Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. A similar practice known as flipping is another reason for failure as the nature of the investment is often associated with short term profit with less effort.
Contents
Risk management
Management and evaluation of risk is a major part of any successful real estate investment strategy. Risks occur in many different ways at every stage of the investment process. Below is a tabulation of some common risks and typical risk mitigation strategies used by real estate investors.
Foreclosure investment
Some individuals and companies are engaged in the business of purchasing properties that are in Foreclosure. A property is considered in foreclosure when the homeowner has not made a mortgage payment for at least 90 days. These properties can be purchased before the foreclosure auction (pre-foreclosure) or at the foreclosure auction which is a public sale. If no one purchases the property at the foreclosure auction then the property will be returned to the lender that owns the mortgage on the property.
Once a property is sold at the foreclosure auction and the foreclosure process is completed, the lender may keep the proceeds to satisfy their mortgage and any legal costs that they incurred. The foreclosing bank has the right to continue to honor the tenants lease (if there is a tenant in the property), but usually as a rule the bank wants the property vacant, in order to sell it more easily. Thus distressed assets (such as foreclosed property or equipment) are considered by some to be worthwhile investments because the bank or mortgage company is not motivated to sell the property for more than is pledged against it.
Foreclosure statistics
U.S. foreclosure activity dropped to a 74-month low in April 2013, with 144,790 properties with foreclosure filings. Although still about twice as high as the average 75,000 per month in 2005, it was 60 percent below the monthly peak of more than 367,000 in March 2010., with about one of every 100 U.S. households at some stage of the foreclosure process, according to the latest numbers from data aggregator RealtyTrac.