One of the best things about real estate investing is that there are multiple strategies that you can implement to make money. Each strategy has it's own pros and cons. Most importantly, is that you can switch strategies depending on the property that you are looking at.
The first two strategies are the ones that most people have heard of, but the other strategies can be just as successful. In fact, being able to move from one strategy to another can turn a bad deal into a great one.
Strategy #1 - Flipping
This strategy has become extremely popular over the last 15 years due to the abundance of flipping shows on networks like HGTV. People have seen the success of these shows and how "easy" they seem to make it look. Flipping involves buying a run-down property, rehabbing it, and then selling at a profit. Sounds simple, doesn't it? Well, slow your roll! Before you jump into your first flip, you're going to need to have some knowledge. First, you are going to have to find a property that you can add value to. And like I said, flipping is very popular, so you're probably going to have some competition. Then you need to understand the cost of the rehab AND what the ARV (after repair value) will be. You may need the help of a contractor for the rehab portion and a real estate agent for the ARV portion. This is especially true if it is your first flip. The two biggest mistakes that first-time flippers make is that they underestimate the cost of the rehab and overestimate the ARV of the property. Another cost to keep in mind is the holding cost that you will have during the repair. You will have utilities, any loan costs, property taxes, etc., during the time you are holding the property. Now, I don't want to make flipping sound like an impossible mission. In fact, the reason flipping is such an attractive strategy is that a successful flip can earn a smart investor large amounts of money in a short amount of time. A successful flip could get you $20,000 or more in 6 months or less. Some flippers that specialize in high-end properties can even bring in $100,000 or more in profit in under a year. These successful investors understand successful flips require knowledge and planning and also some risk.
Strategy #2 - Buy and Hold
This strategy might be the one that most people associate with real estate investing. This is the landlord strategy. You buy a property, hold it, and rent it out. This strategy requires an investor to understand property values and rents for an area. It will also require you to understand your income and expenses for a property. The monthly rent for the property is the first income people think of, but are there other incomes like coin operated laundry or garage rent as well? And then you must also understand your expenses. Mistakes that investors make in this strategy include underestimating expenses and overestimating rents. Another big mistake is some investors do not hold enough cash reserves to cover unexpected expenses that come with owning a property. For every property you plan on holding, you should have $10-15,000 in reserves for any large, unexpected expenses. Of course this amount can vary depending on the age of your property. If you have a brand new property, your reserves can be less. A 100-year old property will definitely require more reserves. As you acquire more properties, you could also bring that amount down per property. For example, if you have 10 properties, you probably don't need $100,000 in reserves. Not every furnace or roof on all of your properties will go out at the same time, but as you use up some of those reserves, you'll want to make sure you build them back up.
This strategy might not pay out the large sums of money upfront like we see with the flipping strategy, BUT this strategy can produce many streams of income that would make George Clason proud! We will go into more depth on this strategy in a later post.
Strategy #3 - Wholesaling
Wholesaling is not actually "buying" real estate. This strategy involves you finding good deals and then getting them under a contract. You then sell that contract with your assignment fee. This fee varies by the size of the deal. This strategy is great for someone who doesn't have the capital to purchase deals themselves but is good at finding and sourcing deals. It requires a lot of hustle and willingness. It can also dry up pretty quickly if you don't build a good marketing funnel to constantly bring in new deals. Just be careful of the real estate "gurus" out there who are more than willing to "sell" you their wholesaling course for the modest sum of a few thousand dollars. If wholesaling was as easy as they make it seem to be, wouldn't every real estate investor be doing it? Don't get me wrong, it's a great strategy for a person with the right mindset and hustle.
Strategy #4 - House Hacking
House hacking is a very popular strategy for first time real estate investors. This strategy is when an investor buys a property and then rents out one part of the property. It is a great strategy for a first-time investor because it can give an investor a place to live with little or no mortgage payment and gives you practice as a landlord. The negative is that you are right next door to your tenant. This strategy can also be a little easier to work if you don't have a family because if you by a single family property, you would be renting a room to someone else. If you have a family, you'll probably want to find at least a duplex so you don't have someone living in your house with you and your spouse.
This can also be a great strategy if you have a kid heading off to college. Once they are able to live off-campus, you purchase a property near campus and have your child live there and have their friends live with them paying you rent! It saves your college kid money in cost of living, and you are getting the mortgage on your property paid off by their friends! Once they are finished with college, you can continue to rent it out, or you can sell the property to another investor. Just make sure that you check into the city's rental requirements before you jump at this option. Many college towns have specific zoning ordinances for rentals.
Conclusion
Real estate can be a fantastic wealth generator for the smart investor. Any of these four strategies taken alone or in any combination can grow your money tremendously. There are also numerous other ways to get into real estate but before you jump into any of these investments, be sure to do your research! Read books, watch videos, read blogs, visit forums. Investing used to be controlled by those that controlled the knowledge. With the explosion of the Internet, that knowledge is out there for anyone willing to do the work. Now get out there and...
KEEP STACKIN!