investors are then asked to join the group with one or more properties that they own, but the management compa- ny will take care of the duties related to operating all of the properties held in the group. In exchange for overseeing the group of properties, the manage- ment company will receive a percentage of the total rents collected. Typically, the investor still holds the lease for his or her property, while contributing a portion of the rent into a fund each month to cover the manage- ment fees and other expenses shared by the group. There are several variants of this type of real estate investing group depending on the type of property you own, the area where the property is located, and the kind of returns your property generates. Research is key to finding the right group for you. WRONGAREA, ANDYOU MAYBE SADDLEDWITH BAD TENANTS, LOWER RENT, AND DAMAGE TO YOUR PROPERTY.” THE NEIGHBORHOOD WHERE THE PROPERTY IS LOCATEDWILL INFLUENCE THE TYPE OF TENANTS YOUWILLHAVE, ANDYOURVACANCY RATE. BYCHOOSING THE RIGHTNEIGHBORHOOD, YOUREDUCE THE RISK ASSOCIATEDWITHHIGH TENANTTURNOVER RATES. CHOOSE THE
location of the property, appreciation rates may vary, but the value of the property can increase by double digits over a relatively short period, partic- ularly in high profile regions such as Southern California. The neighborhood where the property is located will influ- ence the type of tenants you will have, and your vacancy rate. By choosing the right neighborhood, you reduce the risk associated with high tenant turnover rates. Choose the wrong area, and you may be saddled with bad tenants, lower rent, and damage to your property. There is also concern over the main- tenance of the property. Many times, a rental property will need exterior and interior work after it is purchased. The difference between being a landlord and participating in other types of real estate investments is the amount of time you must spend renovating and maintaining it. You could hire a profes- sional management company, but then, of course, you would have to deduct that expense from any potential profits gleaned from the property. FIX-AND-FLIP PROPERTIES This type of investment has become very popular because of a massive number of older homes hitting the market since the 2008 recession. Reality television shows have furthered the popularity of fix-and-flip investments. The fix-and-flip strategy is the opposite of buy and hold. It is similar to trading stocks, in that, an investor identifies an asset that could potentially make him or her a profit, purchases the asset, and “flips” it for a profit. Most investors who employ this technique buy a home with the inten- tion of holding it for a short period of time, usually six months to one year, and reselling it. The strategy can be challenging, in that the investor needs to identify properties that are signifi- cantly undervalued for their neighbor-
hood while ensuring that the cost of repairs or renovation will not eat up too much of the potential profit. The recent recession provided ample inventory and opportunity; however, many contend that opportunities in larger markets like California have become oversaturated. The lower value must provide enough equity so that the investor can make im- provements and still be able to sell it at market value and earn a profit. Another challenge is that the improvements to the property have to be appealing enough to compel prospective buyers to accept the market price. However, there is a risk that an investor will be unable to sell the property for whatever reason, saddling them with those expenses as- sociated with the property, namely, the mortgage and maintenance. The costs associated with purchasing this type of investment are also high. Many times, flippers will have to take out a short-term loan, typically with a much higher interest rate than a tradi- tional mortgage, to outbid competitors. If the property doesn’t sell or they run into problems with the renovation, the investor may get stuck making those high mortgage payments for many months, or be forced to dump the prop- erty for a loss. REAL ESTATE INVESTMENT GROUPS Real estate investment groups are a type of investment vehicle, similar to a mutual fund, which invests into rental properties in specific markets. This strategy is a good investment for those who like the idea of owning rental prop- erties but don’t want the headache asso- ciated with collecting rents, maintaining the property, and filling vacancies. Under this scenario, a management group will build or buy rental prop- erties, typically apartment buildings and multi-family dwellings, and hold them in a rental portfolio. Individual
REAL ESTATE LIMITED PARTNERSHIPS
A real estate limited partnership (RELP) is similar to an investment group in that it holds and maintains a rental property or a portfolio of rental
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