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The best real estate investments are low risk and offer a good return on your investment. There are numerous strategies for investing in real estate, and some carry more risk than others. The best way to avoid risk in any real estate transaction is to do your due diligence. When determining the return on your investment, it’s important to remember that your return comes from both cash flow and appreciation. To profit from appreciation, you should be prepared to commit to long term ownership. Holding a property for a short amount of time typically doesn’t compensate for the transaction fees from the sale. In addition to a cash investment, many real estate strategies require a time investment that can often be inconvenient. Some of the best real estate investments have eliminated these cumbersome aspects to allow investors to enjoy passive income.
1) Residential Real Estate
Residential real estate investing remains one of the best investment opportunities available. Since people always need a place to live, it presents consistent income potential. Residential real estate is also easier to comprehend than many other types of investments. If you own your own home, you already have some experience. There are investment opportunities in single family homes, condominiums and apartment complexes. Single-family homes are easier to manage and maintain than the others. There are several real estate investment strategies that work well with residential real estate. You can choose to buy and flip or buy and hold. To take advantage of appreciation, you should implement buy and hold strategies. Incorporating both strategies into your investing will allow you to maximize your income potential. Optimizing cash flow should be the priority regardless of investing strategy.
One of the best ways to ensure appreciation is to choose the location of your investment carefully. Analyze the demographics of an area and take note of key indicators of growth. Look for areas where the population is growing rather than contracting. Communities where new roads are being constructed indicate expansion and increasing economic activity. When searching for a property, look for homes that need light cosmetic work or simple repairs that allow you to increase the market value. The best real estate investments are modest homes with good resale or rental potential. Avoid purchasing substandard homes that are undesirable or luxury homes that are expensive to maintain. Cash flow is determined by the income generated from the property after expenses. This includes mortgage payment, insurance, maintenance and holding costs. Generating positive cash flow becomes easier with time. As you pay down the mortgage and rents increase, income is more likely to exceed expenses.
2) Syndicated Commercial Real Estate
Multi-family syndications are one of the best real estate investments for passive investors. Essentially, multifamily syndications pool capital from multiple investors to purchase a large apartment complex. The advantage of these types of investments is that it allows you to invest in much larger properties than you would be able to on your own. You also don’t need to be knowledgeable in renovations, maintenance or management. You do, however, still need to do your homework. Research the syndicating company thoroughly, ask for references and documentation of their claims. There are also disadvantages of this type of investment. You have little control over decision making processes regarding the assets.
The syndication sponsor secures the property, performs all due diligence, inspections and financial audits. They will review the key components of the investment; discuss the projections and investment strategy and answer any questions before you make a commitment. A Limited Liability Company (LLC) is usually formed to own the property. Once you invest, you become an equity partner in the company. You are usually updated quarterly on the performance of your investment. When the apartment is sold, you will also be paid your share of the profits. Reinvesting your profits as they accrue can create a compounding effect that will allow your investment to grow much faster.
3) Mobile Home Syndications
Mobile home park syndications operate similar to multi-family syndications in that they pool investor resources. One of the major differences is that the investment typically involves only the land, not the homes. The investors own the lots, streets, utilities, swimming pools and other amenities while the tenant owns their home. The tenant pays to occupy the land and use the facilities. Mobile homes are relatively inexpensive in comparison to other types of homes. This creates a high demand for them as well as rental space. There is also very little turnover. Despite the fact that they are called “mobile” homes, they are not that portable. The expense of moving a mobile home discourages it unless it is a necessity. Most remain parked in the same location they were set up at when purchased.
The funds manager for the mobile home park syndication will locate the properties, perform research and secure a property manager. The properties are placed in an LLC, and you become a partner when you invest. The investment strategy often entails adding improvements to increase value for resale. In addition to regular cash flow, you are paid your share of the profits when the park is sold. Mobile home parks have the potential to provide a greater cash flow than many other real estate investments because there is very little maintenance cost.
4) Real Estate Notes
Real estate notes are created when a borrower assumes a loan for the purchase of a property. The documents stipulating the terms and conditions of the loan repayment are called a note. A note can take the form of a promissory note, land sale contract, deed of trust or contract for deed. Notes are bought and sold on the open market, and can provide an excellent investment opportunity.
One example of how you might profit from investing in a note is as follows. An investor wishes to purchase a property valued at $100,000.00. You lend the investor $50,000.00 that he invests in the property. He agrees to pay you $375.00 for five years at which time he will repay the $50,000. This provides a 9% return on your investment. If he fails to pay according to the terms of the agreement, you gain control of the property.