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Strategies for the Investment Property Market

written by: nataliajones•edited by: Jason C. Chavis•updated: 8/7/2010

If you have ever wondered how real estate tycoons make their money or what was behind their success, these investment property strategies can give you a bit of insight into the world of real estate investing.

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    Ideas for Investment Property Strategies

    Property Investment Strategies Getting into real estate investing is not a simple matter of buying a property and hoping for the best. There are lots of ways to make money from investment property strategies and they all have different potential for profit and different associated risks.

    Buy and Hold

    This is probably the most popular way to invest in real estate. It essentially involves sources a property that is below market value and then after making a few minor upgrades placing it on the market for rent. This kind of strategy requires a considerable investment of capital and time. Money, or rather financing is a necessity because it involves taking the purchase through to the end and adopting legal title. The property becomes fully your responsibility and so you would be required to do proper maintenance as well to continue to get the maximum rent from your tenants. Using a "buy and hold" strategy on property investing means that your expected return would come from a mix of capital appreciation and rental income. Over time the value of the property should rise if the location and other elements continue to be favorable, but it must be noted that any appreciation in the value of the property only reflects a potential profit because this can only be realized upon its sale.

    Buying and Selling of Contracts

    This approach is a bit more sophisticated but it calls for a lot less capital while the potential for a quick turn around is exceedingly high. Under this investment property strategy you agree to purchase a contract for a property that is not yet built. This venture is highly speculative because its success is hinged on a number of factors including; the ability of the contractor and developer to complete stages on schedule, public interest in the development and the general desirability of the area. The investor is usually required to put down any where from 10% to 30% of the cost of the property. For this amount they have purchased an interest in a contract. The average investor does not mean to see the purchase through to the end, but instead holds onto this contract that guarantees them a "pre-construction price." During the development stage the developer or a private agent can place the unit up for sale at a higher price on behalf of the investor. If the sale goes through the investor pockets the appreciation in price, but the catch is that if the contract is not sold, the original investor is obligated to complete the purchase.

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    There are numerous investment property strategies that can enable savvy investors to make the best profit available.
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    Ideas for Investment Property Strategies Continued

    Real Estate Renovation

    The idea behind this strategy is to make money on the value-added to the property. You can purchase a property and then make renovations that are either cosmetic or structural, but either way the aim is to keep the cost of the changes below the expected price the property can expect to fetch after your changes are complete. This type of strategy works best for those who have access to very affordable labor or materials and can therefore guarantee the cost of the renovation can be controlled. The capital required for this type of investment though is still considerable but it can be a success if you pay close attention to your financing costs the time it takes to get the renovation done and the house back on the market. It may be possible to get up to 95% financing, but the mortgage cost must be factored into the equation because every month that goes by without a sale is another month that costs on the project escalate.

    Lease with a Call Option

    This is a hybrid arrangement between a buyer and a seller. You can invest in a property and then put it under a lease rental contract. This lease contract is not the average residential rental agreement, but instead gives the renter the option to purchase the property at an agreed price in the future. The option of purchasing the property is a luxury that the renter must pay a premium for and this premium is included in the rent. Therefore houses with this option are slightly more to rent because the owner essentially makes hedge against any risk that prices would not increase too much which would make their pre-quoted price disadvantageous. The investor or landlord under this strategy is essentially willing to extract some of the profits upfront (in the form of the call premium) instead of waiting to see what the market will be like down the road. The investor is also providing himself with a ready-buyer in the form of the tenant so the time on the market will not be a concern. This arrangement suits more conservative investors and is favorable to tenants who may not have the capital to make a purchase right away as well. If the call option is exercised the portion of the rent that was itemized for the option to buy is considered payment for rent and absorbed by the landlord.

    There are several property investment strategies available but you must ensure that you choose the option that is right for you.

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