Real Estate and property investment is one of the most constantly changing and adaptable investments you can explore. The real estate and property market provides opportunities to make a profit from flipping houses, wholesale deals, and buying and holding property. Investing always has risks associated with it, no matter which strategy you use.
There are many reasons to invest in rental properties. Here are a few of common favorites:
- Positive Cash Flow
- Appreciation
- Tax Benefits
- Personal Control
- A Great Retirement Option
- Passive Income
You likely already know everything mentioned in the text, which is why you’re interested in starting to invest in real estate. Do you find yourself wondering which road to take or which strategy fits with your goals? Many first-time investors face the problem of finding the right real estate investment strategy. However, it can be easy to find the one that fits you best.
Is Property Investment a Good Idea?
There are potential benefits for investors who enter the real estate market. Although the benefits of investing in real estate may not be present all the time, they may be appealing enough to start investing. Here are some of the reasons real estate investing might be a good idea:
- Rental real estate is a popular strategy to keep up with inflation because home prices and rental income tend to rise right along with inflation.
- Including real estate in your investments might give you a diversified portfolio. It might also reduce your investment portfolio’s volatility because home prices do not go up and down as much or as quickly as the stock market.
- In some cases, prices of real estate may go up while the value of stocks goes down.
Aside from these reasons, people may prefer real estate investing due to psychological or emotional preferences such as:
- Real estate investing might provide a tangible investment that people see and feel. By comparison, getting into the stock market often means looking at charts reflecting your monthly earnings and losses. For some, this makes real estate more exciting, and this excitement helps them be more active in growing their wealth.
- Real estate investing could be a part-time or full-time endeavor. Some people may use rental properties as a side gig to their normal nine-to-five job. Some other people may invest in real estate full-time by acquiring new properties, improving properties they already have, or more.
- Although buying a piece of real estate might be very expensive, you could start investing in real estate with little money. Small money investment options include wholesaling, certain types of rental property opportunities, and Real estate investment trusts (REITs), which allow you to invest in real estate through companies that own and operate certain properties.
Real estate investing could be easy to get into and may present a good investment idea.
Property Investment Strategies For Short-Term Goals
When you are thinking about which real estate investment strategy to use, it is important to think about what your goals are. Do you want to find a small, low effort job that can make you some extra “fun” money? An investment strategy that will continue to pay off even after the “hard work” is done? If you are looking to get into real estate investing, wholesaling and pre-habbing are great investment strategies to start with.
Wholesaling
Wholesaling properties involves signing a contract and reselling the property to another investor. This strategy does not need a real estate license and does not need a lot of manual labor. The goal of wholesaling is to sell a property for such a low price that other investors will be willing to put in some work to make it livable. The investors you’d be selling to usually pay in cash or with lines of credit, which means the closing happens quickly and there are minimal fees to pay.
The recommended course of action, if you choose to pursue this, is to never purchase the property yourself, but rather to find deals and put the property under contract with a contingency. The goal is to find investors who are willing to pay more for the property than you paid. If you are unable to do this, you can back out of the deal using your contingency. No loss on your end.
Prehabbing
Rehabbing is when you buy a house that needs some work and then you fix it up and sell it. Pre-habbing is when you buy a house and fix it up a little bit so that it is more desirable to investors who are going to come in and fix it up more. If the house is uninhabitable, it could be hard for house flippers to see the potential and get excited about purchasing the property. Pre-habbing refers to the process of cleaning up the exterior of a property, getting rid of leftover trash from previous owners, and sometimes even gutting the place to start over. This option provides a good balance between wholesaling and flipping houses.
Property Investment Strategies For Long-Term Goals
If you think that real estate investment is a long term goal, you may not be able to do it with wholesaling and pre-habbing. The most money can be made by owning rental properties and flipping houses. These kinds of investment strategies require more time and effort, as well as more money, at the outset, but if done right, they have the potential to earn greater financial rewards.
Rental Properties
If you’re looking to make money in the long term, one popular option is to own rental properties. An investment in a long-term rental property appreciates, on average, 4-5% annually. This makes long-term rentals a smart investment opportunity for those with long-term goals. The tax deductions associated with owning a rental property can save you a lot of money. When choosing a rental company, you must consider the company’s ability to cover expenses and generate income. If your income is more than your expenses, you will make a profit. The more rental properties you own, the more passive income you earn from them.
Our own personal favorite strategy for acquiring rental properties is to work with a turnkey real estate company to prepare a fully rehabbed property which is rent ready. An added bonus to this if they have in-house property management with a tenant ready to rent from them either at or soon after closing.
Rehab/House Flipping
A common real estate investment strategy is to buy distressed properties and renovate them so they are habitable for future tenants or homeowners. Fix-and-flip properties are popular among investors because they often have a higher return on investment than wholesale properties. However, the costs associated with fixing and flipping a property can vary greatly depending on the condition of the home. If you have the time and skill set to tackle a project like this, it can tend to be profitable.
Rental properties and flipping houses are two investment strategies that can help to sustain retirees after they stop working. These methods provide a regular income stream, which is especially important in retirement.
How to Fund Property Investing
New investors in real estate need to build pools of available money to purchase properties. If you don’t have an existing business or experience in real estate, it may be difficult to get a bank loan to purchase properties.
If you want to invest in a property, there are different funding sources that may be available to you, depending on the type of investment you want to make and the properties you are targeting. Different types of investment properties might require different types of funding. For example, funding for flipping houses might be different than funding for other types of investment properties.
Personal Savings
If you’re looking for cheap financing, personal funds may be the best option. If you have money saved up to pay for your real estate deals, you can act quickly without having to pay any interest charges. For example, wholesalers may only need a small pool of money to pay for the deposits to get real estate properties under contract. This means that they can get started in the business with less money than they would need if they were going to buy the property outright.
Credit Cards
Credit cards allow you to pay for repairs, utilities, insurance, and other expenses without having to carry around a lot of cash. You can earn rewards on these purchases or have a credit card that provides a 0% APR promotional offer to give yourself more time to pay off the balance.
Family or Friend Loans
While borrowing money from family and friends can have its perks, it can also result in some negative outcomes. Although some creditors may not charge you interest on your debt, they may feel entitled to get involved in your business. If something goes awry, you will not only have to pay them back, but it could damage a personal relationship as well.
Personal Loans and Lines of Credit
Personal loans and lines of credit are financing options that are not secured by any property. With cash on hand, you can buy a property without waiting for an appraisal or getting approval from a lender. Personal loans require the borrower to make set monthly payments and pay interest on the loan. A personal line of credit is a type of loan where you only accrue interest and make payments if you’ve taken money out from the account.
Seller/owner Financing
When you purchase a property using seller or owner financing, you will make your payments to the owner of the property instead of a bank. The advantage to this method is that you don’t need bank financing to get approved. Although the interest rate for a non-traditional loan may be higher than a traditional bank loan, you may not have to pay many of the fees that a bank would charge. The down payment for this type of loan can also vary.
Conventional Loans and Government Programs
Some investors may choose to buy a rental property and live in it while repairing it or until the value of the property increases. If you plan to live in the home, you may be able to get a conventional mortgage or a government loan.
You may be able to get a conventional mortgage from either a credit union or a bank. Credit unions are usually able to offer lower interest rates and fees because they are nonprofit organizations. Credit unions have an advantage over other lenders because they are membership-based and serve specific communities. This makes it easier for them to approve loans.
Government programs that may provide funding include the U.S. Federal Housing Administration, Veterans Affairs, and U.S. Department of Housing and Urban Development loans. Each will have its own specific criteria for eligibility. For example, you would only need to put down 3.5% when getting an FHA loan and you could finance a maximum of four units.
If you owe more than 80% of what your home is worth, you have to pay extra money for insurance that protects the lender in case you can’t pay back your mortgage. With an FHA loan, you may have to pay a one-time upfront mortgage insurance premium of 1.75%, as well as ongoing premiums of 0.45% to 1.05% each year.
Financing Secured Through a Mortgage Broker
Another option is to work with a mortgage broker. Mortgage brokers can help you find the best mortgage deal by shopping around with different lenders. Other than Rocket Mortgage, there are other websites that also offer this same service.
A mortgage broker’s fee must be paid by either the borrower or the lender. The standard rate for this type of loan is usually between one and two percent of the total amount borrowed, and will be noted in your loan papers. These fees can typically be paid upfront at closing or added to your loan balance.
Cash Value Life Insurance
Our own favorite way to fund at least the down payment for a rental property is to utilize a cash value life insurance policy, preferrable a whole life insurance policy. These are also known as infinite banking polices and have many advantages, including repayment plans that you pick and choose.
The Smartest Property Investment Strategy
Specific real estate investment strategies work for specific goals. Every individual needs to think carefully about what their goals as an important part of what investment strategy they are considering.
With that said, holding real estate can generate a significant amount of income and is great for all types of investors. Most notably, buy and hold investors don’t actively seek to sell their investment properties. Buy and hold investors differ from other real estate investors in that they don’t actively seek to sell their properties.
Basically, they offer a positive cash flow that covers the monthly expenses of the property and then some. Since you can write off the value of any property that is 27.5 years old or older, it reducing your taxable income. This mortgage strategy lets investors use the money their tenants pay them in rent to make mortgage payments, rather than using their own money.
Buy and hold real estate provides a consistent stream of income, unlike flipping where the income ends once the house is sold. Lastly, holding multiple properties allows you to build equity, which allows you to refinance and buy more properties. There are advantages and disadvantages to every type of investment strategy, but some experts believe that buying and holding onto real estate property is the smartest move, especially for those just starting out or who have experience in the field.
The strategy you choose should be based on how much effort you’re willing to put in and what you hope to achieve through investing. Each of the investment strategies mentioned above has the potential to be profitable if done correctly.
You should think about why you want to invest in real estate, stay up to date with market trends, get advice from experienced investors, and remember your goals. With this approach, you will be able to find an investment strategy that works for you.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor owning properties in multiple states.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here.
