5 Best Real Estate Investing Strategies (2019 Beginner’s Guide)
In this beginner’s guide on real estate investing I’ll share the best strategies to help you make money from buying investment real estate.
Having a strategy in mind is super important.
There are 3 basic strategies to choose from but then countless variations of them that you can utilize.
One example I’ll give you right off the start is with rental property.
You normally think of buying a property and renting it out to tenants, but a variation would be buying your main residence and renting it out to roommates/tenants known as the live and rent strategy.
Alright let’s get into the 3 basic strategies and then you can get as creative as you want with each.
The basic 3 real estate investing strategies are:
- Buy, Rehab, and Sell (Fix & Flip)
- Buy, Rehab, and Lease (Rentals)
- Get Property Under Contract & Sell Contract (Wholesaling)
Notice how wholesaling doesn’t say “buy” like the other two.
That’s because you don’t need any money to make money with this strategy as you never actually buy the property or if you do it’s for a brief half hour before re-selling it to your lined up buyer.
We will get into it more below, but just wanted to point that out to you since this strategy is a strategy not many people know of or understand clearly, yet is the strategy most beginner’s start off using ironically once they learn of it.
Strategy #1: Fix and Flip
You’ve probably seen one of the many HGTV shows where they buy a property in awful condition and fix it up beautifully then resell it for nice profit. This is fixing and flipping homes.
You can make large sums of money in short periods of time if the deal goes right. The downside is your income depends on volume of flips and most people can only do one to two flips per year so profits have to be large enough to be worth the time committed.
Wholesalers often argue their strategy is better because you can flip several contracts to cash buyers per year and make more money with less risk than a fixer and flipper who takes on all the risk of owning the property and making the repairs and trying to resell it for a margin well above cost.
A “Fixing and Flipping” example is when you acquire a property below its market value for let’s say $50,000 and you put $15,000 into the rehab work and then sell it for market value of $100,000. You’ll gross $35,000 in profits before subtracting closing costs and holding costs. This strategy should be well known from all the house flipping shows on HGTV and others.
- After Repair Value of the Home You Can Sell For $135,000
- Profit You Expect to Earn on the Flip ($25,000)
- Closing Costs during the Purchase ($5,000)
- Closing Costs during the Sale ($5,000)
- Commissions to Real Estate Agent on the Sale (6%) ($8,100)
- Holding Costs (Utilities, Loan Payments, Etc.) ($10,000)
- Renovation Budget aka Rehab Cost ($25,000)
- Max Purchase Price You Should Offer $57,000
Subtract out all of your estimated expenses from your estimated after market value price the home could sell for and you’ll get the maximum price you should offer to buy the house.
Then offer a price lower than this number so that you leave yourself some negotiation room with the seller.
Strategy #2: The Live and Flip
You may also decide to buy a property and live in it for a little while and then flip it. You can fix it up along the way as you’re living in it until it’s all renovated and ready to sell.
This is known as the live and flip strategy.
Strategy #3: Buying Rental Properties
Buying and Leasing (rental properties) is when you find a property in a decent neighborhood that people would want to live in and you purchase it to rent out to tenants.
Your tenants pay a monthly rent which ranges based on the property, location, and market value but 1-2%% of the property value is generally a rule of thumb.
If you get a house for $70,000 then you could expect to rent it for about $700-$1,400 but again it depends on a few factors.
Owning rentals is the way to build long term wealth but requires a lot of capital as you have to purchase the property, fund repairs, and fund any holding costs until the property gets rented out to a tenant as well as repairs caused by ignorance and carelessness of the tenant.
You build wealth in rental property through 4 ways:
- Cash flow that remains after all expenses have been paid from the rental income collected
- Equity forced into the property by purchasing it below market value and fixing it up for less than the spread, leaving profit aka forced equity.
- Equity from paying down a loan. Every payment includes part principal and part interest.
- Appreciation – when the property value increases over time due to inflation.
The 5th way that you build wealth is through tax savings. Other asset classes hit you hard in taxes but in real estate there are ways to defer or reduce taxes paid, leaving more money in your pocket to invest and compound over time.
Strategy #4: The Live and Rent House Hack
The variation to this strategy is the live and rent. You could essentially buy a home with more than one bedroom and you could live there while renting out the extra rooms to roommates.
Or, you could purchase a duplex (2 unit property) and live in one unit while renting out the other unit and using that rent to pay for the mortgage of the entire property.
I love the live and rent strategy because it allows you to live in your home for free essentially.
Your roommates are paying you rent, which you’ll use to pay off your mortgage if you have one as well as to pay for property taxes and insurance.
Your roommates will also pay for their share of the utilities leaving you a small portion you’ll have to pay for utilities which may be covered by their rent money if there is any left over after paying the mortgage, insurance, and taxes.
Read more about house hacking in this article on creative real estate strategies.
Strategy #5: Wholesaling
If you’re looking to get into real estate investing but don’t have much capital or a good credit score don’t worry.
Wholesaling is one of the best strategies available to beginning investors. Wholesaling doesn’t require any capital to complete a deal if you know what you are doing and your credit score is completely irrelevant for this investing strategy.
What is wholesaling and how does it work?
Let’s say a wholesaler finds a property that is under market value (meaning the property is selling for less than similar properties on the block).
A wholesaler would get that property under contract with the seller and then assign or sell that contract to another investor or buyer and then that investor or buyer would complete the purchase with the seller.
You could also do a double closing where you use the investors funds to buy the property from the seller in one closing and then a half hour later meet the buyer/investor and sell the property to him/her.
The double closing allows you to remain private to the seller that you flipped their house to someone else after getting it under contract.
A wholesaler does not improve the property at all like a normal fix and flip.
The only job is to get it under contract and sell the contract to another investor who is looking for a worn down house in need of repair.
Then go to closing and complete the transfer and collect your fee.
Pretty simple huh?
Since a wholesaler finds investment properties that can be fixed up and flipped or fixed up and held as rental properties, the wholesaler’s first step is to make friends with both types of investors, fixer flippers and landlords.
As a wholesaler you’ll build up a buyers list of cash buyers who we just mentioned so that when you come across a property that can be fixed and flipped or fixed and held as a rental, you’ll have cash buyers to turn to that will purchase the property from you.
It has to be all cash because it complicates things when dealing with lenders.
Most deals are done by contacting sellers directly and leaving real estate agents out of it. This allows the seller to save money on commissions and allows you to negotiate a better purchase price.
For example, if a seller has a $100,000 house owned free and clear, he would have to pay a 6% commission to the real estate agent plus closing costs leaving him maybe $90,000 left.
As a cash buyer going straight to the seller, you can negotiate a sale price of $95,000, $5,000 below the market value the seller was selling for with a realtor.
Then you can turn around and sell your contract to your cash buyer list for $100,000 so you make a $5,000 profit.
Or in other words you sell your contract for $5,000 assignment fee and the cash buyer now has the rights to purchase the house from the seller for $95,000.
This strategy allows you to use zero of your own money.
3 Strategy Summary:
Buying to rehab and rent is a wealth building strategy where as flipping is an income strategy.
What I mean is once you buy and flip a house that’s it. You get the one time income and it’s moving on to the next property.
With buying and renting you receive income every month from a tenant.
Your tenant is paying off the mortgage or loan on the home for you ultimately building your equity which is a component of the net worth calculation.
People do a combination of all 3 strategies to build their business and wealth.
The first two, wholesaling and flipping houses, can supply income that the investor can use to continue acquiring more properties to lease to tenants as a landlord that then provides long term wealth and passive income.
Decide on your strengths and weaknesses and choose the strategy or strategies that will work best for you. If you don’t have much capital as a beginner then I would try wholesaling.
Here are some additional articles on wholesaling:
- What is Wholesaling?
- Where to Start as a Real Estate Investor
- Building Your Wholesale Buyers List of Investors
Comment below which strategy appeals most to you? Have you tried the live and rent strategy or live and flip strategy before? Love to hear your thoughts.
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