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by Ben Luxon June 16, 2019 5 min read

Real Estate can be a great investment opportunity. But there are a few things everyone should know before they invest their hard-earned cash.

Top amongst these things are the kinds of investment you can make as well as some of the associated risks around each of them.

We have broken down these investment types and risks in this article to help you take the first steps down the road to property investment success. This though is a big topic and this single article merely scratches the surface.

Types of Investment

There are a variety of ways people make money when investing in the real estate market - everything from home improvements and ‘flipping’ houses, to investing in mortgage notes.

On top of this, the cost and return period can vary widely. From more instant and quick house flipping investments which might be as quick as 90 days - to much longer 30-year investments that work on the assumption that most property will appreciate over time.

Each form of investment, like any investment, has its own associated risk. If managed without proper research beforehand, or even you are just unlucky, they could cause serious financial issues.

Types of Investment

Home Improvements

One way to increase the value of a home is to make improvements to the property. With this increased value entrepreneurs are quickly able to sell the property on for more than they bought it.

This is a fairly fast investment with a quick turn-around. However, it requires a large amount of capital up front, enough for the purchase of the property as well as the refurbishments, and plenty of backup cash for when things, inevitably, go wrong.

There is a careful line to draw and you need to work out the profitability of a property by balancing the expected costs of purchase and refurbishments with the expected end sale value.

For example, you may find a distressed building on the market for way below the areas average market value. However, it could have serious integral or structural issues that would cost you far more money to fix and make the building habitable again than you will get from the end sale.

Types of Investment

Buying and Selling (Flipping) Houses

This is one of the most common ways to make money with residential property. It involves buying a property at a low price, below market value - maybe it’s on auction, for example - and then selling it on for a higher price.

Most people will also make some improvements on these investments to increase the profitability of the property. Once the entrepreneur is able to get an appraisal that is substantially higher than they paid for it, they will sell it, pocketing a tidy profit in the process.

There is another common way of doing this though, which is higher risk. Entrepreneurs often flock to areas in which real estate prices are rising - with the expectation that they will continue to rise. They then purchase a house at market price. The gamble is that they expect the property to continue to increase in value due to the region's success.

The potential for a local market collapse and the difficulties that surround getting a mortgage for a property that isn’t one's prime residence can make this a risky strategy.

When the bubble bursts, it’s not uncommon for investors to lose.

Owning and Renting Property

Property rental income can be extremely lucrative, depending on the property, location, and tenants. 

For this reason, this is probably the most common form of property investment. It allows you to own an asset with increasing value whilst generating a steady income from it at the same time.

However, expenses can be considerable, including closing costs on the purchase, maintenance and upkeep, property taxes, mortgage payments and problem tenants amongst other things. Because of this, it’s not uncommon for people to make net losses on their property investments - at least for the first few years. Add to this the potential of a property bubble bursting and the monetary risks really begin to add up.

This strategy makes a lot of sense though if you can make the property have a positive cash flow quickly.

Once you have one property in the green, it becomes easier to get investment and loans for further properties.

Types of Investment

Investing in Mortgage Notes

The Investor who owns a mortgage note owns a homeowner's mortgage debt and this means they are entitled to the mortgage payments that the homeowner might otherwise pay a bank or other mortgage originator.

The risk here is with non-performing mortgage notes. People can’t always pay their debts and you take upon yourself that risk.

Buying Commercial Property

Investing in commercial property is much like residential real estate. You can do it either with the intention of doing it up and selling it on for a profit, buying with the intention of renting it out or holding it for appreciation.

By commercial real estate, we mean things like “office space”, retail storefronts, industrial buildings, hotels, land or entertainment venues.

A long-term lease of retail space in a centrally located building could be worth anywhere from tens of thousands of dollars to millions of dollars per year depending on the location and size of the space.

Conclusion

This is a quick breakdown of the various kinds of investments that the umbrella of 'Property Investing' encompasses.

For the most effective investment plans, you should know the strengths and weaknesses of all of these, and your portfolio shouldn’t rely solely on any single investment strategy.

For example, an ideal situation might be:

You buy a property at a low price in an up-and-coming area and spend a bit of extra cash fixing it up. This increases the value immediately of not just the sale price but the rental price.

You then rent it out whilst holding it for a longer investment strategy aiming to sell after greater appreciation. However, it will require more money up front and entail more risk than simply buying a rental property that’s ready to rent - or purchasing a property and quickly flipping it.

It’s also important to note that not all properties or areas are appropriate - or likely to succeed in certain investment plans. Buying a house with the expectation of appreciation when local politics or development will likely cause it to drop in value. For example, there are talks of adding a new runway to the local airport nearby.

We hope you found this blog interesting! However, do note that it should not be used as a substitute for competent legal and/or other advice from a licensed professional.

Ben Luxon



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