As many people will tell you, the real estate market is incredibly volatile, subject to radical change at a moment’s notice. But for a lot of people, that fact scares them off, when actually, it’s possible to make money at any stage of the real estate cycle.
To do that, you have to understand that the real secret to real estate investing is not buying properties. It’s what you choose to do with them after the purchase. Like the song says, you make your money by knowing when to hold ‘em and when to fold ‘em.
And that’s a decision you need to make before you buy. There’s nothing worse than purchasing a property to rent, investing $50K in rehab, and then learning that the neighborhood doesn’t permit subletting. Now you have to go back in, upgrade all of your rehab work for an ultimate buyer, hold the property for much longer, and realize much less.
Likewise, you also don’t want to purchase a property using hard money, pay 4 points and 14%, only to learn that the market has taken a nose dive and in order to make any profit off the thing, you have to hold it for 10 years as a rental.
So, decide before you buy how you will realize your profit on the property. In a fix and flip situation, you organize the renovation from start to finish and then sell the property to a homeowner or a property management firm.
In order to fix and flip successfully, you need to know something about home renovations. It helps to have contractor connections, and you definitely need to be able to manage money. You also need to know how to work with people who don’t work for you. And finally, you need the vision to see potential in a raw property and the discipline to see that vision through to its completion.
Historically, buy and hold investing has been the traditional way of accumulating wealth through real estate. For many, it’s viewed as being a little too conservative for the gung ho newbie. The energetic upstart doesn’t necessarily want to manage tenants for the long haul while only pulling in a few hundred a months.
But keep in mind that during low swings in the market the long–term buy and holds are the only way to buffer yourself against downturns, and in the long run these are the properties that provide you with real wealth through appreciation and equity.