Seven Ways to Invest in Real Estate
Let’s check what’s happened over the last few years: End of 2019 Someone you knew got sick but it seems like the flu on steroids. 2020 We find out there is actually a flu on steroids only Dennis Hoffman won’t find the solution this time. Because of this the government gave tons of money to Americans to shop on Amazon. 2021 After much deliberation, everyone has to go back to work.
With all of this chaos going on the cost of borrowing money became low making it more affordable for consumers. This gave millennials the chance to jump from the nest to ownership. The tenant became the landlord and everybody became The Property Brothers overnight. If your newsfeed is full of people investing in real estate and you’re wondering, here are seven ways to invest. This is only the tip of the iceberg.
No. 1 Wholesaling
The process of wholesaling is not as complicated as people may think. You simply make contact with a motivated seller and place their property under contract. Then you find a buyer interested in the property and charge a finder’s fee, otherwise known as an assignment fee. The key is finding properties with a nice equity margin to be able to collect a check. Be careful in some states like Illinois, you need to work with a realtor since this is considered a real estate transaction. You can do this in your own backyard or nationally. It is important to understand the wholesaler is selling their interest in the property. Meaning the bundle of rights to the property. The new owner will be responsible for whatever liens and encumbrances attached to the property. Which is why it is important to do your own research before finalizing the transaction. With this method of investing you need a solid attorney who doesn’t mind messy deals.
Startup: $0
How much can you make a deal: $3,000-$30,000+
No. 2 Tax Sale Flip
Tax sale flip is purchasing a property for the taxes owed and then reselling it. Some states have commissioner tax sales. This is different from your traditional tax sale because the redemption period (the time allowed for a person who has interest in the property to pay everything owed) is practically cut in half. Instead of waiting two years to sell you can own the property free and clear in as little as seven months. You have few options after you take possession. Rent the property out if it's habitable, renovate the property to resell high or sell the property over to another investor and let them decide what they want to do with the property. You don’t even have to be in the same state as the property. If the property is reclaimed, not only do you get your money back but also a nice little check for your troubles. This applies to traditional tax sales as well. An experienced tax sale attorney is necessary because they are the ones who writes up all the legal redemption paperwork and in many cases appear before the judge on your behalf.
Startup: Varies but in some states as little as $4,000 to acquire the property.
How much can you make a deal: Varies by market $10,000-$100,000
No. 3 Fix and Flip
If you grew up watching shows like “Flip or Flop” or “Fixer Upper” then you know no doubt got bit by the ‘I can do that’ bug. Apparently during the pandemic everyone else did too; especially as money was lent at an all time low. Fix and flip is a concept where you buy a home, do some renovations (minor or major) and resell it for more than what you bought it and renovated it for.. The spread in between what you purchased the house for and it’s after repair value is called equity. There are expenses incurred throughout the process so be sure to have enough equity to cover that as well. After all expenses have been paid is the profit. Investors using this model go after distressed properties a lot because they usually have more equity. If you are going to pursue this investment strategy it is important to have a team surrounding you. You need to have good relationships with your attorney, realtor and contractor. Be sure before you make the move you have your down payment, closing costs, carrying costs and reserves. This is one of the most riskiest methods because of how much money goes into the investment, the various team players and the tight deadline you have to pay it all back. The more you do this, the better your relationship will be with lenders who will eventually grant favorable interest rates and more.
Startup: $35,000-$60,000+
How much can you make a deal: Varies by market $10,000-$100,000
No. 4 House Hack
House hacking is becoming very popular among millennials. Being handicapped with student loan debt, unforeseeable economic factors and a marginal entry-level salary many have turned to this route. It is the easiest way to start a portfolio with limited capital. It allows you to afford your half-a-mil dream home later. The hack is you purchase a multi-unit before purchasing a single family home. With FHA you need a credit score as low as 580 for 3.5% down payment. With a 40% credit utilization you may qualify for down payment assistance as well taking this down to $0 sometimes. Why a multi unit? Because they use the additional income from the other units you do not live in and add a sizable percentage to boost the borrower’s income. The additional unit(s) helps pay the mortgage and building expenses allowing the owner’s financial responsibilities on the property to be little to nothing. To make this the best investment possible, purchase a multi-unit in a stable to growing market. That way if you decide to sell the property later (maybe upgrade to a commercial residential unit), you can profit off the sale too.
Startup: Down payment + Loan Acquisition (varies by market and buyer’s profile)
How much can you make a deal: $5,000 to $65,000+
No. 5 Purchase Your Own Home
Since the beginning of time people have fallen on either side of the coin. Either you are a landlord or a tenant. Being a landlord doesn’t just mean having people pay you rent. It is a person who owns land, hence land-lord. When purchasing your own home it is important not to focus solely on the aesthetics of the home. Purchasing a home is an investment. It is a piece of property that you hold onto, maintain and raise a family within. Sometimes people move when they are not really ready to. They have so much debt that when they add the mortgage debt they lack disposable income. Disposable income is when you are able to purchase additional things that are not essential to survival. That’s your clothes, cars, entertainment, higher education and traveling. This makes you “house poor” and it’s not a favorable situation to be in. Purchasing a home in a stable community with good schools is a good will investment. A stable community doesn't appreciate astronomically unless they're out of this world design upgrades and surrounding land can be developed. Purchasing a home in an emerging neighborhood (even renovating it) adds value to the residence. It appreciates because you’ve renovated the home or the neighborhood amenities have room to grow. Both create equity within a home. The equity is simply the difference between what you paid for the home and what it’s appraised value is. This is a sophisticated way to purchase a home. Seeing the value of it beyond the interior beauty. Later your home turns into a bank that lends you money for graduate studies, maternity leave or funding your kid’s college education.
Startup: Down payment + Loan Acquisition (varies by market and buyer’s profile)
How much can you make a deal: $5,000 to $65,000+
No. 6 Purchasing Mortgage Notes
There is an underbelly world of real estate. Think of a property as an apple pie divided into several slices. When a property is financed with a loan, it becomes an investment instrument in itself. Lenders are in the business of making loans, not keeping them. After a cooling off period, the promissory note of the loan is placed on the secondary market. The secondary marketplace is made up of government entities, lenders and private investors. They purchase the note with the hopes that the mortgagee- a person who is paying the monthly mortgage- will continue to pay on time and pay the loan back in full. The return on this could be months or years (in the case of a traditional mortgage). In other words this entity is the new bank. This investment strategy takes a lot of the headache of ownership away. You don’t have to do the flip yourself, you don’t have to manage the tenants yourself. All you need is to sit back and collect money every month with a lump sum coming during the sale of the property.
Startup: varies 75%-100% of loan’s current value
How much can you make a deal: 12%-20%
No. 7 Private Lending
Some of us have some extra cash laying around. It doesn’t make sense to hold it in the bank to gain less than 1% while they use your money to make loans for a 12% return. Why not become the bank itself? Being a private lender allows you to finance what you want to finance. In this case, another investor looking to flip or hold a property would come directly to you for money. You set the terms you want: how much interest they will be paying monthly, when the loan is due and what will be used as collateral. This is also a hassle-free way to invest in real estate because you’re not dealing with the headache of renovating or being a landlord. You build a relationship with the borrower that hopefully turns into a repeat venture as you seek out more individuals to do the same. If the deal gets shaky, the note is unloaded on the secondary market transferring the risk from you to someone new. This is one of the best positions to be in and allows you a different kind of freedom.
Startup: varies $30,000+
How much can you make a deal: 12%-20%
There are plenty of other ways to invest in real estate and more than one way to do so. Each category is so broad and requires different levels of expertise. Reading articles such as this and staying in tuned with other sites like Investopedia, Bigger Pockets and more helps. Join a local real estate investor club that has regular meetings where you can network with like-minded people. Find a mentor. Whichever way you choose, don't just jump into it blindly. Real estate has large gains, as well as, large losses. Also understand every deal is different. All in all, be a student of the game and be patient. Once you’ve found your groove, the world is yours.