Most people have some understanding of the financial potential of investing in real estate. There are two ways in which you can gain from real estate investments. One way is through earning capital gains from the appreciation of the value of the investment property. A second option is to collect income from charging rent to tenants.
Both ways of gaining from your real estate investment come with their own advantages and disadvantages.
Fixing up a property
One strategy for earning capital gains through investment real estate entails taking a property and improving it in order to increase its market value. Usually this means purchasing a property which has not been properly maintained, resulting in significant deficiencies. These deficiencies mean the value of the property may be much less which can present a perfect buying opportunity.
Once you have found a property you think would be suitable for fixing up, you will need to make repairs. These improvements can include fixing deficiencies in the building’s structure and aesthetic improvements such as a new paint job. It is important you do a proper assessment of the needed repairs before purchasing the property, since these costs will eat into the capital gains you are hoping to benefit from.
There could be some instances in which the cost of repairs would not be worth the potential appreciation in value. Of course, this will depend on the current real estate market conditions.
Gradual appreciation
Another way to earn capital gains from a property is by simply identifying real estate that is priced below the current market value. You can also try to identify property located in an underdeveloped neighborhood you think is about to be developed, therefore increasing the value of real estate in the area. This would be considered a passive income stream while fixing up a deficient property would be active income, since it requires you to materially take action to earn profit.
Collecting rent
An alternative strategy to capital gains is earning income from collecting rent. This means renting out your investment property to tenants. You would either manage the property yourself or you can choose to hire a professional property management company to do it for you. Each of these options have their advantages and disadvantages.
Also, even if you were mainly looking to earn capital gains, you will likely want to rent out the property for a certain period of time while waiting for the market value of the property to appreciate.
Earning rental income is considered a passive income strategy.
Weigh the risks against the potential rewards
Ultimately, what strategy you employ in your real estate investment endeavors will depend on how much risk you are comfortable in taking. Fixing up a dilapidated property may be quite risky since you never know if the rehabilitation will be successful. However, if it is successful, it has the potential for large capital gains. On the other hand, rental income does not provide as much potential reward, but it is generally considered safer and less risky.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.