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Chapter 3: Four Proven Property Investment Strategies

 

Here are four proven property investment strategies which are making many people very wealthy the world over.

Buy and Hold

This is the most popular investment property strategy. It is simply buying a house which puts money in your pocket and is more likely than not to appreciate in value.

The challenge is to find a property, which is positive cash flow and is likely to go up in value. It may take some time to find an area that you are comfortable with, but the search is worth it.

When you find a property, you typically rent or lease it to a tenant. They pay you rent in exchange for the use of the property. This rental income must cover all the associated costs of your ownership - including mortgage repayments.

If you're creative, you can then up-sell the tenant on a number of items to obtain a better return. Include a deal on a new dishwasher or VCR and simply increase the rent.

Be very careful about estimating the costs of ownership. Include an allowance for repairs and maintenance as well as periods of vacancy.

Lease Options (Rent To Buy)

A lease option occurs when you provide a tenant with an option to buy the house in the future at a price agreed to in the present. Depending on the arrangement, some investors require the tenant to pay an option fee too. The tenant must usually save a deposit over the lease term.

Provided the tenant completes their obligation under the lease, the purchase price is discounted by an “equity” component of his/her regular rent payment. This is promoted as a feature of the deal as the rent already paid is not effectively “dead money”.

If the option is exercised, the initial option fee is usually deducted from the purchase price. If the option is not taken, the option fee is retained by the investor and all monies paid over the lease term are deemed as rent (i.e. the equity portion is foregone).

There are some investors who have made lease options their niche. However, be aware that, depending on the location, tenancy laws make some of the “usual” conditions (like the tenant paying all repair bills) illegal.

Flips

A flip is where you agree to buy a house and then on-sell it before taking possession. You flip your ownership interest to someone else.

This is an ideal way of raising some fast cash because you don’t need a lot of money to set up the deal. You can put down a low deposit to tie up the deal and then pass on your “ownership” to someone else.

There are some risks though. The first being that you must be very selective in your purchase because you'll need to buy the property at a “wholesale” or discount price. You'll also probably need to on-sell it at a lower than “retail” value price too in order to clear a margin and still sell it easily (and quickly).

However, a big risk associated with this type of arrangement is that you may be left with the property and then you?ll have to close the deal yourself. If you don't have the money, it can be a very awkward situation.

Wraps

Wraps are my personal favorite as they’ve been very lucrative for me. It's common to make cash on cash returns of 70% plus and wraps are very, very easy to do – even easier than the buy and hold strategy.

It's essentially the same concept as the flip, except you take possession of the property and then on-finance it to a third party. Not only do you make a margin on the sale price, you also make a margin on the interest you charge the third party.

The best feature of a wrap is you don't have to buy at wholesale prices. All you need is someone who wants to buy your property for more than you paid for it.

Summary Of Chapter 3.

Every now and again, a new spin on an old property investing theme emerges. But the new idea is really only a variation of one of the four options (buy and hold, lease option, flips, wraps) which have already existed for many years. Success will come when you find the option that you are most comfortable working with and make it your niche.

 




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