How Does a Cash Accumulation Real Estate Investment Strategy Work?

The cash accumulation strategy works well when you’re new to the real estate market and need to gather money and learn the ropes of investing. Essentially, you have three options as described below.

Option 1: Become a Scout (“Bird Dog”)

As a scout or “bird dog,” your role is to locate good properties for investors for a fee – usually $500 to $1,000 each time you provide information that leads to a purchase by another investor. As you can tell, this is a purely cash strategy. It’s a good option for a “newbie” because it doesn’t require any money from you or any previous knowledge of the market. It’s also the fastest way to earn cash and, at the same time, learn the fundamentals of your local real estate market.

So, what are the cons of scouting? Perhaps foremost is the fact that the money you earn per transaction is the least in the market! Another disadvantage is that scouting can take a lot of time and effort in order to locate suitable properties.

Option 2: Flipping

“Flipping” can be defined as the art of buying a property, waiting for the right moment, and then selling it for a quick profit. Note: Although “flipping” has received bad press, it’s an entirely appropriate investment strategy when applied within the law. On the other hand, illegal flipping is "a predatory lending practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value within a short period of time." Needless to say, never practice illegal flipping!

With flipping, you basically get control of a property with a binding purchase contract. Flipping is what’s called a “speculative” strategy. This means that you gamble that the market value will rise to the point where you can make a fast profit before you close on the deal. Flipping is most effective in areas where housing demand is so high that there’s a limited supply, causing prices to rapidly rise.

Flipping has two benefits for you as an investor. First, you’ll receive negotiation leverage and good profit potential. That is, you can put little money down and get great gains. And, second, it can be a good life if you enjoy a lot of freedom and an entrepreneurial way of life. Now, here are the disadvantages of flipping:

Disadvantage #1: Volume can be low, depending on market conditions. That means your income can yo-yo up and down.

Disadvantage #2: When too many speculators get into the market, prices plummet quickly, and you can end up stuck with the property and no immediate profit.

Disadvantage #3: In some situations, interest rates can rise, thus dampening the demand for housing.

Disadvantage #4: Hidden property problems can eat up your profits if you don’t do careful due diligence.

Option 3: Buy and Sell As-Is

The steps to this method are simple: buy a property, leave it as-is, and then place it back on the market but at a higher price. A great advantage of this method is that the profit margin is even higher than with the flipping method. The disadvantage lies in the fact the method can eat up time and volume can be low.

Option 4: Buy, Improve, Sell

Also known as “rehabbing,” the method involves buying a property, making improvements, and then selling it at a higher price. Margins are even better with “rehabbing” than with the previous methods described above The disadvantage is that there is a much bigger investment of time and money than the methods listed earlier.

So, now you know four standard options for a cash accumulation strategy in the real estate market. Choose the one(s) that best fit your needs and personality! And if you want to talk more about them, contact me today at 402.657.7663 or chris@teamelliott.net, and I’ll either give you the information or steer you to someone who does! Look forward to talking with you!