If you didn’t realize it, real estate investing is an art. It is the art of creating value. As you master this art you will discover that there are many ways to creating wealth. In this article I will share with you the four most common ways to make a profit from real estate.
Quick Fix and Flip
This approach consists of buying, renovating and then selling a property all within a very short amount of time. This technique is used to generate fast cash which is reinvested in larger projects that will produce higher profits. When getting started fix and flip can help you build up your bank account faster than any other means.
Slowly Fix and Flip
In this approach to real estate profits you buy a property and live in it for a period of time, usually at least two years. During this two year time you slowly fix up the property to increase its value. Also, as property values increase it will add to your profits, just from holding on to the property for those two years. If you did nothing to the property for those two years you should still see a small profit just from property value increases alone, assuming an increase of course. By living in the property any gain up to $250,000 for a single person and up to $500,000 for a married couple is tax free. This could be a nice strategy to use if you don’t mind moving every two years.
Fix, Hold, Refinance
The fix, hold, refinance approach is the preferred approach when investing in rental properties. The strategy here is to buy rental properties, fix them up and then rent them out. You can then, after a year or so, pull your equity out in the form of tax free cash. This is done by refinancing the property. You can then use this cash to buy another property. If you are looking to get into rental properties, done right this is an excellent strategy to use.
Fix, Hold, Trade Up
Here is a way to avoid income taxes on your real estate profits, legally. Real estate investors can trade up tax free through the Internal Revenue Code 1031. With this approach you purchase your property and fix it up a bit. You now have boosted the properties market value and have created equity. If you were to sell this property now you would have to pay taxes on any gains so instead you find a more expensive property that you would like to buy and execute a section 1031 exchange. By doing this you are applying your full amount of gain, or equity to the new property and you end up paying the IRS nothing.
Now that you have four ways to make a profit from real estate its time to decide which strategy or strategies you would like to use. If you are looking for fast cash to start building your rental portfolio then start with the quick fix and flip then use the profits to buy your rental properties.
If you are looking to purchase your own home while building equity then I would suggest trying the slowly fix and flip strategy. No matter what your real estate investing goals are these four ways to make a profit from real estate should help you get started on the right track.