Two Methods of Investing in Real Estate

Method One (The Old Tried and True Method)

            This method has been around for years and it is where most investors begin. It is how the majority of real estate is purchased, which is using other people’s money. Most people get mortgage loans from a mortgage broker, bank, credit union or some other lending institution. However, at this moment the majority of homes in America are purchased with the intent of living in them ourselves. Many investors also take advantage of using other people’s money also.

The old tried and true method calls upon the borrower to get the financing to purchase a property. The investor using the old method does likewise. In so doing they try to purchase below market value and add value by improvements they make or both. Sometime these investors sell it during this stage and are typically referred to as flippers. Some Investors rent the properties out allowing their rents to make their loans payment and usually get a little off the top for themselves. As the length of time, they hold the property increases so does the amount of income they glean form the property.

Once the Return On Investment (ROI) stabilizes the investors begin their saving process all over again. When they have enough for the next down-payment they start searching and begin the process over and over.

(The ROI Method)

The Second method, understands that the weakness in this model is that they borrow from the lending Institutions when the value of the property is the lowest. This model locks up their money’s purchasing power for a longer period of time. That effects the opportunity cost of the first methods purchases. The second method of Purchase, rehab, rent, refinance goes about this investment process in the opponent order. Once a person is able to, they purchase their new property with their own cash. The rehab or improve their new property with their own cash. They then rent out the property. Once that is accomplished, they refinance the project. This allows them to get the maximum amount for the property. They can borrow against their lower than market value purchase. They can borrow more for all their improvements. They have the property rented and have no need to speculate what the rent needs to be for them to earn their desired (ROI). By doing so once their project is finished, they are able to pursue their next project immediately. This may be the difference between purchasing one or to investment properties a year and purchasing 10 or more.

Some will tell you there are two ways to make profit from real estate:

• Pay less than the property is worth. Buy equity.
• Improve the property. Forcing appreciation.

However, when you pay cash for the property and the improvements you are able to acquire more of other people’s money for the property and you know the fact before you apply for your loan.

Note: Images on this blog site are from a free source or taken by the author. No image or group of photos is intended to represent the people the author serves. The author does not care about Race (that is a politically correct term that he does not like because we are all of the same Race, the Human Race. He prefers the term ethnicity, color, religion, sex, gender, marital status, disability, genetic information, national origin, source of income, Veteran or military status, ancestry, citizenship, primary language or immigration status.) He is a service provider for all people. We will all rise together when we band together and help one another. Joseph Erwin is a Real Estate Broker, DRE # O2131799, and a CA general contractor # B 696662. He’s a member of the CRMLS and The East Valley Association of Realtors located in the Inland Empire region of Southern California.