There’s more than one way to make money in real estate--and it’s crucial to choose your strategy carefully.

Not only are there multiple types of properties and areas in which you might invest–fortunes have been made in single families, apartments, mobile homes, commercial properties, raw land, options, mortgages, great areas, awful areas, middling areas, and dozens more–but there are also multiple ways to make each type of property make money.

Most people are initially familiar with just one or two of these strategies. Renting is certainly the one that comes to mind for most people; fixing and reselling is another fairly well known strategy. But these are just two of the possible ways to make properties make money–and in some ways, they are the two most risky and difficult.

The problem is, most people are not cut out to be landlords. They don’t have the time, patience, or personality to deal with the hassles that tenants cause. And even fewer have the money and skills to successfully renovate and resell properties, which is cash-intensive and depends on the investor’s knowledge of inspection, estimation, rehab, and sales.

And although landlording and “retailing” are both extremely profitable for the right people under the right circumstances, they create totally different types of profit: renting properties results in long-term tax-advantaged cash flow and wealth building, while retailing creates a large, one-time, highly taxed cash profit. So not only is every strategy different in the knowledge, resources, and skills it requires; each strategy is different in terms of the financial goals it meets.

That’s why it’s so important to pick your strategy wisely. And this means deciding before you start what it is you hope to gain from your real estate investments:

Is it cash to pay off debt, or build a fund for down payments, or buy a dream?

Is it income, for retirement, or to replace your salary, or simply to realize a higher standard of living?

Is it tax benefits, to offset a high working income?

 Is it appreciation, to build wealth?

And at the same time, it’s important to take stock of your own assets and liabilities, so that you can match your skills and personality and resources to your strategy.

Do you have cash and good credit, or are you lacking in one or both of these areas?

Do you have time to commit to your investing, and if so, how much?

Do you have experience in renovation? Negotiation? Sales?

Are you patient? Good with people? A great manager? Fearless?

What’s your risk tolerance?

Each of these resources is important for certain strategies–and completely unimportant for others. And, of course, each can be obtained with study and experience. But knowing where you’re coming from and where you want to end up are crucial for choosing a path that will allow you to make the kind of money you want to make in real estate–and make it as easily as possible.

Having said this, here’s the world’s shortest course in real estate strategies. Note that entire books and week-long seminars have been written about each of these techniques–and I suggest that you take advantage of one of these before diving in. This is simply an overview of some of the basics of the most popular strategies used today, so that you can compare and contrast the benefits they provide, the resources they require, and the hassles they produce.

Landlording

• The basics: buy a rental property, keep it occupied, managed, and maintained for as long as you can stand it.

• The benefits: cash flow, long-term wealth through appreciation and pay down of the mortgage balance by rental income, tax breaks through depreciation.

• The hassles: management and maintenance can be time-consuming, tenants can be frustrating, often takes many years for a property to show significant cash flow. You can’t pull cash out without refinancing or selling the property, and there’s a long and growing list of liability issues, including lead paint, black mold, radon, asbestos, personal injury, discrimination that come with owning rental properties.

• What you’ll need to do it: 10%-20% of the purchase price in cash as a down payment plus good credit, OR a cooperative seller who’s willing to carry the financing privately; cash, in the amount of approximately $2,000 per unit, as “capital repair fund” for turnovers, emergency repairs, upgrades, and so on; good people skills and patience for dealing with tenants; time to deal with management and repairs; an education in tenant-landlord law in your state; and understanding about how to screen tenants carefully; and entity, such as a limited liability company, to own the properties and shield your personal assets from liability.

• Good for: people who are building income and assets for retirement.

Retailing

• The basics: buy a 1-3 unit property that needs repairs and upgrades in an affordable but desirable area at an under-market price. Bring the property into good condition for the neighborhood; sell it to a qualified homeowner for full retail price.

• The benefits: a cash profit of $20,000 or more in 6 months or less

• The hassles: repairs are ALWAYS more extensive and expensive than predicted; finding and keeping skilled, affordable contractors; finding qualified buyers and moving them through the purchase process without incident; not tax-advantaged.

• What you’ll need to do it: 10%-20% of the purchase price in cash as a down payment plus good credit, OR a cooperative seller who’s willing to carry the financing privately; access to cash in the amount of the repairs and holding costs; a working knowledge of renovation, including how repairs are made and how much they should costs; a trustworthy general contractor, or a team of subcontractors; a good real estate agent or the ability to show and sell the property yourself.

• Good for: people who have renovation experience and access to cash who want relatively quick, cash profits with no long-term obligations.

Wholesaling

• The basics: find a 1-4 unit property that can be purchased at least 30% under market (typically because it needs significant repairs), get a purchase agreement with the seller, assign your right to purchase the property for a fee of $5,000-$10,000 to an investor. The investor steps into your shoes and purchases the property at the agreed-upon bargain price, then fixes and retails it for a profit or fixes it and rents it for cash flow.

• The benefits: a cash profit of $5,000 or more in 3 weeks or less with NO repairs or cash out of pocket

• The hassles: creates a one-time profit–if you want another check, you’ll have to find another deal; taxed as a short-term capital gain.

• What you’ll need to do it: the time and ability to talk to many, many sellers (usually takes about 20-50 contacts to find one good deal; contacts with a number of investors who will buy your contracts, and who can buy the properties with cash

• Good for: anyone who needs quick cash; new investors who have no experience in renovation or rental management; people with limited cash and credit.

Lease/Optioning

• The basics: find a 1-3 unit property that can be purchased 20% under market or with favorable seller terms. Lease the property to tenant who wishes to purchase it after 1-2 years.

• The benefits: 3 paydays–one in the form of an “option fee” of 1%-5% of the sale price when the tenant/buyer moves in, plus monthly cash flow from rents, plus a final payoff when the tenant/buyer purchases the properties; tax benefits similar to renting; tenant/buyer typically takes care of repairs and maintenance as part of his option agreement.

• The hassles: not every tenant/buyer purchases the property, which means you have to start the process all over again.

• What you’ll need to do it: 10%-20% of the purchase price in cash as a down payment plus good credit, OR a cooperative seller who’s willing to carry the financing privately; access to cash in the amount of the repairs and holding costs; a good mortgage broker who can get financing for “B” and “C” credit buyers.

• Good for: people who want medium-term cash flow and tax benefits without the management hassles of renting.

Selling with Owner Financing

• The basics: find a 1-3 unit property that can be purchased 20% under market or with favorable seller terms. Sell the property with owner financing (usually a land contract, contract for deed, or seller-held mortgage) to a homeowner.

• The benefits: Cash flow with no management or repairs responsibilities

• The hassles: Foreclosure, if the buyer stops paying; no tax advantages

• What you’ll need to do it: In order to sell a property with an owner-held mortgage, you must own it free and clear–in other words, pay cash for it. The sell via land contract or contract for deed, an understanding lender–these strategies both trip the due-on-sale clause in a typical mortgage.

• Good for: people who want medium-term cash flow without the management hassles of renting

And yes, there are other strategies for making money in real estate: becoming a private lender, investing in group homes, and developing land are just a few. But these 5 are the easiest to understand and easiest for most people to handle in terms of the cash and credit requirement.

None require special licenses, and each is a proven money-maker. But as you can see, each also provides different benefits and requires different types of skills and resources to accomplish.

Choosing the right strategy (or combination of strategies) will allow you to reach your income and wealth goals with a minimum of work; choosing the wrong ones is a recipe for financial disaster.

Contributed by Vena Jones-Cox.

Reprinted from the "Ten Things You Need to Know Before You Invest One Dime in Real Estate", a Special Report by Vena Jones-Cox. Get a free 3-month trial subscription to Vena's newsletter by logging onto www.regoddess.com . One per household, please.

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