At its core, residential real estate investing is a relatively simple business. To do it well, you need to master three steps. First, you need to find a suitable investment. Then, you need to fix the issue with the property that made it a good investment. Finally, you finish executing on your strategy by either turning it into a long-term cash flowing rental or selling it to a traditional homeowner at a higher price.
One adage in the real estate industry is that you make your money when you buy a property. If you buy a property at a below-market price, you can expect to sell it for at least what you pay for it, and probably sell it for a profit. On the other hand, if you pay a top of the market price, you minimize your opportunity to sell it for what you paid or more. With this in mind, successful real estate investing requires you to find assets that you can buy below their true values.
There are many reasons that properties trade for low prices. It could be that the whole market is undervalued. Alternately, the property could need work, limiting the buyer pool and leading to the property having a discount that is more than the price of fixing it up. Finally, the property could also be on the market with terms that make it unattractive to most buyers. This happens with many distressed properties that are in good shape but either require very fast all-cash closings or involve months of waiting while the deal works its way through the lender's process.
To create value, fix the property's problems. If it's listed with terms that are unattractive, buy it so that the terms no longer matter. Depending on your strategy, you can then re-list it with better terms or rent it out at a reasonable rent. In other cases, this step involves fixing up the property so that it is in turnkey condition for a buyer or tenant.
Once you've fixed the property's issues, you can finish the acquisition phase of your real estate investing strategy and move into your next step. If the property cash flows and you have permanent financing, you might choose to hold onto the property and enjoy the income that it generates. Alternatively, you could resell the property for a profit, freeing up your equity to reinvest.