Investment opportunities in real estate abound. As an investment vehicle, real estate allows your clients the flexibility to control their involvement and time invested. From passive investment in Real Estate Investment Trusts to buying homes and placing them for rent, there are many ways to profit in real estate investment. As their agent, you need to know all the ways they may choose and the advantages and drawbacks of each.
Real Estate Stocks and Mortgage Instruments
The passive investor would likely want to place investment funds into the stock market in the form of equities of major national homebuilders. Or they might invest in a Real Estate Investment Trust (REIT). This is a fund set up and managed to invest in stocks, bonds and mortgage instruments in the real estate area.
Discounted notes are another investment strategy. Sellers many times accept a mortgage from a buyer, and after payments have been made for a while, they want to convert to cash. They sell the note to an investor at a discount and the investor then gets payments from the buyer.
Appreciation of the Market Value of Properties
This is the most widely known way of profiting in real estate. A property is purchased and held. Over time, the value of the property appreciates, sometimes even faster than the overall market. Certain areas of the country have experienced significant appreciation in home values over the last ten years.
General Price Inflation In The Economy
Even if home values aren't appreciating in a given area due to demand, their value can still increase significantly over time just due to economic inflation. If the cost of labor and materials to build a home are rising, then the construction of an identical property would be more costly. Thus the property's value is higher just because of recreation costs.
Cash Flows And Mortgage Payoff
Purchasing rental properties and keeping tenants in them results in cash flow in the form of rent payments. This can generally provide better returns than bank interest or stock appreciation.
Even if your rents on a property are only making the mortgage payments and no more, you are increasing your equity along the way. At some point the rents will totally satisfy the mortgage balance, and you'll own the property free and clear.
Buying Below Market Value
For a variety of reasons, there are always property sellers that have an immediate need to get their equity out of the property. This need can be pressing enough that they'll let the property go at a price significantly below its true market value. Some properties are in foreclosure and the lenders will take less than the market value in order to avoid further marketing expense and clear their books. When you can purchase one of these properties, you immediately enter an equity position that is your profit in the transaction.
You Can Increase Value In The Site And/Or The Property
An example of both of site and property value increases might be a home in an area with great mountain views. However, this home is older and has small windows facing the views. In addition, some large trees are directly in the views, and there's no outdoor enjoyment areas on that side of the home. You purchase the property and do three things:
You remove one tree and trim the others to open up the view.
Site Value/Property Value
You add a patio and deck on the side of the home facing the views.
You add larger windows in the home facing the view.
You Can Convert The Use Of The Property
A classic example of this would be the purchase of apartments with low rent yields, remodeling the structure and converting the apartments to condominiums for sale.
Create New Value In The Neighborhood
Getting into an area early when it's beginning to gentrify can be quite profitable. All around the country, urban neighborhoods are experiencing renewal. Older properties are being refurbished and values jump significantly.