Different Types Of Real Estate Investing

by Mr. Cheap

I’m gearing up to do a new real estate investment (being a silent partner in the purchase of a mixed use building in small town Ontario). I kept thinking about doing a post iterating all the types of real estate investing I can think of and the pros and cons of each, so this seems like as good a time as any.

Speculation – this is anyone who buys a house hoping it’ll go up in value, whether they live in it, rent it out or leaving it sitting vacant (such as buying land). If you hope it’ll be worth X% more in the future, and the bulk of your profit will come from selling at that future time, you’re speculating.

Pros:
-Very easy and fun (pick an area, listen to the reasons its “hot” and put your money down!)
-Mixed benefit, if you’re renting it out you get some income, perhaps you live in it and get to enjoy the property

Cons:
-No way to reliably pick the next hot area, you’re basically gambling

Land-Lording – This is where you buy a property that’s cheap relative to the rent it can command, find tenants, and make income from the difference between their rent and your costs. You can rent a single unit, a small building, or a 400 unit monster as you learn more and make more money.

Pros:
-VERY well established technique (perhaps the oldest on this list)
-All sorts of data you can use to reduce your risk (i.e. average rental price in an area, vacancy rates, etc).

Cons:
-May have to fix toilets in the middle of the night
-Many laws are very tenant friendly

Wholesaling – This is what the “I buy houses” signs you see mean. Basically you search for “motivated sellers”, quickly buy their properties for cheap, then turn around and sell them for market rate.

Pros:
-If you’re buying at a steep enough discount its a fairly safe way to make money
-Fast return, if you can sell the property you get your money back and are on to the next property

Cons:
-You might feel bad profiting from people who have had some bad luck (or made some bad decisions)
-You need to learn to accurately appraise what a house will sell for
-You need to be able to quickly close, so you’ll either need lots of cash or great credit

Lending – This includes funding mortgages and being a silent partner. Basically you provide the cash, someone else does the work, and you split the profits.

Pros:
-Its great to make money while someone else does the work
-Some security on your investment if your name goes on the deed

Cons:
-Some risk, if the person managing the property messes things up (or takes advantage of you)
-Since you’re not on site checking things out, the property may get into trouble or be under-performing and you wouldn’t know about it

Bird Dogging – Often pitched as the way for people with no money to get into real estate, you look for deals, then sell them to other investors who have money.

Pros:
-No cash risked
-Put as much or as little time into it as you want
-Learn while you earn

Cons:
-I believe this is illegal in Canada and some states.
-Pays quite poorly
-Requires expertise, but is often performed by newbies. People who can properly evaluate a deal to determine if its good or not, can probably pull together the money to buy it themselves.

Flipping – Based on the idea that a house in good repair is worth or then the same house in bad repair minus the cost of repairs (e.g. its worth money to have everything already done).

Pros:
-Great way to capitalize on skills you may have (if you’re handy)
-Not very risky if you can properly appraise property and get the repairs done quickly (before a market shift)
-Fun (according to the home improvement shows)

Cons:
-Very competitive, so it doesn’t pay very well these days (many people are doing it)
-Takes a lot out of your hide (you could have just worked your ass off at work and collected tons of overtime)
-Not fun (according to the reality of having to fix up a crappy house then not even get to live in it).

Any other ideas for big approaches to investing in real estate? Any ideas about more pros and cons?

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{ 4 comments… read them below or add one }

1 jesse

Re flipping: The idea of flipping is often mixed with speculating. That you sell a house 6 months later for more than you bought it for and justify it by your renovations might not be correct. In a falling market, it’s likely that no amount of renovations can turn a profit.

2 Shank

You missed about investing in REITs:

PRO: proffesional management, portfolio diversification, liquidity, diversification of units, buildings, geography, ability to rebalance portfolio with minimal costs, minimizes the ‘home field bias’ of investing (buying hard assets tend to be close to home, which leads to underdiversifiaction).

3 Mr. Cheap

Shank: You’re right, that sould have been another category.

CONS: professional management, passive (no opportunity to actively improve your return), possibility of misleading information in prospectus and / or annual reports.

4 Ryan Martin

I suggest that owning a duplex (but as a separate and distinct category) in which the owner lives in one half and their renter lives in the other. You have it under speculation. In most cases the renter will cover the mortgage. It really is the best of three worlds: speculation, landlording, and your own roof.

This is what I did in my twenties twice. I believe it could be the most practical means for a poor to middle class person to put themselves in an extremely excellent financial position by the time they hit their 30’s or 40’s.

Also, can I politely suggest you update the “Pro” for speculating and remove “easy and fun”. My reasons are that this is a personal financial blog, most reading will be first time buyers looking at “speculation” as their means to move forward financially (via home ownership).

It may be oversimplifying things and irresponsible to suggest to readers that a speculation pro is “easy and fun” (listen to the reasons its hot and put your money down?)

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