by Matt Leicht
on Tuesday, February 2nd, 2021 at 11:17am.
Dozens of times, I've had clients ask me about real estate investing. Hey Matt, the market seems good... how should I go about investing in real estate?
Well, this is actually a pretty complex question. See there are a lot of different answers and opinions when it comes to cap rates, interest rates, pulling money out of the stock market, and more. But there are a couple of things that DON’T change when it comes to investing in real estate and these are the different models of ways you can get a return on your money in real estate. Now, hear me say there are more models of ways to make money in real estate investing, but today, I'm talking about three of the ways. I'd love for you to check out the video below or you can read it on the blog below the video.
Real Estate Investment Models
The Appreciation Model
The appreciation model is when you purchase a property and rent or live in it for a period of time while the market appreciates in value. You then turn around and sell the property for more than purchased, making a profit. Some things to think about with this model are.. what is the national inflation rate? And what is the appreciation rate? Your profit on the property will be the appreciation rate minus the inflation rate. So, if the appreciation rate is higher than the inflation rate, you are profiting. You have to determine as an investor if the percentage you’re getting back on your money is worth it to invest in real estate, or if you can make more money in a different kind of investment.
In Sarasota, we’re currently seeing an appreciation rate of around 6% per year, with the national inflation rate in 2020 being 1.4%. Every year these rates can change. A great resource to see the appreciation in Sarasota can be found in my quarterly market updates, where I compare median home prices from year to year. You can find that under the blog section on my website.
The Quick Flip
This model is when you buy something at a good price. Typically, because it needs a lot of cosmetic work. You do the work and sell the property a few months later. The majority of people making great profits in this model are doing the labor themselves. And, make sure you know how much these updates are going to cost before making the investment. Side note, if you are thinking about doing this in the state of Florida… you need to be aware that if you pull a permit in your name, you cannot sell that property for 12 months according to Florida statute 489.1037. I’ve got a quick 2 minute video on this subject that can be found here.
The Auction Model
This would be purchasing a property for cash at auction, fixing it up, and selling it. When it comes to this model, you can purchase homes for really desirable prices, but you’re not really getting a good look at the property. In other words, it’s not like you’re getting a home inspector in there to tell you the problems before you buy. This can turn a large profit, depending on the condition of the property.
Risks of Real Estate Investing
So yes, you can definitely make money in real estate through appreciation, quick flips, and auction homes. But that doesn’t mean you always make money in real estate through appreciation, quick flips, or auction homes. In fact, anytime you invest in anything, it’s always good to know the risks.
When it comes to the appreciation model.. what if the market doesn’t appreciate enough for you to make money? You may be stuck holding onto a property longer than you intended.
For the quick flip, sometimes they may take more work or more money than you thought decreasing your margins.
And with the auction model… well it’s pretty simple. You’re buying a property you haven’t seen. So, it could be a total win, or it may take more money or time than intended. You also do need to know what are the comparable properties in that area selling for. Make sure you’re not overpaying, and that you’re leaving enough room for profit.
And when it comes to any of these models, you will also want to factor in the cost of selling the property. Consider doc stamp taxes, and real estate agent commissions. Make sure you’ve mapped this all out financially before pulling the trigger on an investment.
Two Tips for Real Estate Investing
Before I close out today… I don’t want you to miss this. I want to give you two tips that you should be thinking about when investing in real estate. No matter which way you choose to invest, these apply.
First of all, you make your money in the BUY of a property, not the SALE of the property. It’s important to purchase at a good price in relation to the comparable properties in the area. And, I’m not talking the comparable properties LISTED, but rather the prices at which they’ve actually SOLD.
The second tip is that you need to create value. The way to make more money in any real estate investment is finding ways you can increase the value within the property or the value that the property offers to the community.
Contact Matt Leicht, Realtor®
As a Sarasota realtor, I enjoy educating my clients and providing them resources to help guide them to the best real estate decisions! Please feel free to reach out directly if I can help you in your real estate transaction!