Income or Equity! What Should a Real Estate Investor Focus On?
INVESTING IN HAGERSTOWN
Income or Equity, Real estate investing is one of the best business models for creating long-term profitability and success. Though it takes hard work and can involve large amounts of financial risk, few opportunities offer the same potential for building wealth that comes with real estate. However, there are two very different approaches to the real estate investment business. The first focuses on acquiring large amounts of income in the short run by buying, repairing and reselling homes for potentially large profits. The other, somewhat more conservative method, involves building a portfolio of homes in order to gain wealth in equity and rental incomes. Here are the pros and cons of each of these methods.
Flipping properties for income has always been a key component of the real estate industry. This type of real estate investment can yield very high returns, often creating multiple thousands of dollars in income on a single property deal. For some real estate investors, these high-income ventures are the key to success and creating a large capital base. Flipping a property, however, also comes along with a fairly high degree of risk. Since selling a house at a profit will almost inherently mean putting money into it, the personal risk to an investor can increase dramatically with each improvement made to the home. It is also important for investors pursuing deals of this sort to sell their houses quickly, as having money tied up in a single deal for too long can make it difficult to take advantage of other opportunities that might arise.
Taking advantage of property flipping as the core of a real estate business also requires being able to consistently find good deals that have the potential for a high return. Though this is possible, it can be somewhat difficult. In order to keep a steady stream of such properties coming into your business, it may be necessary to expand beyond your local area. Alternatively, you can hire one of more bird dogs or scouts who will scour the areas around you for such deals for a fee.
Building wealth in real estate through equity is another model that has always been at the heart of the real estate industry. Though it does not yield the same high volumes of liquid capital that flipping offers, it can increase the net worth of an investor even more than flipping properties can in the long run. For example, an investor who has accumulated even 10 properties (a fairly small portfolio in the context of the professional real estate business) would have a net worth of one million dollars if each property was valued at only $100,000. Though the wealth in equity is not liquid, selling one or more properties can liquidate the capital. For this reason, many investors who focus on equity choose to sell part or all of their portfolios when they decide to retire in order to liquidate the equity wealth they have built up over years or decades of investment.
Equity investing, however, should not be looked at exclusively as a long-term proposition. Any property that an investor owns can generate regular rental income. If an investor has a large enough portfolio of properties, renting can produce a very large flow of regular and largely passive income. Though this income will not be as large as the potential income from flipping, it has the advantage of being regular income that will continue to come in as long as the property is occupied.
The Best of Both Worlds: Flip and Own
It is clear by now that both of these methods of building wealth with real estate have their advantages. Though many real estate investors specialize in just one or the other, the best solution is to be versatile and to do some of each. By flipping properties with the potential to generate quick income and holding onto those that can produce regular monthly rental income while building equity value, a real estate investor gains the ability to profit from many more deals that either method on its own could provide.
Ideally, an investor will be able to find a relatively stable number of properties to flip while keeping only the best and most potentially profitable rental properties for his or her own portfolio. Not only does this allow an investor to select the cream of the crop as rental properties, but it also ensures that enough income will be coming in from flips to purchase new equity properties without the financial risk of a bank loan. Though it may take time for new investors to build up to this volume of deals, it is a goal that every professional real estate investor should have.
Flipping or building wealth through equity in rental properties can allow you to make money in real estate on their own. Each has its own advantages and disadvantages that will tailor them to the individual preferences and goals of individual investors. However, the greatest potential lies in being able to make money with either strategy. Like any other business, diversification is crucial to optimal results in real estate investment. Investors who understand this and take the time to build a business rich in both income and equity will be more likely to prosper and build long-term wealth in the real estate market.
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