You’ve probably seen TV shows and heard radio ads about “flipping” houses.
Or maybe you’ve met an investor that holds rental properties to make passive income.
Have you ever wondered what it takes to get started in real estate investing? And how profitable it can truly be?
Let’s take a look at what real estate investing looks like from the inside.
The first step is understanding how real estate investing works and what options are available to you. From there, you can assess what strategies suit you best and find a place to get started!
This post is by no means a comprehensive guide to all the types of real estate investing, as that would be a book-length project, but it is a quick crash course through some of the most common strategies that investors are using in residential REI today. Real estate investing is a world filled with its own insider lingo, so the more you’re familiar with, the quicker you’ll be able to follow along!
Rehab and Resale
This method, also called “house flipping,” is as simple as the name suggests: you buy a property in need of repairs, and fix it up to resell. You can choose to target retail buyers, or sell to other investors who want a rent-ready property for cash flow purposes.
Flipping can be as high or low maintenance as you want it to be. Some investors who are “handy” like to do some cosmetic work themselves; others like to contract out all of the work. Rehabs can range from low to high end homes.
One of the major perks of rehabbing (besides the profit potential!) is the satisfaction of taking a distressed, dilapidated property and turning it into a beautiful home for a family or a first-time buyer. This especially suits people who enjoy design and hands-on work.
The downside to rehabbing is that new investors sometimes have difficulty correctly budgeting for the repairs needed and end up in bad deals as a result. You can avoid this by learning from or partnering with an experienced investor. It also helps to build a good relationship with a licensed Contractor, who can help you assess the types of work that will need to be done on your rehab.
One more word of caution: make sure you’re familiar with building and zoning codes in your state and county! My home state of Florida, for example, has pretty strict regulations on remodeling and permitting if I do not occupy the home I’m remodeling!
Renting out properties can offer you the opportunity to bring in additional cash flow each month (also called residual or passive income). Landlords can rent out anything from single family residences to multi-family apartment buildings.
One of the major advantages of a successful buy-and-hold strategy is that you’ll have a reliable passive income each month. This can be an excellent retirement strategy!
Some new investors aren’t so sure about the idea of having to deal with tenants and repairs, but many investors use a portion of their rent revenue to hire a property manager and build up a “reserve” of cash for future repairs. If you can leverage your property so that all of these costs (and any financing you have on the property) are covered–and you’re left with some cash flow–you’re in good shape!
If this sounds like the strategy for you, start by doing some research. What type of residence would you like to rent out? What location? What do comparable properties rent for? Get to know your market.
Private lending is a process of loaning money to another investor so that they can use it to fund one (or several) of their projects. Private lending is perfect for a potential investor who has some cash saved up, and wants a hands-off, low maintenance approach to investing. You can make a much higher return on your money than you would investing in a money market account or a CD. You’ll need to screen your borrowers carefully, though, to mitigate your risk.
The upside of this strategy is that once you’ve built a good relationship with a borrower, you’ll essentially get to sit back and let your money go to work for you. While a responsible lender will carefully analyze the deals that are proposed to them, they don’t have to do any of the hands-on work of a rehabber, deal with the issues and complaints from tenants if landlording or have any interaction with buyers and sellers such as a wholesaler would have!
Wholesaling is a process of putting a house under contract to buy, and then re-selling to someone else very quickly or before you actually close on the home. You might do what is called a “double closing,” meaning you find a buyer who wants the property before you close on it and assign the contract over to them. Then, at closing, you close first and then the new buyer closes immediately after. You can also close on it yourself and then find a buyer to wholesale it to after the fact. The other possibility with wholesaling is that you can get a home under contract with an assign-ability clause and market the contract itself to a new cash buyer. In this approach, you are marketing your contract (the rights you have to buy the subject property) to a willing buyer and will assign the contract for a fee to that new buyer. The main idea is that you may never own the property or you hold the property for only a very short time.
One of the main perks of wholesaling is that you can make a quick return without having to have a lot of cash to get started. You’ll probably need some cash to invest in marketing at the beginning, but if you can assign your contracts to another buyer to close, you don’t have to have a ton of funding for each project like you’d need to if you were going to rehab some houses.
BONUS TIP: “Reverse wholesaling” is a term some folks use to describe a process in which an investor finds buyers first (instead of finding the houses first!). The investor then uses the buyer’s criteria to find the right deals to appeal to that buyer.
Once you decide what strategy might be the best fit for your needs and resources, we recommend that you spend some time focusing on learning everything you can about that single strategy. This “laser” focus prevents investors from falling into the trap of trying to learn everything there is to know about real estate investing, bouncing from strategy to strategy but never actually practicing any of them consistently–thus, getting “stuck” and never doing any deals.
That having been said, once you feel comfortable with your knowledge and skill level, you can mix and match strategies to meet your needs and goals. For example, you could find a distressed house to fix up (rehab), and then rent it out instead of selling it. Or, if your goal is to be a private lender but you don’t have the funds available to lend, you could use another method, like wholesaling, to put some funds away for that purpose. Your model can be as creative and diverse as you are!
As previously stated, this is NOT a comprehensive list of all of the methods you can use to do real estate investing! There are lots of strategies that this article doesn’t cover–for example, buying tax certificates, real estate development, and commercial investing–and those can be just as exciting and profitable! However, these four techniques are some of the most common in residential investing, and will give you a starting point to understand how to talk with other investors as you begin to put the piece of the puzzle together and discover what strategies are the best for you!
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