If you want to build wealth, real estate investing is really a good way to do it. There are many reasons why you should invest in real estate, but let’s focus on the main thing: the value of real estate is always appreciating.
The market value of real estate is always increasing. If you notice, the value of a particular house today is higher than it was a couple of years ago. That should be enough to entice you to go into the real estate business.
Real Estate Investment Strategies for Beginners
It’s not going to be easy though. You don’t just become a real estate investor without knowledge and hard work. You need to learn the basics of real estate and you need to develop a good real estate investing strategy.
When you invest in real estate, you really have to spend money in order to earn money. However, it doesn’t just stop with the money. You also have to put in serious effort to make it work for you. If done correctly, real estate investment will provide significant cash flows and return of investment. If done poorly, you would have just invested a large amount of money for nothing.
You need to get into the real estate industry with conviction and with a good real estate investment strategy. Now, here are some of the investment strategies that newbies can take part in to make money from real estate:
House Flipping
This is the process where you purchase real estate, fix it up, and then put it back on the market. This is a really great way to make a handsome profit in real estate.
It also helps that this could be a really fun investment opportunity. At least, that’s what we usually see on television, builders having fun renovating fixer-uppers. But while these reality shows make it seem like flipping houses is such an enjoyable investment idea, the reality is so much more than that.
Yes, it’s quite fun to flip houses, but it’s really so much more than that. This is a real business opportunity where real estate investors need knowledge and in order to succeed. You need to have knowledge of the real estate and construction industries in order to make flipping profitable.
You also need patience since renovating a house could take months, no matter what those shows try to convince you otherwise. Not only that, if you want to make a killing in this type of business, timing is going to be crucial. You might have to wait for the right moment to sell your newly renovated real estate property.
It’s important to know the pros and cons of this type of investment strategy to determine if it’s the right one for aspiring investors like yourself.
Pros of House Flipping
- You can make a large profit.
- You can learn more about construction.
- You have a better understanding of the local market.
- It will increase your knowledge about real estate.
- It will increase your network.
Cons of House Flipping
- Waiting for the right time to make a generous profit may test your patience.
- Unexpected expenses in construction and tax increases could affect your profit.
- You could be subjected to capital gains tax.
This is a stressful endeavor–from finding the right property to monitoring the renovation and construction process until the part where you find a potential buyer.
Buy and Hold
This is a strategy where the investor buys the property and holds on to it as a long-term investment property. In the meantime, while waiting for the time to make a huge profit from property appreciation, the real estate investor will make short-term cash flow from renting out the property.
It’s like hitting two birds with one stone: you get a short-term and long-term investment. The rent money received from this form of investment would go to mortgage payments. This is one of the more popular real estate investment strategies. It’s also a great way to diversify one’s real estate portfolio.
The buy-and-hold strategy will also provide you with a passive income. You only need to make an effort once, which is when you buy the property. After that, you continually receive rental income until such time you sell the property.
You can sell it five years or 10 years later where the market value will greatly increase, allowing you to enjoy massive profits.
Pros of The Buy and Hold Strategy
- You have ongoing passive income.
- You get a tax advantage when you manage a rental property.
- Your rental income increases with inflation.
- Real estate appreciates over time.
Cons of The Buy and Hold Strategy
- Risk of rent default.
- Property damage from renters.
- Lack of income during vacancies.
House Hacking
This is the strategy of buying multi-unit properties. The buyer will live in one while also renting out the other units. This is the right strategy for a lot of people as it also kills two birds with one stone: you get a place to call your home while also earning rental income from tenants.
If you have a good number of units being rented out, this could become your main source of income. Besides, the role of the landlord is stressful enough that it should be a full-time job.
It doesn’t always have to be multiple-family properties. If you don’t have enough realistic budget to purchase a land income property, then you could just buy a house with multiple bedrooms. You could occupy one, if you are single, or more than one if you have a family. The rest could be rented our or you could put an ad on the Airbnb.
In many cases, people develop and rent out their basements to generate income.
Pros of House Hacking
- You earn monthly rent while also having your own home.
- Decrease transportation costs since your home is now your place of work.
- You learn more about real estate investing by becoming a landlord.
- You make mortgage payment from your rental income.
Cons of House Hacking
- Being a landlord is not an easy job.
- You basically have to learn to live with other people, some of whom you may not get along with.
- Tenants may not pay rent on time.
- Vacancies would lower your income.
BRRRR Investment Strategy
The name is an acronym for buy, rehab, rent, refinance, and repeat. It is one of the real estate investing strategies that could definitely improve personal finance when done right. There are a lot of things to do right in this case.
For one, it involves a lot of steps. With the first one, it’s not just about buying any property. Real estate investors usually look for a distressed property or properties to buy. This type of property is more affordable for obvious reasons.
For this strategy, you would have to invest in repair value. Since we are talking about a distressed property, you have to set aside a large amount of money for material and labor costs. In most cases, it’s going to be a major renovation.
When the renovation is complete, you then need to study the real estate markets and figure out the rental price of the property. Then, you find people who would rent the newly renovated home. But your real estate investment doesn’t end there. It won’t be a BRRRR strategy if you don’t refinance the property. Refinancing the property basically means taking out another mortgage, a bigger one, by converting your equity.
The process will provide you with extra money. If it’s large enough, you could even use it as the down payment for another property, hence, the last “r”. By doing so, you have just doubled your investment properties.
Pros of BRRRR Investment Strategy
- You have ongoing passive income from the rent of the property.
- You will also increase your rental properties portfolio.
- The rehab process will also build equity.
Cons of BRRRR Investment Strategy
- Just like the buy and hold, it would be stressful looking for a distressed property and renovating it. The rehab will involve construction costs and the waiting period.
- There’s a risk that during the process of refinancing your home, you may get less money than originally expected.
- You need a lot of patience to see this strategy through.
Bonus: Understanding Debt Snowball Method
When you purchase properties for real estate investing, you are most likely going to take out loans. That’s what investing means–you have to expend money in order to make money.
But your mortgage may not be the only debt obligation you have. There may be credit card obligations and other loans as well. To maximize the money you earn, you have to pay off your debts one by one since the mortgage might take up much of your income.
There are different strategies for paying off debt and one popular one is called the debt snowball. Under this strategy, you will have to list down all your debts, from smallest to largest. Each month, you have to try and pay off your smallest debt and make your way to the largest one. The goal is to eventually pay off your smaller debts and eventually experience positive cash flow.
The downside here is that you don’t actually consider interest rates when you practice the debt snowball method. However, you get a high whenever you pay off a debt.
Make Money by Investing in Real Estate. Start today!
Investing in real estate is a great way to make more money. You could have ongoing income from a rental property or take a larger profit from the value appreciation of a long-term investment property.
However, you don’t just go take on real estate investments without arming yourself with knowledge about the industry and devouring real estate investing tips. You also have to learn strategies to ensure that you will earn money rather than lose them in the process.
Whether you intend to take on flipping house or house hacking, buy and hold or the BRRRR scheme, you need to commit yourself to the process by continually learning and educating yourself with the latest real estate trends. Making money through real estate will have a good payoff when you do it right.