Wealth Building Strategies
by: Jeff Quintin, on August 25, 2010 - Uncategorized
How Does a Wealth Building Real Estate Investment Strategy Work?
Any equity/wealth building real estate investment strategy has the aim of securing your financial future through sound investments. There are three basic long-term strategies in this category, and I describe them below. Remember, they all work well; it’s all a matter of matching a strategy to your style and personality.
1. The Lease Option Strategy
A real estate lease option is also known as “Rent to Own” or “Lease with Option.” The option gives you the right to control a propertywithout the obligation to buy it. With this right, you can purchase the property during a specific period of time (agreed on by both parties when an option agreement is made). However – and this is key – you’re not required to make the purchase. Therefore, if you don’t exercise this option, it expires, and you have no further obligation to the seller. In most cases, as a buyer, you have to pay an option fee (which may or not be applied to the purchase price of the property). Within this strategy, you have several methods to achieve cash flow–Lease Option In, Lease Option Out, or both.
a. Lease Option In
This occurs when you negotiate a lease on a property (usually 2-5 years) and include an option to buy at the end of the period at a pre-negotiated price. Once you gain the right to lease the property, you can then lease it at a higher payment to a lease-to-own buyer. The difference between the lease payment and the occupant rent constitutes your cash flow.
b. Lease Option Out
This happens when you rent a property you own to a tenant with the option to buy at the end of the lease period. With this strategy, you gain increased cash flow during the lease period and equity as well. It’s also low cost since you need only a small percentage of cash to gain control. Then, there’s the fact that you limit your risk while saving capital for other investments (leverage). Another advantage is the potential for a substantial return on your investment through property appreciation. A final advantage is that you don’t have to be a full-time investor in order to get started in the real estate market. You can use this method as a stepping stone to a full-time career as an investor. Due diligence on your part can prevent many of the disadvantages of the lease option strategy.
What are those disadvantages? Well, the seller may be experiencing financial problems. This can result in liens on a property or delinquent property taxes, and it can get very expensive and time-consuming to get all these legal issues sorted out. Another possible disadvantage occurs in a situation when the property doesn’t appreciate. If it doesn’t do that before the option expires, then the lease-option holder won’t be able to buy unless he or she is able to bring in the cash for the difference between the appraised value and option price.
2. The Buy and Hold Strategy
With this strategy, you buy a property and lease it out. Unlike the Lease Option strategy, you’re now the actual owner and have all the responsibilities that go along with ownership. Buy and hold has several advantages. One is low risk, since, generally speaking, holding on to properties long-term brings in appreciation and income that’s hard to beat. Buy and Hold also provides you more flexibility than with the lease option strategies listed earlier. By that, I mean that you have the option of selling at any time or holding onto the property for the cash flow and equity buildup as long as you care to! This strategy is also a good way to build up investment capital.
As with any investment strategy, there are disadvantages. One is low liquidity. In other words, you can’t simply sell most properties overnight if you need cash Another disadvantage is the potential for unforeseen problems; e.g. building code violations, rezoning, etc. Such troubles can lower the value of the property. A third possible disadvantage is dealing with difficult tenants in properties and also the usual problems that come with such properties (leaky faucets, electrical malfunctions, etc.).
3. The Buy, Improve and Hold Strategy
This is the strategy many investors feel is the best one for building cash flow and equity. You buy a property, improve it, and then hold onto until it reaches your target level of appreciation. Overall, it’s a fact that properties tend to appreciate over time (despite fluctuations in market prices), so you gain value with a “hold’ strategy. And, of course, when you make improvements, you gain the potential for higher rents (more cash flow) and greater equity buildup.
And, in regard to those improvements, some of them are classified as capital improvements by the IRS, so you have the potential for the reduction of your taxes paid on the cash flow earned from the property. Finally, you have the potential for re-zoning. If you can get a property approved for a different use, you can then create more income and profit. The disadvantages are the same as the Buy and Hold Method.
Want to learn more about Buy, Improve and Hold strategies?Contact me today and I’ll provide you with answers or direct you to someone who can! Look forward to talking with you!