There are many different wealth strategizes in real estate which can acquirer additional income streams if purchased correctly. Understanding the process or knowing how to execute properly one can be successful in the game of real estate.
We are going to break down these wealth strategies and explain how you can make money from each strategy.
These wealth’s strategies, that we are going to discuss, are assigning a contract, encumbering a title, flipping, buy and hold, and commercial development.
When it comes to real estate income there are many ways to generate wealth.
You can generate passive income by buying and holding or active income by flipping contracts, renovations or adding value in other areas, like putting property development deals together.
Let us start with how to encumber a title. This is also known as assigning a contract, also called wholesaling, or no money down. This is done by a buyer looking to purchase a distress property with as little money down as possible.
Most individuals trying to break into the real estate market start here, because of the low financial commitment that it takes to purchase the asset. Once the buyer locates a distress property then the buyer proceeds to ask the homeowner if they are open to selling their property through a quick claim deed. This is called encumbering the property. Once the buyer has ownership of the property the buyer can then decide what or how they want to proceed with the property. The buyer can either purchase the property and do necessary repairs and then flip the property, sell the contract through assignment to another investor and take a profit without doing anything to the house, or hold onto the house and rent it out looking to improve the buyer’s cash flow stream over time.
If the buyer decides to flip the contract to another buyer he can either do a simultaneous closing or if the buyer does not want the investor to know how much money they are going to make then the buyer can do a separate closing. Usually when assigning a contract or encumbering a property the buyer usually just flips the contract for a profit and decides not to do any repairs.
Why is that the case? Even though the profit is much less, there is a lot less work that goes into seeing a project from start to finish. Many things can happen when going into a house that has just been bought as is. When flipping a house, navigating these waters can be very tricky. You may end up on, the losing side of the deal.
So, what is involved in flipping a house? First it is all about location. Finding a distress home in a good neighborhood is a great start. This can be difficult if you do not have a strong network or a good real estate agent working for you. Next, look for no hidden surprises. For example, make sure that the house is sitting on a solid foundation, that the house does not have mold due to a leaky roof, the electric is not aluminum wiring, and the plumbing seems to work throughout the house. This is what we call the bones of the house. Without this an insurance company will not insure the house. The house will not qualify if the house does not have the proper repairs and will be difficult to finance.
Calculating the repair cost is the most important thing when flipping a house. If your estimations are wrong or you run into some structural problems, you could lose money on the house. So be careful and either have a good contractor to help with this process or have a good understanding on what items many cost for repairs. I can tell you that some of my friends have lost money in flipping homes. They have not only lost their money but also their time when meeting with contractors and working on the house.
If you understand the process of flipping, there is profit, to be made. The key is not to over leverage yourself by extending your credit line so far out that you cannot pay back your investors or lenders.
Being creative, a problem solver, and knowing how to crunch numbers, will lead to success.
If you get in trouble with an investment, while flipping a house, you also have the option to lease the property out to another buyer or rent the property. With either of these two options, you can buy yourself time for the market to recover. If the buyer cannot afford the property then a hard lender may come in handy when helping create additional cash for the buyer. However, this comes with a high interest rate of return from the lender. Sometimes when people first get into real estate hard lender is crucial for a buyer to complete the deal. Just be smart when looking to flipping a house.
The last area we are going to go over is commercial real estate and development portfolio. Commercial real estate has the most potential to making the most amount of money However, funding the projects can be exceedingly difficult and expensive. As a developer if you have experience of past projects, the bank is opened to lend money. However, the bank is looking for a past track record and knowledge on how to develop a similar project. With a large project like this I would not go with a hard lender. We are talking about tens to hundreds of thousands of dollars, so a bank is the best option. Some of the scopes, of the projects are large hotels, office buildings, airports, large apartment complexes, football coliseum and many other commercial complexes. Some of the advantages of owning commercial real estate over residential is that commercial property usually has more tenants meaning a higher cash flow, the tenants are usually on a longer lease, and the lease creates a higher yield. The downside of commercial real estate is that in some states there is a state sales tax that is applied to the rent. For example, in Florida the sales tax is 5.5% so if the rent is $12,000 dollars then the sales tax would be $660.00 monthly. Usually, the tenant absorbs this cost through the lease.
There are numerous ways to generate wealth through different wealth strategies in real estate. In this blog we talked about encumbering a title, flipping, buy and hold and commercial development.
Which Strategy do you think is best for you?
For more information on different wealth strategies you can go to www.DiverseInvesting.com or purchase my book on Road Map to Investing on Amazon.
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