Real estate investments can be incredibly rewarding when done correctly. However, it must be remembered that every property type has its own risk/reward profile. For someone who is thinking about getting involved and building a portfolio, it is important to understand the pros and cons of various types of real estate investments. An in-depth knowledge of the different types of real estate investments can definitely help you decide which type is right for you.
Apartment Complexes:
Investing in apartment complexes is considered as an opportunity by many to earn a large sum of money each month while providing a large number of people with a safe and comfortable place to live. But, before investing your money, ensure to understand the pros and cons that are attached to investing apartment complexes.
Pros:
- No decline in the demand, even where the economy is poor
- Less risky cash flows and good ROI
- Depreciation period is shorter than that for commercial real estate
- The possibility of additional value from condo conversions, remodeling, and rezoning
- Professional management costs spread over multiple units
Cons:
- As all units are in a single place, the property is vulnerable to a downturn in the community
- Demands more secure financing when an investor invests in more than four units, including higher down payment and reserves
- Frequent turnover
- Relatively illiquid investment and therefore, costly to dispose of
Flipping houses
House flipping is when a real estate investor buys houses and then sells them for a profit. In order for a house to be considered a flip, it must be bought with the intention of quickly reselling. Most ‘flips’ require additional work to the house in order to boost the selling price and turn a larger profit.
Pros:
- Planning ahead, doing the homework right, and marketing well can definitely help in making a quick profit. After repair value and location, and calculating repair and closing costs, you determine how much you need in profit
- You don’t always need to fix up the home that much. Sometimes new homes in hot markets can sell for a good profit, too
- Buying homes that don’t need extensive renovations and bringing them up to par with others in the neighborhood can prove to be profitable.
Cons:
- You may have to spend on unanticipated expenses which include contractor delays, material delays, permit delays and renovation
- Any profit that you make on an investment property may be subjected to capital gains taxes – depending on how long you owned the property
- You may incur a loss if you fail to find a buyer for your property because you must pay the holding costs on the property. Therefore, the longer it takes to find a buyer, the more money you are losing
Wholesaling real estate
Real Estate wholesaling occurs when the wholesaler contracts with a home seller, markets the home to potential buyers and then assigns the contract to one of them. Profit is made from the difference between the contracted price made with the seller and the price paid by the buyer.
A typical wholesaling scenario looks like this: The wholesaler has a house under contract for $90,000 that he estimates needs $20,000 in repairs but will sell for $150,000 once the repairs are made. Using his network of investors, he finds an eager buyer at $100,000. He assigns the contract to this investor, who then has a profitable fixer-upper project. The wholesaler makes a $10,000 profit without ever owning the home.
Source: Investopedia
Pros:
- Firstly, it doesn’t require an upfront cash investment
- There is no real cash investment involved and a good credit score isn’t necessary.
- Little real estate experience is needed for wholesaling real estate
- Short-term investments found in wholesale properties offer an easy alternative to low-risk investments in the real estate market
Cons:
- Whole real estate, once sold, stops making you money and will probably not become your full-time job
- One of the most difficult parts of wholesaling real estate property is finding below market value homes
Development Real Estate
Real estate development can range from the renovation and re-lease of an existing building to the purchase of empty land to build something profitable. Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control, and orchestrate the process of development from the beginning to end. Developers usually take the greatest risk in the creation or renovation of real estate—and receive the greatest rewards.
Pros:
- You can save a huge amount of money by choosing a development property and avoid paying transfer duty on the property
- With a development property, you can choose your property layout, size, and finishes
- Add-ons can be used to increase the desire of a property, and boost the overall value. Some add-ons include controlled access, security guards, high ceilings, and valet parking.
Cons:
- Fixtures and fittings in the model house may be different than those that you end up getting
- Most new buildings will have building defects or snags that need to be fixed before the property is listed. In addition, it might require a maintenance crew and staff to oversee operations and keep everything up to date.
The risk is an inherent part of investing. Therefore, before investing in a new property, ensure to analyze the pros and cons. Weigh out the different options and see which one best fits your current financial situation and work ethic. Raising capital is a possibility, but don’t rely on it. If you don’t have any capital to begin, then dig into wholesaling real estate. If you do have the money to spend and some free time on your hands, then you may find flipping houses to be very fun, actually!
At any point, all of these methods can be used to create long-term wealth and financial freedom. With the right mindset and mentoring, becoming a real estate mogul is just on the other side of the hill. What are you waiting for?