If you haven’t already, subscribe to our newsletter here to get our articles directly to your inbox and follow us on Twitter, Instagram, and YouTube! In our Educational Series we will be taking a deep dive into different ways to invest your money in hopes that one or multiple of these methods strikes you as interesting and encourages you to invest your money to grow your wealth.
First off, what is real estate investing?
A very basic description of real estate investing is using houses, land, apartment complexes, office buildings, or commercial properties to profit through appreciation or cash flow. In real estate the term appreciation refers to the increase in value of a property over time. Cash flow describes earning money - either as income or to be used to pay for expenses - from a property. The three main strategies to real estate investing are: buy and hold rental properties, flipping houses, and wholesaling. To gain indirect exposure to the real estate market, you can invest in a Real Estate Investment Trust (also known as a REIT), which trades similarly to a stock. Below, we provide brief descriptions of each strategy!
Buy and Hold Rental Properties
Buying and holding rental properties is exactly as it sounds: purchase a single family home, multifamily complex, or apartment building, and then hold the property and rent out rooms or units to gain cash flow. Earnings can be used to pay down the expenses and/or earn income. There are various ways to buy properties, which we will get into next week, but the common strategies to purchase rental properties are house hacking, the BRRR (buy, rehab, refinance, repeat) method, or simply purchasing a property and holding it.
House hacking (which I described in my article last week about my first house hack), involves purchasing a property and living in it while renting out other units or bedrooms to try to cover the expenses. The most common way to house hack is to use a low down payment loan such as an FHA, which requires only 3.5% down, and then live in the property while renting out the rooms or other units. This strategy is great for new investors, who may not have access to a large enough sum for a traditional down payment and are somewhat tentative about renting out rooms or units (having immediate access to your property and living in close proximity to your renters can help put you at ease).
The BRRR method is a little more complex and is a strategy I have not personally done yet, but have read a lot about. The BRRR method involves purchasing a property in cash or with a hard money loan (which is essentially money from a person, not a bank with varying rates and terms) and rehabbing that property to the point where it can be rented out. After that property is rehabbed, the owner of the property can get it reappraised, meaning someone can look at the interior and exterior and comparable homes to determine the new value of the home. After the appraisal, the owner can refinance the home and get a loan for the value of the home (in most cases 80% of the total home value) in order to pull their money or the hard money loan out and have the renter pay down the refinanced loan. This strategy is useful because you can theoretically use the same money over and over again to purchase multiple properties. This is a difficult strategy to perfect, but being able to pull some money out of a deal and have renters pay down a loan doesn’t seem too bad to me!
The last strategy is simply buying and holding properties. This strategy generally requires more capital to purchase new properties, but if you’ve got it and would rather invest in real estate than anything else, then it might be the perfect strategy for you. This method can be easier as you can buy properties that are “turn key”, meaning the property has been fully rehabbed and in some cases has a property management company in place to rent out the unit.
With each one of these methods, you can benefit from both cash flow AND appreciation. Depending on your market, it may be harder to cash flow or appreciation may not be as strong. You will have to evaluate that on your own and determine what strategy is best for the location you’re interested in.
Flipping Houses
Flipping houses might be the most “active” form of real estate investing of all of these methods, because it involves purchasing a distressed property (in most cases) and then rehabbing the property. This can take a lot of connections, managing contractors, or doing a lot of rehab yourself. Flipping a house can come with tough tasks, but the great thing about real estate is although problems may seem tough at times, there is always a solution.
The process of flipping a house can be extensive, but can pay great rewards if done properly. Flipping involves forced appreciation by rehabbing the property extensively. Many try to rehab the property as quickly as possible in order to get a profit as soon as possible.
Wholesaling
Wholesaling is similar to flipping in a sense, because you are trying to sell a property as quickly as possible. Also similarly to flipping, this is not a passive form of real estate investing. In order to wholesale a property you need to first find a property, arrange a price and conditions that work, and assemble a purchase agreement. After you find a property you’d like to wholesale, you need to find someone who will purchase the property per the terms of agreement you’ve arranged and now the buyer is the homeowner, the seller gets paid, and the wholesaler collects a finder’s or assignment fee.
Wholesaling requires you put together a plan for purchasing and selling a home and working directly with homeowners. Wholesaling can be difficult and is by no means passive, but can be very rewarding as you can earn money by simply moving properties from owner to buyer.
REITs
Real estate investment trusts, or REITs, give investors broad and indirect exposure to the real estate market and can be purchased on a stock brokerage account. However, similarly to a stock, you do not have control over the properties (in the case of stock ownership, you do not have direct control over the company). This may be a positive or may be a negative to some. REITs are required to pay out 90% of their earnings and those earnings are paid in the form of dividends.
Wrap Up
In the end, there are many ways to get involved with real estate investing and I will be breaking down the strategies more in depth in the coming weeks. Be sure to share and subscribe to the newsletter to get the in’s and out’s or real estate investing in the coming weeks!
Have a great rest of your week!
Brandon & Dan
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Disclosure:
The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.