financing4prosperity

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 (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment.financing4prosperity

Contents

• 1Sources and acquisition of investment property
• 2Sources and management of cash flows
• 3Risk management
• 4Advantages and disadvantages of real estate investing
  • 4.1Advantages
  • 4.2Disadvantages
• 5Investment strategies
  • 5.1Foreclosure investment
  • 5.2Buy, rehab, rent & refinance
• 6See also
• 7References

Sources and acquisition of investment property[edit]

This section does not cite any sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. Find sources: "Real estate investing" – news · newspapers · books · scholar · JSTOR (March 2015) (Learn how and when to remove this template message)

Real estate markets in most countries are not as organized or efficient as markets for other, more liquid investment instruments. Individual properties are unique to themselves and not directly interchangeable, which presents a major challenge to an investor seeking to evaluate prices and investment opportunities. For this reason, locating properties in which to invest can involve substantial work and competition among investors to purchase individual properties may be highly variable depending on knowledge of availability. Information asymmetries are commonplace in real estate markets. This increases transactional risk, but also provides many opportunities for investors to obtain properties at bargain prices. Real estate entrepreneurs typically use a variety of appraisal techniques to determine the value of properties prior to purchase.financing4prosperity

Typical sources of investment properties include:

• Market listings (through a Multiple Listing Service or Commercial Information Exchange)
• Real estate agents and Real estate brokers
• Banks (such as bank real estate owned departments for REO's and short sales)
• Government entities (such as Fannie Mae, Freddie Mac and other government agencies)
• Public auction (foreclosure sales, estate sales, etc.)
• Private sales (transactions for sale by owner For sale by owner)
• Real estate wholesalers and investors (flipping)
• Via shares in a listed REIT

Once an investment property has been located, and preliminary due diligence (investigation and verification of the condition and status of the property) completed, financing4prosperity.the investor will have to negotiate a sale price and sale terms with the seller, then execute a contract for sale. Most investors employ real estate agents and real estate attorneys to assist with the acquisition process, as it can be quite complex and improperly executed transactions can be very costly. During the acquisition of a property, an investor will typically make a formal offer to buy including payment of "earnest money" to the seller at the start of negotiation to reserve the investor's rights to complete the transaction if price and terms can be satisfactorily negotiated. This earnest money may or may not be refundable, and is considered to be a signal of the seriousness of the investor's intent to purchase. The terms of the offer will also usually include a number of contingencies which allow the investor time to complete due diligence, inspect the property and obtain financing among other requirements prior to final purchase. Within the contingency period, the investor usually has the right to rescind the offer with no penalty and obtain a refund of earnest money deposits. Once contingencies have expired, rescinding the offer will usually require forfeiture of the earnest money deposits and may involve other penalties as well.

Real estate assets are typically very expensive in comparison to other widely available investment instruments (such as stocks or bonds). Only rarely will real estate investors pay the entire amount of the purchase price of a property in cash. Usually, a large portion of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan collateralized by the property itself. The amount of the purchase price financed by debt is referred to as leverage. The amount financed by the investor's own capital, through cash or other asset transfers, is referred to as equity.financing4prosperity. The ratio of leverage to total appraised value (often referred to as "LTV", or loan to value for a conventional mortgage) is one mathematical measure of the risk an investor is taking by using leverage to finance the purchase of a property. Investors usually seek to decrease their equity requirements and increase their leverage, so that their return on investment (ROI) is maximized. Lenders and other financial institutions usually have minimum equity requirements for real estate investments they are being asked to finance, typically on the order of 20% of appraised value. Investors seeking low equity requirements may explore alternate financing arrangements as part of the purchase of a property (for instance, seller financing, seller subordination, private equity sources, etc.)financing4prosperity

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This section does not cite any sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed.
Find sources: "Real estate investing" – news · newspapers · books · scholar · JSTOR (March 2015) (Learn how and when to remove this template message)