What Kind Of Investor Are You?
By Paul Esajian on March 9, 2018
There are several different types of real estate investors. Just because most of the investment shows we see on TV are about rehab and flipping doesn’t mean there aren’t other options. It wasn’t that long ago that investing was all about finding a good rental property and holding on to it for as long as possible. Things have changed over the years, but rentals are still a viable option. Regardless of how you invest the first question you need to answer is “what kind of investor are you?” Are you a buy and hold investor looking for long term additions to your portfolio or are you interested in short term quick flips and rehabs? In a perfect world you will have a mix of both but until you get to that point you may need to pick. Here are some benefits of each to help pick what kind of investor you are.
SHORT-TERM INVESTING
- Quick returns. The most basic reason any investor would entertain flips and rehabs are for the short-term returns. Instead of having your money tied up in a property for years you can turn it over often in just a few months. This isn’t to say that house flipping is easy but if everything is done right it can produce a return in a short timeframe. This allows you to turn your money over and continue to grow your business whenever you see opportunity. Instead of waiting to time the market you can pounce whenever a good deal becomes available.
- Increased closings. The goal of any short-term investor is to close as many quality deals as possible. In a perfect world, there should be no gaps from one deal to the next. This is one of the reasons why it is so important to keep the process moving and close in as short a timeframe as possible. With a rental property you may only have enough capital to close one good deal annually. With rehab funds you can constantly turn them over and close three or four deals a year, or more. Increased closings give you a greater chance to maximize your income and improve your bottom line.
- Turnover. Getting involved in a bad rental property is a problem that will plague your portfolio for years. You will have to wait to the end of a lease to find new tenants or wait until the market turns to dump the property and move on. Even if you get involved in a bad rehab deal you can wash your hands with it in three months and move on. This doesn’t make it any easier to stomach but it is ok to make a small profit and move on. When you do the math on most deals the rate of return on even an average flip is still greater than what your money would earn in a bank.
LONG-TERM INVESTING
- Forced savings. In the past if you bought a house, any house, it was viewed as a method of forced savings. Most homeowners would stay in the house their whole lives and ultimately pay it off. At that point they could either live in the house without a mortgage or sell and live off the nest egg. This type of thinking has long gone by the wayside, but it is still applicable to real estate. If you buy a quality rental property it can produce revenue for years to come. When you get to the point that you own the property free and clear you can not only earn 100% positive cash flow but have all the equity as well.
- Rent and equity. One of the great allures of rental property is the fact that you don’t have to wait twenty years to realize a gain. Sure, there is massive upside potential down the road but there is also a chance to make money monthly. A good rental can generate positive cash flow all the while paying down your loan balance. You can truly enjoy the best of both worlds now and years down the road.
- Increased rate of return. There is no question that managing a rental property has its share of challenges. Between dealing with tenants, organizing maintenance and collecting rent there will be days you wonder exactly what you are doing. However, the benefits should outweigh the negatives. Think about what your money is currently doing for you in a bank or other investment vehicle. The odds are you are generating a small rate of return that is barely moving the needle. With a rental property you will see a dramatic difference based on monthly cash flow numbers alone. Sure, there is always risk associated but you can find a property manager to manage the property and help mitigate your risk. Given the rate of return the risk is often worth the reward.
There is truly no right or wrong choice in the world of real estate. What works for you may not work for a fellow investor. The best option is to know and understand what is out there and be open minded for anything that comes your way. You may only be fixed with rehabs and flips today but you never know what your real estate future holds.