Real estate investing
Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment.
Risk management
Management and evaluation of risk is a major part of any successful real estate investment strategy. Risks occur in many different ways at every stage of the investment process. Below is a tabulation of some common risks and typical risk mitigation strategies used by real estate investors.| Risk | Mitigation Strategy |
| Fraudulent sale | Verify ownership, purchase title insurance |
| Adverse possession | Obtain a boundary survey from a licensed surveyor |
| Environmental contamination | Obtain environmental survey, test for contaminants |
| Building component or system failure | Complete full inspection prior to purchase, perform regular maintenance |
| Overpayment at purchase | Obtain third-party appraisals and perform discounted cash flow analysis as part of the investment pro forma, do not rely on capital appreciation as the primary source of gain for the investment |
| Cash shortfall | Maintain sufficient liquid or cash reserves to cover costs and debt service for a period of time, |
| Economic downturn | Purchase properties with distinctive features in desirable locations to stand out from competition, control cost structure, have tenants sign long-term leases |
| Tenant destruction of property | Screen potential tenants carefully, hire experienced property managers |
| Underestimation of risk | Carefully analyze financial performance using conservative assumptions, ensure that the property can generate enough cash flow to support itself |
| Market Decline | Purchase properties based on a conservative approach that the market might decline and rental income may also decrease |
| General wear and tear | undertake DIY or professional technicians such as plumbers, electricians, builders, carpenters |
| Fire, flood, personal injury | Insurance policy on the property |
| Tax Planning | Plan purchases and sales around an exit strategy to save taxes. |
Investment strategies
Foreclosure investment
Some individuals and companies focus their investment strategy on purchasing properties that are in some stage of foreclosure. A property is considered in pre-foreclosure when the homeowner has defaulted on their mortgage loan. Formal foreclosure processes vary by state and may be judicial or non-judicial, which affects the length of time the property is in the pre-foreclosure phase. Once the formal foreclosure processes are underway, these properties can be purchased at a public sale, usually called a foreclosure auction or sheriff's sale. If the property does not sell at the public auction, then ownership of the property is returned to the lender. Properties at this phase are called Real Estate Owned, or REOs.Once a property is sold at the foreclosure auction or as an REO, the lender may keep the proceeds to satisfy their mortgage and any legal costs that they incurred minus the costs of the sale and any outstanding tax obligations.
The foreclosing bank or lending institution has the right to continue to honor tenant leases during the REO phase but usually the bank wants the property vacant in order to sell it more easily.
Buy, rehab, rent & refinance
Buy, rehab, rent, refinance is a real estate investment strategy, used by real estate investors who have experience renovating or rehabbing properties but who want to invest in rental property for consistent cash flow. Some investors add an additional R that stands for Repeat as a way of building a real estate portfolio.A real estate investor purchases an investment property with a depressed value because it needs repairs and/or cosmetic updates. The investor then updates the property, including needed structural repairs to bring a house up to the current code. It often includes cosmetic updates such as new paint, flooring, tile, counter tops, and kitchen appliances. The investor then finds a tenant and becomes a landlord receiving rent, usually on a monthly basis. The property is then refinanced, typically to a fully amortized 30-year loan.