To say that Covid-19 has upset the apple cart is somewhat of an understatement. Covid-19 has had and is continuing to have, a profound effect on real estate market. And it will continue to do so for a few years to come.
Even as the most severe social distancing measures and restrictions on mobility are being very gingerly de-escalated, the world has come to accept that life may never be quite the same again. Working from home and online shopping are now cornerstones of a new normal. And so is Virtual Real Estate transacting.
What has not changed, though, is that real estate is a fundamental investment avenue. As long as there are people on this planet, there will be a real estate market. With that, the opportunities to make money in real estate still abound. All of the real estate investment strategies that have been applied over years, even decades, are as valid today as they have always been.
So, let’s look at six of the most common strategies for building wealth in real estate.
The oldest and most common method for making money is buying and reselling. As long as the selling price exceeds the cost, the exercise will be profitable.
In real estate and certain other asset classes this is known as flipping. Flipping usually entails a purchase and resale within a relatively short interval. The other end of the time scale would be more of a buy-and-hold scenario.
Making money from flipping, as with any retail type business deal, depends on buying low and selling high. Flip opportunities typically arise when a property owner runs into financial difficulty and needs to liquidate or dispose of a property quickly. Forced sales, more often than not, take place at prices below the market value.
If the difference between the market price and the selling price is big enough to cover all costs and still leave an adequate profit on sale, then the flip is a good strategy.
Home flipping requires a potentially significant capital outlay, albeit only for a relatively short time. There is a no-capital (or, at the very least, low-capital) option, though. Contract flipping essentially involves bringing a buyer and seller together.
Contract flipping, sometimes called wholesaling, should not be confused with property brokering or conventional real estate agency. Rather than just earning a commission on a deal between two other parties, you act as an intermediary.
With contract flipping, you acquire the right to buy the property at a specified price at any time in the future. You then find a buyer who is willing to pay a higher price for the property. That margin is your profit and is not a fixed percentage. It is, rather, a function of market forces and your ability to find the right buyer.
Rental – real estate market strategy
Properties that are rented out by the owner fall under the broader buy-and-hold strategy. Typically, an investor would acquire a property with the intention of reselling it sometime later once the value has appreciated. In order to offset some of the cost and increase the ultimate overall return, the property is rented out during the intervening period.
This strategy has the dual benefit of an immediate passive rental income as well as the longer-term profit when the property is sold at a higher price. The drawback, however, is that financing is usually limited to 70% of the property value. The investor needs substantial capital to cover the 30% down payment and all the closing costs.
Rental options are either long or short term. Short-term rentals, most commonly vacation rentals, bring in far more revenue than long-term residential rentals. However, that revenue comes with much more effort and risk. Investors should very carefully weigh up all the factors before embarking on a rental strategy.
Renting out property does not always mean letting an entire property to a single tenant. As property ownership costs continue to spiral, more and more people are turning to house hacking. This involves letting a portion of a property to one or more tenants, while retaining the remainder of the property to live in.
In some cases the property consists of multiple units where the owner lives in one unit and the rest are rented. More and more common, though, nowadays, is the practice of letting rooms in the family house.
The beauty of this strategy is that there is no capital requirement to acquire the lettable space and there is very little risk. The rental income can, in some cases, be substantial enough to cover the mortgage and, essentially, provide the owner with free accommodation.
The capital requirement is less onerous than buying to let. A mortgage for a primary residence requires a far lower down payment.
Between the rental income and the long-term appreciation of the property value, this is an easy way to boost wealth. The downside is the potential loss of privacy of the investor and his family.
This strategy has nothing to do with cold weather. This acronym stands for Buy, Rehab, Rent, Refinance, Repeat. This can be a very lucrative strategy towards building both wealth and stale long-term income.
The strategy works by executing the various steps in exactly the order stated.
· Buy. The target property must be priced well below its potential market value. Usually this would be a property that is sold at a substantial discount because it is in a very run-down state and requires major reform.
· Rehab. The house is then renovated to return it to optimum condition for habitation. The investor should exercise caution here to avoid spending money on changes that do not add to the appeal of the property.
· Rent. Once the house has been restored, it is let out. The rental income starts to repay the capital invested in the property. It also covers the period that the investor has to hold the property before lenders would consider granting a mortgage.
· Refinance. Once the investor has accumulated some equity through the rental income, and also ridden out the waiting period, he can then secure financing against the new appraised value of the property.
· Repeat. The capital freed up by refinancing the property is now available to fund the next investment.
Co-operative property investments include syndication or Real Estate Investment Trusts. Syndication involves putting together a group of investors to jointly acquire property. This strategy is often followed when large investments are involved; particularly entire apartment buildings or gated complexes or similar.
These properties are then upgraded and either resold at a profit or operated as rentals. Rentals may be sold off at a later time depending on market conditions and investor preferences.
Some investors contribute only capital while others provide the expertise and effort of finding, developing, and managing the project. In this way, various investor profiles can be accommodated in a single investment.
Real Estate Investment Trusts are more of an equity-type investment. They are underpinned by real estate or real estate mortgage portfolios.
Despite all the pandemonium and upheaval caused by Covid-19, real estate is still alive and well. All things considered, the crash that occurred in the first half of 2020 was merely a blip on the radar; a violent but transient storm.
One thing is certain; as long as there are people on planet Earth, there will be a real estate market. And there will be opportunities to make money. In one way or another, any one of these strategies may be the way to make that happen.