Choosing the Right Real Estate Investment
There are several key factors that make for a successful real estate investment. For first-time or seasoned investors the goal is almost always static: execute good investment opportunities and grow wealth.
Step I - Determine Timing & Risk
Timing is Everything
Narrowing down your choice for a real estate investment can be overwhelming. During this exploration process, it is important for the investor to be comfortable with the investment time horizon. The investment time horizon is the total time an investor expects or projects to hold the investment or portfolio. The investor horizon calculates the investor’s income, needs, and level of risk. It also assists in the security selection. Some real estate investments could be short and last no more than a few months(“flips”), and other types could last up to 5+ years (“Buy and hold”). In addition, certain markets will produce more consistent cash flow per dollar, with low appreciation; and some markets will have strong appreciation trends, but lack cash flow. Our team at CityVest is ready to help you through this process. Our goal is for you to consider as many factors as possible, because when you are happy with your investment, we are happy.
Measuring the Risk
To start, investing in any asset class, whether it be real estate, bonds, stocks etc., no one investment type has a 100% guarantee rate. Therefore, it is just as important for the investor to be comfortable with the risks as it is to be comfortable with the investment horizon. Please see the article titled, How to Calculate Risk vs Return for more information regarding calculating risk. Two major risks real estate investors may face are vacancies and unexpected maintenance. You never know when a pipe may burst, and it is difficult to stay ahead of appeal-trends for instance why tenants favor an architectural style or up and coming developing location. Choosing the right type of investment, puts the power in your hands as the investor to mitigate certain areas of risk.
Step II - Determine Type of Real Estate Model
Buy-and-Sell AKA Flipping
Have you ever seen the television series Flip or Flop or Property Brothers? These shows dive into the step by step process of buy-and-sell investing. The goal of this type of investment is to renovate or rehabilitate a distressed or unstable property via value-add phasing of real estate, and to sell the property to a new buyer in the shortest length of time possible, usually 5 months to a year. The condition of the property determines the level of work needing to be done. Once the work is done, flippers hope to make a quick sale where they can profit and cover the cost of the original buying price and any renovations. For some flipping situations, minor renovations like a new paint job or putting in hardwood floor is all that is necessary, compared to having to gut the interior and rebuild from the studs.
Rather than aiming for a quick profit at the time of purchase, the buy-and-hold strategy aims to accumulate profits over a longer period via cash flow and appreciation. The investor in a buy-and-hold deal may find themselves in the following circumstances: needing to renovate the property, finding that the property is already producing profits aka ‘turn-key’ properties, or building from the ground-up.
Pledge Vs Blind Funds
Investing in a real estate fund changes the game. A pledge fund is a private equity fund where investors are given information on a given project(s). Investors in a pledge fund have the option to not participate in a project if they do not want to. A blind fund is a private equity fund where investors entrust a fund manager to determine which investments will be made. The investor in a blind fund does not make investment decisions.
There are many factors that can make or break a successful real estate investment venture. CityVest is here to help you along the way in choosing which real estate investment is best for you.