photo © 2009 Robert Fairchild | more info (via: Wylio)
Welcome back to my ongoing saga of learning about investment property. When you’re thinking about puchasing property for investment purposes one of the first questions to ask yourself is “what kind of investor do I want to be?” There are basically 3 types:
Fix and Flippers – Have you been watching too much HGTV? These folks want to buy a house that looks a little shabby and then rehabilitate it and sell it as quickly as possible. This requires one to have the capital to not only put in a down payment and make the mortgage while you’re fixing it but also all the costs of improving the property. If you are wealthy, handy, and willing to act as your own general contractor, you might be able to do this. However, this is not me. I don’t have the time, and I’m certainly not a general contractor. That inset picture just scares rather than excites me. On to the next category.
Cashflow Seekers – As the name implies these folks are more interested in the cashflow an investment property can throw off. In order to achieve this these folks usually have to make a larger down payment than either of the other types. This debt:equity ratio makes it much easier to be cashflow positive. The typical Cashflow Seeker is usually older simply because of the higher capital demands. This really isn’t me either. Although, I’d like to be cashflow positive, I’m not really in need of a monthly income stream. Maybe one day.
ROI Seekers – This investor is most interested in property appreciation. In most cases, they have a cashflow neutral situation where the rent basically covers the mortgage, maintenance, and taxes on the property. A lot of ROI investors got killed in the real estate market collapse when they bought investment properties that actually lost value. Now, they have to keep these assets much longer than originally planned. These investors typically sell the proceeds from 1 investment property after 7-15 years and then funnel those funds into 1 or 2 new properties. In this way they grow their number of properties and protect themselves from taxes through 1031 exchanges (AKA like-kind exchanges). This most closely aligns with my plan. I would like to eventually own several properties and given my current financial standing and knowledge this seems like the most appropriate path.
As you can see, the type of property that best fits the needs of each of these investors will probably be quite different. Since I fall mostly in the ROI Seeker category, I’ll address the properties of interest to me in my next post.
To see all the related posts in this series, simply click the “investment property” tag.