There are three broad categories of investment strategy that I advocate:
Bargain purchase is the purchase of real estate for at least 20% below current market value.
In the increase-value strategy, you buy a property for its current market value, but you select only properties with some unrealized potential. Then, immediately after purchase, you make whatever changes are necessary to increase the value of the property. In general, you must increase the value by at least 20% within six months in order for the strategy to be worthwhile.
Double-digit cap rate means that you buy the building on terms that it has a capitalization rate of 10% or more. The capitalization rate is the net operating income (rent minus operating expenses but before debt service) divided by the purchase price. In other words, it is the cash-on-cash rate of return you would get if you owned the property free and clear. In the absence of a bargain purchase, double-digit cap rates are very hard to find. They generally only occur temporarily in depressed markets or in small market niches.
The most common real estate investment strategy, however, is one which I condemn: buying properties which the investor believes will soon increase in value due to market-wide appreciation. This is, in fact, pure speculation. No one knows which areas will appreciate. Many billions have been made by investors pursuing this strategy, but they were simply lucky.
Another common strategy which is advocated by most real estate gurus are various forms of finding unsophisticated sellers and using some convoluted real estate transaction to take advantage of their lack of sophistication. These strategies are unethical, immoral, and often illegal. I do not advocate them.
There are two broad categories of holding period:
Long-term means you hold the property for years. Most investors do that. I used to advocate that. I no longer like long-term holding. It requires clairvoyance, a skill that humans do not possess.
Flipping means selling the property as soon as possible after you acquire it. In some cases, you can even sell it before you buy it or simultaneously with buying it. Some seminar gurus are big on advocating this, probably only because it sounds really spectacular to a novice. In fact, selling before you close or simultaneously, although theoretically possible and occasionally done, are quite difficult to do and may not be worth the trouble. When I talk about flipping I generally mean to sell as soon as possible after acquisition.
Different strategies require different amounts of time or require that you be available for particular hours of the week. For example, rehab is extremely time-consuming. Anything involving the government, like buying at sheriff's sales or appearing in court, generally requires that you be available during business hours on week days. If you have a full-time job or do not want to give up all of your after-work hours for real estate, you must not choose a time-consuming investment strategy. If you work at a regular salaried or hourly job during business hours, you probably cannot pursue a strategy which requires you to do real estate stuff during business hours.
Some strategies, like buying foreclosures, require huge amounts of cash. Others, like buying judgments secured by real estate or buying at builder auctions, require little or no cash. In general, cash makes your investment life much easier. Too often, the use of cash is dismissed as non-macho or some such. That's nonsense. But if you absolutely have no cash, you must either get some or use strategies which do not require any. The grandaddy of all real estate gurus, William Nickerson, wrote the book How I Turned $1,000 into $5,000,000 in Real Estate in My Spare Time and How to Make a Fortune Today Starting From Scratch. In those books, he talks a great deal about ways to save the money you need for a down payment. The concept of saving must seem downright quaint to graduates of today's real estate gurus' seminars and boot camps. They all preach the "something for nothing down" approach. I prefer the save-up-the-down-payment approach. The book The Millionaire Next Door says that real millionaires are big savers. Real estate gurus, most of whom are phony millionaires, either ignore saving or dismiss it as impossible.
I am not mechanically inclined. On the other hand, many people mistakenly think that I am a lawyer. Accordingly, it would not be a good idea for me to specialize in rehabs, but it might be a good idea for me to specialize in a legally oriented strategy like foreclosures. Similarly, you should take stock of your real estate related aptitudes and gravitate toward strategies that take advantage of your strengths and avoid your weaknesses.
Different strategies require different interactions with people. The amount of the interactions varies, as does the nature of them. If you hold long-term, you must be a landlord, and an employer if you buy multi-unit buildings. If you buy pre-foreclosures, you must negotiate over the kitchen table with people who are in financial difficulty. On the other hand, if you buy foreclosures, about the only people you encounter are the auctioneers and all you have to say to them is the high bid. In other words, there are places in real estate for the gregarious as well as for recluses. Just make sure you know which you are and that you select your strategy accordingly.
Much of what the current crop of gurus teach is unethical. In general, it's difficult to do nothing-down or lease-option deals ethically. I talk about the ethical, legal, practical, profitable ways to buy real estate for 0% to 5% down in How to Buy Real Estate for Little or No Money Down. When pursuing bargain purchases, there is a strong temptation to lie to the seller about the market value of their property. Bribery is big in the business of increasing values by getting favorable zoning changes. Transactions between sophisticated and unsophisticated people create powerful temptations for the sophisticated to take unconscionable advantage of the unsophisticated. There are plenty of ways to do real estate investment ethically. Anyone can resist temptation. But real estate also has more than its share of ways to misbehave. Let's be careful out there.
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Acquiring property by adverse possession |
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Acquiring property from addicted sellers |
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Acquiring property out of bankruptcies |
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Acquiring lots from lenders who seized them from failed builders |
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Acquiring unsold lots from developers who want to move onto their next project |
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Acquiring "surplus" corporate real estate |
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Acquiring property auctioned off for nonpayment of special assessments |
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Acquiring property indirectly by buying delinquent mortgages on subdivided land |
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Acquiring property that is being auctioned off for nonpayment of property taxes |
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Acquiring property which apparently has no equity but where lenders will release liens at a discount |
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Acquiring property from lenders who have foreclosed on failed housing developments |
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Acquiring property from persons who are in various personal difficulties |
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Acquiring property from U.S. Marshals who seized it from drug dealers |
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House auctioned off for nonpayment of homeowner dues, featured on 60 Minutes |
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Lease unfurnished condos long-term from owners then sublease them short-term and furnished to executives on temporary assignments |
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Acquire property by purchasing "in-the-money" options on real estate from persons who cannot or will not exercise them |
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Acquire property by buying rights of redemptions from foreclosed owners who cannot redeem on their own |
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Acquiring property where the minimum bid is cut at the last minute at foreclosure auctions |
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Acquisition of landlocked land adjacent to investor's already-owned land, assembly (combining two substandard parcels into one standard one, Acquiring both the life estate and remainder estate on the same property |
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Acquiring the last few houses owned by a builder who has closed his on-site sales office and moved on to his next development |
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Acquiring house that are shunned because of severe odor problems |
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Acquiring property in a temporarily-depressed area (Anchorage) |
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Acquire property by buying rights of redemptions from foreclosed owners who cannot redeem on their own |
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Acquiring to-be-torn-down buildings and moving them to a new site |
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Acquiring houses which have another house in their back yard |
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Acquiring rehab property in bad neighborhoods |
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Acquiring property which has been seized by the IRS for nonpayment of income taxes |
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Acquiring repossessed properties from HUD |
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Acquiring equity in real estate indirectly by buying small claims court judgments against persons who own real estate |
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Acquiring life estates and remainder estates |
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Acquiring tenant-in-common interests in real estate |
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Acquiring property through property-wanted ads and OREOs |
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Acquiring property from lenders who acquired it by foreclosure |
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Acquiring property whose ownership is unknown to local tax authorities by tracing the heirs |
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Acquiring tenant-in-common interests in real estate |
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Acquiring property from partners who are fighting and property which apparently has no equity but where creditors will release liens for nothing |
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Acquiring repossessed VA homes in Phoenix during a real estate depression in that area |
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Acquiring property from an owner who is on the verge of losing it for nonpayment of property taxes |
Probates | 1/89, 6/90, 9/90, 10/94, 2/99 | Acquiring property from estates |
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Acquiring OREO property from special agencies set up in the wake of the savings and loan crisis |
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Acquiring property which is shunned because of seemingly serious foundation problems |
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Acquiring property through property-wanted ads |
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Acquire property by buying rights of redemptions from foreclosed owners who cannot redeem on their own |
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Acquiring property from owners trying to sell without a real estate agent |
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Acquiring property from various categories of sellers who tend to sell cheap like bureaucrats, heirs, donees |
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Acquiring property by suing sellers who renege on option agreements for specific performance |
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Acquiring raw land from out-of-county owners |
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Acquiring property which has been stigmatized for irrational reasons |
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Acquiring property through property-wanted ads |
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Acquiring property with serious title problems |
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Acquiring property from a divorcee enroute to foreclosure |
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Acquiring one property from an out-of-area owner and the adjacent extreme fixer property |
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Acquiring one property from a lender by getting creditors to release liens at a discount and another at a foreclosure auction |
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Acquiring two office condos OREO from lender |
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Acquiring property out of estates being probated |
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Acquiring property which has been condemned |
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Acquiring property from owners who are enroute to foreclosure |
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Acquiring property from troubled syndicates |