Types Of Real Estate

Real Estate Investing Course - Lesson Four

There are different types of real estate, and also different ways to invest in them. Which way is best is for you to decide, according to your particular needs. This lesson will introduce you (or re-introduce you) to some of the types and ways, with their advantages and disadvantages.

1. Rental houses

Advantages: One of the easier ways to get started, and good long term return on investment. Disadvantages: Being a landlord isn't much fun, and you typically wait a long time for the big pay-off.

2. Rent-to-own houses (selling on a lease option)

Advantages: When you buy, then sell on a rent-to-own arrangement, you get higher rent, and the buyer is usually responsible for maintenance. Disadvantages: The bookkeeping is tricky, and most tenants don't complete the purchase (this can be an advantage too, but it does mean more work for you).

3. Low income rentals

Advantages: The same as with any rentals, but usually with higher cash flow. Disadvantages: The same as with other rentals, but with more repairs and tenant problems.

4. Fixer-uppers

Advantages: A quick return on your investment, and it can be more creative work. Disadvantages: Higher risk (many unpredictables) and you get taxed heavily on the gain.

5. Buy for cash, sell for terms

Advantages: You get a high rate of return by using cash to get a good price, and selling with payments to get a high price AND high interest. Disadvantages: You tie up your capital for a long time.

6. Buy land, split it and sell it

Advantages: It is simpler than most real estate investments, with the possibility of great profits. Disadvantages: It can take a long time, and you have expenses, but no cash flow while you wait.

7. Boarding houses

Advantages: You can get a lot more cash flow renting a house by the room, especially in a college town. Disadvantages: You can get a lot more headaches renting a house by the room, especially in a college town.

8. Commercial real estate

Advantages: Long term triple-net leases mean little management and high rates of return. Disadvantages: Tough market to break into, and you can lose income on vacant storefronts for a year at a time.

9. Buy, live in it, and sell

Advantages: The new tax law means you can fix it up, and sell for a big tax-free profit after two years, then start the process again. Disadvantages: You have to move a lot.

10. Speculation

Advantages: Buying in the path of growth and holding until values rise can yield large gains, especially if you buy low to start. Disadvantages: Prices aren't that predictable, you have expenses with no revenue while you're waiting, and transaction costs can eat much of the profits.

Bonus Lesson!
How To Be A Slumlord

Okay, I got your attention, but I really don't recommend endangering renters with unsafe housing. Much of what people call slumlording though, is simply providing reasonable housing for those with low incomes. It is of benefit to the renter and the landlord.

Why Do People Rent Dumps?

People rent not-so-nice places because they can afford to. A house that needs paint, has old rusty hinges on the doors, and a dirt driveway - this is a house that cost less to buy, and therefore can be rented for less. Anything major that the landlord does to improve it will result in higher rents, and possibly drive the renter away.

In fact, this often happens. A few years ago my own town enacted its first rental regulations. The fifteen pages of new rules included many non-safety-related requirements, like a minimum of windows, to allow natural lighting, bedroom square-footage requirements, and no peeling paint.

These things are done in the name of poorer renters, and yet the result is always the same: higher rent. With that and the regulations against mobiles homes, poor families are moving further away from town and jobs. I mention all this to let you know that if you offer an ugly, but safe and affordable rental, you are providing a real service.

Why Consider Low Rent Housing?

If a nice two bedroom house in a small town costs $135,000 and rents for $800, an old mobile home on a lot will probably cost $45,000 and rent for $500. Notice that the house costs three times as much, but the rent you get isn't even doubled. This means the mobile gives you more c a s h flow. That is why old houses and mobile homes (on land) are good investments.

It's important to know you'll have more risk and management problems with low rent housing. Repairs come up more often, and rent will be late more often, on average. This is why you deserve a better rate of return. Otherwise, who would want to provide low-cost rentals?

Treat your renters well, and make your places safe. Do these things, and you can do well and sleep well - even if some want to call you a slumlord.

Steve

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