In addition to your primary residence (which isn’t usually defined as an investment though it is a significant asset in your portfolio), there are several types of real estate investments. Investing in one or is what we would call an investment strategy.
- Short Term Residential – This could include the strategy of buying a fixer-upper and making the improvements and then selling. In highly appreciating markets, it could just mean buying, holding for a short time and “flipping”. In depreciating markets, it could mean picking up a foreclosure or distressed sale of a property and __________.
- Long Term Residential – This strategy usually requires research into areas that have great rental income for the purchase price and in a market that has reasonable market growth. It also works for multi-unit properties (apartments)
- Residential Construction – Buying land or a home that needs to be demolished and rebuilt has great potential in huge returns on investment… but you need to know about the construction process, be able to manage your costs (and your contractor) and have lots of cash.
- Commercial – Those that don’t want to be residential landlords, often go to this form of investing, and usually it is best to be part of a larger group and invest in either a fund or “Tenant In Common” purchase.
Each type of investment strategy has its pros and cons; so finding the right team of advisors or partners is essential. Many underestimate the value of a good real estate agent. In fact, many people think that real estate is easy and agents are overpaid. When a real estate agent performs his role thoroughly, in a totally professional manner, he is definitely not overpaid, even in absurd priced markets where home values are in the millions. But like the difference between a mortgage professional and the typical loan officer, or the CPA versus an amateur tax preparer, there is a big difference between a professional real estate agent and someone who is licensed to buy or sell real estate.
Part of the big picture is hooking you up with the right real estate agent for your needs. At Insider, we have alliances with the right agents in many cities throughout the United States (since real estate investing better be more than just California).
USE of LEVERAGE in REAL ESTATE INVESTMENTS:
Real Estate Investments offer something very few other types of investments can: LEVERAGE. Therefore the returns on investment in real estate have the greatest opportunity for you to build wealth.
If you had $50,000 to invest and were questioning if you should buy stock or real estate, let’s review the following two scenarios:
If you bought 10,000 shares of a stock at $5/share, you will have invested $50,000. If the price of the stock doubles in one year’s time to $10/share, you will have doubled your money. But note, in order for you to make $50,000 on your $50,000 investment, the stock would have to increase 100%.
If you took your $50,000 and used it as a down payment on a $500,000 piece of real estate, you would be leveraging the asset and coming in with only 10% of the purchase price. You will therefore be borrowing $450,000. In order to make $50,000 on your investment, your real estate would have to appreciate only 10% in the year (10% of $500,000 is $50,000). Of course this isn’t completely true since there is a cost of borrowing that $450,000 (which is pa