Investing in real estate is a time-honored way to make money. In fact, it is one of the first sectors most of us invest in. Granted, your first investment in real estate might not be a rental property but it is an investment, nonetheless.
However, there is more to investing in real estate than just buying a home and smart investors are constantly looking for ways to increase the profits. This not only includes keeping an eye on which sectors are the best performing but also looking at a way to increase the yield in the properties they already own. With that in mind, here are some pointers on how you can learn from the smart money.
Focus on Cash Generating Properties
While properties that are generating cash often sell at a premium, this is a proven way to gain a return on your investment. The reason is simple; these properties are bringing in cash on a regular basis.
For smart investors, they try to identify off-market properties as these can be had at a discount when compared to listed opportunities. One way to do this is to develop relationships with other investors in your area as they might have properties in their portfolio which they are seeking to sell.
Another way to do this is to learn how to mine the property tax rolls as this information will let you know who owns a certain property when they acquired it, and how much the property is worth today. When you have this information, you can start to identify properties which might be prime for acquisition.
Obviously, cash-generating properties mean that they are already occupied, but smart investors often go one step further – they look for opportunities to subdivide the property. Doing so helps to increase profits in two ways. First, it increases the number of rental units and this means more cash coming in every month.
Second, it reduces the risk that a vacancy has on a property’s cash flow. Think of it this way, one vacancy on a property with four units is higher, on a percentage basis, than one vacancy on a property with five units. As such, smart investors always want to increase their cash flow while reducing their risk.
Investing in Greenfields
This is a process known as “Land Banking”, where an investor finds a greenfield property on the outskirts of a growing metropolitan area and then works to get the right zoning in place. In doing so, they increase the value of the land without needing to invest massive sums of capital.
In some cases, the investor doesn’t even purchase the land. Instead, they get an option on the property. This ensures that the owner cannot sell the land to anyone else, thus reducing upfront costs.
One way to start is to look for plots on land which are underused in your area. This can include hunting lands which can be easily accessed by major roads or it could include farmland which has gone fallow. The advantage to this approach is that you might be able to lease the property for its current purpose while you get the necessary zoning approvals, allowing you to generate cash in the near term.
While you are probably familiar with the concept of house flipping, you might not be aware that investors do this with contracts as well. This happens when you bring together a distressed seller with a buyer who is ready to move quickly.
In this scenario, you do not actually purchase the property. Instead, you get an option for purchase and then you use the time to find a buyer who would be willing to acquire the property – hopefully at a higher price than the original option.
One way to do this is to find homes in your area that are either vacant or are being on their mortgages. Then you can reach out to the owner and negotiate the terms of the sale. Once the option is in place, you can either market the property or you may even have a list of potential buyers already in place. Either way, the risk in this scenario is usually quite small – especially when compared to the upside potential.
Another way smart investors are profiting is through a practice known as hard money lending. These are short-term loans which are given to buyers who cannot qualify for bank financing. The catch is that the loans usually carry high-interest rates and the terms can be as short as six months.
Keep in mind, that you will need to have enough capital in place if you want to become a lender, or what you can do is invest with a hard money lender in your area as this will not only help you find opportunities but it will give you access to a team who knows how to properly underwrite these loans.