Traditional real estate investment strategies require cash up front
Posted On June 12, 2021
Broadly speaking, traditional real estate investment strategies fall into two areas:
The cash strategy and the cash flow and equity strategy
If you are an experienced investor, you undoubtedly know this information like the back of your hand. However, I wanted to provide a brief description of each “traditional strategy” below for those who might be new to the industry.
The cash strategy
With this strategy, the goal is to generate cash immediately. Then an investor can use that money as earned income or invest it again in more property. There are four options that can be used to follow a cash strategy:
Search and refer
If an investor’s goal is simply cash and not investment, he or she can become a “bird dog.” Bird dogs find good investment properties for investors. By doing so, they earn a “search fee.” It is the fastest way to earn cash.
Control and allocation
With this method, the investor obtains an option or an assignable contract on an investment property and then finds someone else to acquire it. It gives the investor considerable bargaining power and a good margin. However, the volume is low.
Buy and sell
This is the method of acquiring a property, without making improvements and then putting it back on the market at a higher price. The profit margin is better than with a control and allocation strategy. But the investor will have to spend more time finalizing these agreements. Finally, the volume is less than with the following method.
Buy, upgrade and sell
This is the “rehabilitation” method. The investor buys the property, repairs it, and then sells it for a profit. It offers investors even better margins than the buy and sell strategy. Naturally, rehab takes a lot more time and money, and there may be fewer offers to make.
The cash flow and equity strategy
This strategy is long-term. That is, the investor seeks to create cash flow and generate capital for the future. There are three basic options:
This method has the great advantage of requiring little or no money. Within this method, the investor has several alternatives for cash flow: an incoming lease option, an outgoing lease option, or both.
The lease option occurs when an investor negotiates the lease of a property (usually 2-5 years) and includes a purchase option at the end of the period at a pre-negotiated price. Once the investor is entitled to lease the property, he then leases it at a higher payment to a lease-to-own buyer. The difference between the lease payment and the occupant’s rent creates the cash flow. Note: Investors should ensure they have a tenant lined up before accepting the option to lease any property. This ensures that cash flow will come in!
The terminated lease option occurs when investors rent a property they own to a tenant with the option to buy at the end of the lease period. With this method, they get a higher cash flow during the lease period and also capital (depending on the price previously negotiated).
Buy and hold
With this method, investors buy a property and rent it. This is a less complicated strategy than the “lease option” mentioned above. However, the investor is now the actual owner, and with the property there are rewards and risks. Buy & Hold offers investors more flexibility than with the methods listed above. They have the option to sell anytime they want, or they can hold the property for cash flow and capital accumulation for as long as they want to.
Buy, improve and hold
Overall, this is perhaps the best method to generate cash flow and equity. Despite the current market, properties tend to appreciate over time. Also, when investors make improvements, they have the potential for higher rents (more cash flow!) And greater capital accumulation. Additionally, they may also have the opportunity to enhance the potential of a property by relocating it for more profitable use. Finally, when improvements are made, some of them are classified as capital improvements by the Internal Revenue Service, so there is the possibility of reducing the taxes paid on the cash flow obtained from the property.
Of course, there is more to these strategies than can be adequately described in this article. And it took me decades to perfect my approach to each situation.
What these traditional investment strategies lack is the flexibility to turn a profit quickly, and again, many of these methods require a large amount of cash to purchase the property.
The most creative real estate strategies, such as short sales, change of properties, rehab and sale, pre-foreclosures and other “non-traditional” methods run the risk of being restricted with the introduction of the new Uniform Closing Instructions.
These new regulations that are about to take effect will limit real estate investors to using traditional methods, thus closing the opportunity to invest in more creative strategies.