A Real Estate Investment Has The Following Expected Cash Flows Traditional Real Estate Investment Strategies Require Cash Upfront

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Traditional Real Estate Investment Strategies Require Cash Upfront

Broadly speaking, traditional real estate investment strategies fall into two areas:

Cash strategy and cash flow and equity strategy

If you are an experienced investor, you surely know this information like the back of your hand. However, I wanted to provide a brief description of each “traditional strategy” below for those who may be new to the industry.

Cash strategy

With this strategy, the goal is to generate cash immediately. The investor can then use that money as earned income or invest it back into more properties. There are four options to use in realizing a cash strategy:

Find and refer

If the investor’s goal is only money and not investing, he or she can become a “bird dog”. Birders find good investment properties for investors. In doing so, they earn a “finder’s fee”. It’s the fastest way to make money.

Control and allocation

With this method, the investor gets an assignable option or contract on the investment property and then finds someone else to acquire it. It gives the investor significant negotiating power and a good margin. However, the volume is low.

Buy Sell

This is a method of acquiring a property, without improving it, and then putting it back on the market at a higher price. The profit margin is better than with the control and allocation strategy. However, the investor will have to spend more time on carrying out these activities. Finally, the volume is lower than with the next method.

Buy, improve and sell

This is the “rehab” method. An investor buys a property, fixes it up, and then sells it at a profit. It offers investors even better margins than a buy and sell strategy. Of course, rehabilitation requires significantly more time and money, and it is possible that there will be fewer jobs.

Cash flow and capital strategy

This strategy is long-term. That is, the investor wants to create cash flow and build capital for the future. There are three basic options:

Rental option

This method has the great advantage that it requires little or no money. Under this method, the investor has several cash flow alternatives: a lease option, a lease option, or both.

Lease Option In occurs when an investor negotiates a lease of a property (usually 2-5 years) and includes an option to purchase at the end of the period at a pre-agreed price. Once the investor acquires the right to lease the property, he or she then rents it out for a higher fee to the buyer who owns it. The difference between rent and lease payments creates cash flow. Note: Investors should be sure they have a landlord in line before agreeing to a lease option on any property. This ensures an inflow of money!

A Lease Option Out occurs when investors lease a property they own to a lessee with an option to purchase at the end of the lease term. With this method, they get increased cash flow during the lease period, as well as equity (depending on the pre-agreed price).

Buy and hold

With this method, investors buy real estate and rent it out. This is a less complicated strategy than the “Lease Option” mentioned above. However, the investor is now the actual owner, and with ownership comes both reward and risk. Buy and hold gives investors more flexibility than the methods mentioned above. They have the option to sell at any time or they can hold on to the property for cash flow and capital appreciation for as long as they want.

Buy, improve and hold

All in all, this is perhaps the best method for building cash flow and capital. Despite the current market, real estate is becoming more expensive over time. Also, when investors make improvements, they have the potential for higher rents (more cash flow!) and greater capital appreciation. In addition, they may also have the opportunity to improve the property’s potential by converting it to more profitable uses. Finally, when improvements are made, the Internal Revenue Service classifies some of them as capital improvements, so there is an opportunity to reduce the tax paid on the cash flow earned from the property.

Of course, there are more to these strategies than can be adequately described in this article. And it took me decades to perfect my approach to each situation.

What these traditional investment strategies lack is the flexibility to turn a profit quickly, and again, many of these methods require a large amount of money to purchase a property.

More creative real estate strategies such as short sales, flipping properties, renovating and selling, foreclosures and other “non-traditional” methods are at risk of being curtailed by the introduction of the new Uniform Closing Instructions.

These soon-to-be-implemented new regulations will limit real estate investors to using traditional methods, preventing them from investing in more creative strategies.

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