and best use. This could be a commercial building that could be divided into more easily rentable smaller spaces, a home with an unfinished basement, a small apartment complex that would allow for increase rents if car ports were built, etc. The idea of course is to increase the value and resell.
3. Change of Use: this would include buying ag. Land and subdividing it into residential building lots, buying residential property on the edge of commercial zoning and converting the zoning accordingly, converting apartments into condominiums, etc.
4. Purchase or Lease Options: this is often a paper transaction where you find a great deal, buy an option then find an end user who will pay a premium of your contract price. You of course keep the spread.
5. Master Leases: this opportunity is for those willing to lease a large amount of space and then sub-let the space to smaller users at a higher per-square-foot rate, once again capitalizing on the spread.
Any of these opportunities can provide an investor with immediate cash flow, equity buildup for refinance or resale profits, or outright creation of value through sub-development, conversion or rezoning. It all sounds easier than it is. You need to make sure that you understand the market and its vagaries. You need to be willing to take the risk associated with the deal in the event that it does not work, and you need to be willing to meet the financial obligation associated with each opportunity. Yes people make money with these concepts every day. Are they right for you? Are they available in your market? I don’t know. You’ll have to do your own homework to find out. Be sure to take into consideration the lag times of market absorption, lease-up, governmental waiting periods, and closing time frames. If you do the research and make educated decisions, you’ll do fine. If you take foolish risks, you won’t. Get the education and support you need and everything should work out fine. Good luck. We’d be glad to help if we can.
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Interesting list, given me more ideas of what to look at when investing in property.
Most real estate investors in developing countries like Bangkok where I operate are getting on the bandwagon with new condominium developements and buying off-plan, with the intention of flipping later when the building is nearly developed. This normally happens over a time frame of about 2 years.
No. 5 “Master Leases” can be difficult as a large number of Landlords to not approve of Sub-letting.
Tim - I would contend that it is no more difficult than any of the other methods listed. The first problem for any investor is finding a deal that will work. For flippers, that means finding a house that is low enough below market that you can make money. For folks wanting to try a “Change of Use” investment, that means finding land in an area where the city/county will let you change the zoning. For those looking for master leases, that means finding a Landlord who’ll allow to to sublet.
Finding a good deal is almost always a numbers game. You have to look at a lot of properties. You have to make a lot of phone calls. If you’re not willing to do that, you probably won’t be a successful real estate investor.
If you are looking to make money with option number 1: “Fix and Flip”, then I usually go by this formula to calculate the suitable purchase price:
(expected Sales price after renovation x 75%) - cost of renovation = My Offer Price
When looking to make money with option number 1: “Fix and Flip”, I usually go by this formula to calculate the suitable purchase price:
(expected Sales price after renovation x 75%) - cost of renovation = My Offer Price
One thing that buyers have to be careful of is people doing No. 1: fix and flip, and trying to squeeze as much profits as they can out of the transaction by using very low quality materials in the refurbishment. I’ve seen some real cardboard interiors. They look nice, but will fall to bits after 1 year.
Apparently their is also potential for short term real estate investments in the virtual world - but I don’t really understand what this is.
A key factor in all of this is being patient. Being able to wait with money in the bank until the right opportunity comes along.
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[...] Upon On the Road Some reminders of types of short term deals that you can look for. Roger also made such a list a couple of months ago, along with a list for mid term and long term deals, too. Posted by [...]