Investment strategy starts with choose the right market.  Markets drive strategy.  In markets with rapid appreciation or escalating rents, buy and hold strategies or renovation strategies might be appropriate.  In more stagnant markets it might be less attractive to renovate, but investors might be able to generate value by placing quality tenants in quality properties.

Remember, current rents and expectation of future rent growth drive the value of real estate.  An investment strategy is the way in which an investor will affect one or both of these metrics to improve the valuation of the property.  Simply taking an empty property and putting in a tenant increases the current rent and potentially increases the future growth potential; therefore, the property valuation will increase.  Additionally, renovating allows investors to charge higher rents, in turn increasing the current rent and the future growth potential.

In considering the first investment, an investor needs to develop a clear understanding of the market and formulate a strategy that will be successful based on those market factors.  Once an investor selects a strategy, the investor must implement the strategy in a cost effective way to increase value by more than his/her costs.  While this seems obvious, novice investors often underestimate their costs and overestimate the value they should receive from their investment.

Consider an investor, who has chosen to renovate a small foreclosed home in a less than stellar neighborhood.  In this situation, the most important investment strategy should be tenant selection.  Renovations will return very little on their investment because of the general neighborhood conditions and the expectations that the neighborhood will not improve.  If an investor performs cosmetic renovations (~$1,000 – $2,000) and selects a quality tenant that will pay rent on time and take good care of the property, that investor has just created a very attractive, easy to manage cash flow stream.  This investor now has the option of selling the property at a gain and potentially reinvesting the profits into another investment or simply farming the cash flow of the property.

It should be noted in this situation that the investor should not expect any additional appreciation beyond the value created from placing the tenant; therefore, should not plan to hold this type of a property for a long period of time, unless their goal is to invest in stable cash flowing properties.

Investors should look at each investment with a clear plan of action.  Understanding the market and formulating a clear strategy will increase the likelihood of an investments success.