Before we dig into the nitty-gritty of becoming a real estate entrepreneur and millionaire we should first clarify that there are no straightforward answers to the question: What is the best type of property investment?
What we can do though is to explore the options and outline the advantages and disadvantages of each strategy. From there we will determine a few different methods that might be more or less suitable for you depending on your situation.
The short answer to this is obviously the investment property that makes you the most money.
The longer answer though depends on your long and short term investment goals, your current financial situation, and your knowledge of the real estate market.
Whilst some investors focus on long term profits - property appreciation and capital gains - others are more about the quick wins. Some investors are cash-rich, able to purchase property with little need for leveraging, whilst others depend on loans and mortgages which limits their investment opportunities.
So, based on each individual's situation the ‘best’ property investment strategy varies.
Below we go into a little more detail around types of property investment as well as their advantages and disadvantages.
The reality of rentals is a little different from the perception.
A lot of people perceive rentals as money-making machines, and whilst it’s true that you can build up a portfolio of properties that will afford you a good lifestyle from the rental income alone, that isn’t as easy said as done.
The reality is that the rental income you make off a single property could be pretty negligible. After expenses, mortgage payments, maintenance fees, and property tax the rental incomes begins looking a bit slender.
And staying on top of these expenses is absolutely vital if you want your property to carry on making any money for you at all.
There are a number of strategies that will help you turn these properties into successful investments.
This will require a fairly cash-rich start and/or plenty of time. Taking out minimal loans the profits you make off the property will be just that, mostly profit.
On top of that, if you can create a streamlined and cost-efficient management system for your properties then you should be able to manage a number of properties. The accumulated income could begin to add up to some serious cash. However, the more properties you own, the more likely that big expenses will occur which could be pretty financially damaging.
The long term benefits of owning a property are hard to fault.
Whilst it may take 15-30 years to pay off the mortgage your property, it should (hopefully) have been appreciating all that time. It could have doubled or even tripled in value over that time. At this point, you could sell and make a hefty profit and then either reinvest the cash or use that money for your retirement fund.
Land is an interesting investment type, and often overlooked, especially by new real estate investors. However, land typically has low prices and almost non-existent running costs.
There are a couple of ways to make money off land.
First, you could rent it out for farming or hunting purposes. The other way to make money off land as an investment requires a deep and full understanding of the development market in that area. You need to be able to forecast whether that land will increase in value over time through demand for development space.
A major downside in investing in land is that it can be hard to get a loan for this kind of investment. This means that the vacant land market is mostly a cash-only market, and you will need to save up a bit of cash to break into it.
Buy low, sell high. This is the motto for any and all investing. House flipping though, is an investment type that exploits this concept.
Buying houses that are in need of work, fixing them up and then quickly selling them on.
By doing this investors can buy property for far below the market value, increase the properties worth to current market value (or above) with a cash influx, and then sell to quickly reap the rewards.
This can be a very effective short term investment strategy with excellent returns.
However, these kinds of jobs come with high costs, require extensive market awareness, and need a great deal of planning in order to pull off.
So, whilst the low price point of the property may be attractive, you need to be able to budget for all the necessary repairs. You also, need to know what renovations are going to add the most value to the property with the least input of cash. On top of this, you will need a good build team an eye for detail and an interior designer's flair doesn’t hurt either.
There are a number of costs that can quickly get out of hand, and it’s not unusual for renovation budgets to go way beyond the expected costs.
Each of these three strategies has the potential for making some big bucks. However, a combination of the three for your investment portfolio will help ensure good monetary returns.
So we are going to outline a few strategies that combine these practices and are suitable for varying investment levels.
If your goal is to build a retirement fund, then getting one or two investment properties in your portfolio is a great way to prepare. Whilst they won’t make a huge amount of day to day returns you can steadily pay off their mortgages and when retirement time comes you can sell the appreciated properties for good capital gains.
A few things to be wary of:
It is worth putting a large lump sum away for those unexpected maintenance costs that come with every property. A burst pipe, a leaky roof, a new oven, or just routine renovations. Big costs can have big impacts on your pocket if you aren’t prepared for them.
Buying an investment property isn’t like buying your home. You want to purchase property in a location that is either in high demand or will be in high demand in the future. No point buying a farm in the middle of nowhere to rent out. Because no one is going to want to rent it out. Just because you bought a house doesn’t mean it’s going to increase in value.
There are some obvious exceptions to this, a property in central NewYork for example, is likely going to increase in value. However, remember the rule, buy low, sell high. Buying property in NYC is unlikely to fulfill the buy low requirement.
Sell high. You will want to wait for the right time to sell. With that in mind, you should never be forced to sell. If your finances won’t stretch to owning an investment property, don’t over leverage. If an increased expense in another part of your life is going to force you to sell you could end up losing money on your property.
Combine house flipping strategies with rental income and property appreciation.
Being a property entrepreneur is all about leveraging the opportunity. It requires you to keep your finger on the pulse. Doing constant market research will raise your awareness of possible investment opportunities, as well as help you make important contacts within the industry.
Ideally, you would want to purchase your properties below market value, do some work on them to increase their value, rent it out to cover costs whilst you wait for the right moment to sell to make maximum gains.
This requires slightly deeper pockets, a better knowledge of the real estate marketplace and a willingness to be hands-on with your investment. However, if you are willing to put in the time and effort, then this strategy will ensure you excellent long term returns.
A strategy that definitely benefits from the experience and deep pockets.
Unexpected costs and unrealistic budgets could see you lose huge amounts of money. It’s not unheard of for people to be forced to abandon projects before they are finished, or being forced to borrow more money and when they sell not getting the returns they thought they would.
Find a good project property, do your due diligence with an experienced builder or surveyor to understand renovation costs and make sure there are no structural issues. Then do the math and make sure you have enough cash for the work required, plus a little extra for when the build inevitably goes over-budget.
Quick returns, but high risk.
The real money doesn’t generally come from the rental income. Though with a portfolio of the right properties it certainly can. The money comes through a combination of strategies that hinge on capital gains.
If you are looking for steady returns on cash investment that you don't want to have to work on, you would be better off playing the stock market. However, done correctly, the monetary rewards for property investment can be huge.
There are numerous strategies, and determining the right strategy for you depends on why you’re investing, how much cash you have, and your investment goals.
We hope you found this blog interesting! However, do note that it should not be used as a substitute for competent legal and/or other advice from a licensed professional.