I’m gearing up to do a new real estate investment (being a silent partner in the purchase of a mixed use building in small town Ontario). I kept thinking about doing a post iterating all the types of real estate investmenting I can think of and the pros and cons of each, so this seems like as good a time as any.
Speculation – this is anyone who buys a house hoping it’ll go up in value, whether they live in it, rent it out or leaving it sitting vacant (such as buying land). If you hope it’ll be worth X% more in the future, and the bulk of your profit will come from selling at that future time, you’re speculating.
Pros:
-Very easy and fun (pick an area, listen to the reasons its “hot” and put your money down!)
-Mixed benefit, if you’re renting it out you get some income, perhaps you live in it and get to enjoy the property
Cons:
-No way to reliably pick the next hot area, you’re basically gambling
Land-Lording – This is where you buy a property that’s cheap relative to the rent it can command, find tenants, and make income from the difference between their rent and your costs. You can rent a single unit, a small building, or a 400 unit monster as you learn more and make more money.
Pros:
-VERY well established technique (perhaps the oldest on this list)
-All sorts of data you can use to reduce your risk (i.e. average rental price in an area, vacancy rates, etc).
Cons:
-May have to fix toilets in the middle of the night
-Many laws are very tenant friendly
Wholesaling – This is what the “I buy houses” signs you see mean. Basically you search for “motivated sellers”, quickly buy their properties for cheap, then turn around and sell them for market rate.
Pros:
-If you’re buying at a steep enough discount its a fairly safe way to make money
-Fast return, if you can sell the property you get your money back and are on to the next property
Cons:
-You might feel bad profiting from people who have had some bad luck (or made some bad decisions)
-You need to learn to accurately appraise what a house will sell for
-You need to be able to quickly close, so you’ll either need lots of cash or great credit
Lending – This includes funding mortgages and being a silent partner. Basically you provide the cash, someone else does the work, and you split the profits.
Pros:
-Its great to make money while someone else does the work
-Some security on your investment if your name goes on the deed
Cons:
-Some risk, if the person managing the property messes things up (or takes advantage of you)
-Since you’re not on site checking things out, the property may get into trouble or be under-performing and you wouldn’t know about it
Bird Dogging – Often pitched as the way for people with no money to get into real estate, you look for deals, then sell them to other investors who have money.
Pros:
-No cash risked
-Put as much or as little time into it as you want
-Learn while you earn
Cons:
-I believe this is illegal in Canada and some states.
-Pays quite poorly
-Requires expertise, but is often performed by newbies. People who can properly evaluate a deal to determine if its good or not, can probably pull together the money to buy it themselves.
Flipping – Based on the idea that a house in good repair is worth or then the same house in bad repair minus the cost of repairs (e.g. its worth money to have everything already done).
Pros:
-Great way to capitalize on skills you may have (if you’re handy)
-Not very risky if you can properly appraise property and get the repairs done quickly (before a market shift)
-Fun (according to the home improvement shows)
Cons:
-Very competitive, so it doesn’t pay very well these days (many people are doing it)
-Takes a lot out of your hide (you could have just worked your ass off at work and collected tons of overtime)
-Not fun (according to the reality of having to fix up a crappy house then not even get to live in it).
Any other ideas for big approaches to investing in real estate? Any ideas about more pros and cons? Telly has been good enough to offer to write up a guest post about investing in student housing, which I’m very excited about.
To pull a “Canadian Dream“, big news on Monday! And no, I’m not going to announce that I’m going to be a father (I’m not as far as I know…)
September 21, 2007 at 10:34 am
With all the coverage that Telly’s been getting, she should be starting her own blog!
September 21, 2007 at 10:53 am
Who knew that creating a little suspense would get something named after me?
Good post by the way. I think you covered the field well.
Tim
September 21, 2007 at 2:10 pm
I like surprises.
I think that flipping is fairly risky because of the uncertainties involved.
It’s extremely difficult to appraise the original house, the finished product as well as accurately estimate the renovation cost. Too many errors could mean that you lose big bucks.
Mike
September 21, 2007 at 2:21 pm
Mike: Flipping can definitely become risky if it gets away from you, or if your appraisal skills (as you say: either the value of the property as is, the value of the property once finished, or the cost of the repairs) are weak. I’m weak on all 3, so I wouldn’t even *think* of trying to flip a property.
I suspect someone who was good at all three could minimize their risks.
September 21, 2007 at 2:59 pm
Wow! That’s quite a list! I’ve never even heard of bird dogging.
September 21, 2007 at 3:13 pm
SavingDiva: An interesting (very negative) article about bird dogging is available here: http://johntreed.com/birddog.html
September 21, 2007 at 8:11 pm
Every house that I’ve ever owned and lived in has been a flip. Basically we buy a ‘diamond in the rough’ fix it up in our spare time (i.e., this is not a business) and then move on a year or more later. Tough to do unless you enjoy home repairs and definitely more people have gotten into it in the past few years. The thing that I keep looking at is that we’ve seen basically a decade of it being a sellers’ market. I doubt the flipping frenzy will continue, you will still be able to find deals but it will become very important to pick your projects wisely.
There are some companies that specialize in speculation, they’re called land bankers. They buy farm land in areas near cities and hold it until the developers are in need for more land.
September 21, 2007 at 8:54 pm
WC: Yes, that’s the ideal way to flip. I had a buddy whose father liked building houses (go figure!). Every year they’d move, then he’d spend the next year building their new house after work and on weekends. I’m sure this was VERY lucrative for them over the years (but moving every year would get old I think).
If you’re living in the house, it can make almost any real estate strategy work (because, if nothing else, you’ve got a roof over your head). When I bought my condo my back up plan was to live there myself if I couldn’t get a good tenant at a decent rental rate.
September 24, 2007 at 9:11 am
Not quite the same as WC, but my husband had a method that seemed to work quite well for him as well. Each house he bought, he put only 5% down, live in it for a year or two and then rented them out. It’s a much easier way to get into rental real estate that having had to put down the required 25% (though I’m not sure what the requirements are today).
He basically bought homes that were in good rental locations (university housing area). They were pretty nasty though!