Investing in the Real Estate market can be very lucrative. Unlike other investment vehicles, prospective real estate owners can use leverage to buy a property by paying only a portion of the total cost upfront, then paying off the balance and interest over time. But how does one get into investing in real estate? There is no simple answer, as there are many ways to invest in the real estate market. So I have compiled a list of my top four different ways you can invest in real estate and how to do so.
Fix and Flip
The first way that you can invest in real estate is through fix and flips. Fix and flips are basically where you buy a property that needs a little TLC, renovate it, and then sell it for a profit. This is a more active way of investing, you are not making money unless you are putting in the work of acquiring properties, renovating them, and then selling them continuously. However, you can make a lot of money relatively quickly by using this method correctly.
With fix and flips, you are purchasing the properties as an investor so you will typically need at least 20% of the purchase price as a down payment on an investor loan if you chose to finance. However, cash is king; so if you pay all cash, oftentimes you can get a really good deal.
Whichever way you choose to finance your purchases through this method of real estate investing, just remember that you really need to crunch your numbers to make sure that the purchase price, projected renovations costs, and after repair value are aligned to make you a profit. There is nothing worse than thinking you are going to make a large profit on a fix and flip and finding out that you under anticipated your renovation costs or after repair value in a way that after all of the time and effort you put into the project you only break even; or worse yet, you end up in the red.
Buy and Hold
The next method of real estate investing is buy and hold real estate. Buy and hold real estate is a long term investment strategy where an investor purchases a property, holds on to it for an extended period of time, and rents it out for a profit.
When exploring your options for renting out the property after you purchase it, you have three main options. The first rental option is to offer a traditional annual lease for sure and steady income. These are good so that you can clean and repair the property every year or so to make sure it is being well maintained and you can raise the rent when appropriate to adjust for inflation every couple of years as well.
You can also do long term leases of two or more years for consistency. This is a good option if you have a really good tenant that you know will take care of your property and pays the rent on time so that you can lock them in.
You can even do short term rentals, like month to month or AirBNB. Short term rentals are a lot more work because your turnover rate is so high and you are constantly looking for tenants and cleaning and resetting the property in between them. However, even though it may be more work, you can charge more for short term rentals. So if you are willing to put the work in, you may be able to make more money doing short term rentals.
Buy and hold real estate would also require an investor loan to purchase through financing, as it would not be your personal residence, which requires at least 20% down. You could also buy all cash if you have the means to do so and purchase at a discount.
But keep in mind that you also have to do your homework on these properties before you purchase. You must make sure that the purchase price, mortgage payment, and amount you will be renting the property for align to make you a monthly profit. Also, keep in mind that you need to have savings set aside for any maintenance that the property may require.
This method of investing in real estate is my favorite. House hacking is where you rent out parts of your personal residence. You can buy a home and rent out the rooms for profit or make the basement an apartment and rent it out if you're not ok sharing your home. You could even purchase a duplex, triplex, or even a quadruplex and live in one unit and rent out the other ones to cover your mortgage or even make passive income. As long as it is your personal residence and the property is residential real estate of four or less units you can qualify for personal home loan.
You could do an FHA loan and pay only 3.5% of the purchase price as a down payment. If your credit is good enough you could even do a low down conventional loan of as little as 3% down. If you qualify for low down payment assistance programs you may even be able to purchase with no money down! The entry cost is so low considering that your tenants rent will probably cover your whole mortgage payment and how much passive income you could possibly be making in the long run.
The amazing part about house hacking is that you can keep on doing it, forever! If you do an FHA loan, after two years of living in the residence you can refinance to a conventional loan and buy another property, live in the new property and do the same thing by renting out parts of it. You can do this every two years as long as you qualify for a home loan; quicker if you do a conventional loan or pay cash. Plus, it gives you the ability to get a feel of landlording for the future. You can just keep growing and growing and growing your portfolio!
REIT’s are Real estate Investment Trusts. REIT’s are best for investors who want to invest in the real estate market without the hassle of a traditional real estate transaction. A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income producing properties. REIT’s are bought and sold on the major exchanges, like any other stock, and you receive dividends on your investment. In layman's terms, you give the trust your money, they invest it in income producing properties, they do all the hard work of procuring and managing the properties, and you make a profit off of your initial investment through monthly dividends.
So if you have ever been interested in investing in the real estate market but were not sure how, these are my top four ways to do so. No one method is better than the others, it is more of a personal preference of which way would suit you best. Any way you choose to do so, just do it. Real estate is the one market that will NEVER GO AWAY! People will always need a place to live. So why not invest in a market that will be here long after you are gone and build generational wealth for your lifetime and your children's lifetimes?
Additionally, I know that I just briefly went over what each of these four methods of real estate investing is so you may be wanting a little more explanation if you are interested. So I plan on making a four part series going over each method in much more depth over the next four posts. Stay tuned for those coming soon :)