Before you buy a property as a real estate investment, you have to know what you want to do with that property.  A clearly defined strategy is based on understanding your timing, your goals, your financial capacity, and what the market looks like both today and through to your proposed exit.

When defining an investment strategy, there are a number of questions you need to ask yourself:

• How long do I want to invest (when do I need to exit)?
• How much money do I have to work with?
• What is my comfort level with risk?
• What kind of a profit do I need to make?
• Would I be good at managing rentals?
• How much time do I have to commit to my investments?

Creating a good investment strategy is really based on your personal preferences.  There is no magic calculation that you can simply apply that will guarantee success.  A strategy is only as good as the people executing on it, and you have to be completely honest with yourself in order to avoid very expensive failure later.

Strategic Misconceptions
In most cases, the average investor tends to lump investments strategies into one of two categories: Fix-and-Flip (short term) and Rental (long term).  Fix-and-flips are believed to be the domain of high-cash investors assuming large risk for great reward in a short period of time, while rentals are considered to be the long period, low return investments for people who need to finance their investments.  Both assumptions are incorrect.

In fact, there are a such a large number of investing strategies that it would be impossible to list them all.  Successful real estate strategies usually end up as a hybrid of different rehabilitation and holding patterns, all working towards a projected profit margin over a defined period of time. 

For example, instead of the traditional all-cash purchase of a property to fix and flip in a six month period, you can buy the property in cash, rehab the property, flip the property into a rental with a cash out refinance to regain the immediate equity growth, then slow grow the property matching the mortgage for an 8 year period, converting the property into a rent-to-own or land contract with a high income margin over the last 2 years.  This will provide you with both the fix and flip equity gain as well as the long term holding without multiple transactions (minimizing costs).

As you can see, by combining different “traditional” strategies, you can create a significantly higher margin investment.

Cash versus Financing
One of the biggest questions in investing is whether you should use all-cash or finance your investment properties.  Determining your use of your cash is really based on your goals and what the current market availability is for borrowing.

At its simplest, understanding whether to use cash versus financing is really a product of comparing the return on investment of that cash in the current market over the same period of time.  For example, let’s say you want to buy a property to rehab and flip in 12 months.  Common sense says to use an all-cash purchase since it will minimize your transaction costs.  You already have the money, so why pay interest to borrow someone else’s money?  Because no money is free.

Let’s say the going rate for investment loans is 6.5% per year.  By using all cash to purchase the loan, you saved yourself that 6.5% plus the lender fee which adds to your net profit margin, correct?  Incorrect.  Let’s say that during that 12 month period you could have invested that money in another investment that would have yielded you 5.5%.  Your real savings is only 1% plus the lender fee because by using your money (acting as the lender), you forfeited the ability to invest that same money somewhere else.

Real estate is one of the only investments where you can leverage your investment, allowing you to increase the volume of your investment.  So if your strategy bases your profit on equity growth, then leveraging your money to allow you to purchase more volume will increase your profit significantly.

However, do not fall prey to the temptation to over-leverage.  Even if you can finance, it does not mean you should.  Financing versus cash should always be carefully weighed relative to risk.

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