12 Super Tips to Build Wealth through Real Estate
Wealth through Real Estate is Attainable.
Making money and building sustainable wealth through real estate is not only attainable. It’s not as hard as you might think. Let’s go over some of the most popular strategies to get you started on your journey in real estate.
Fix and Flips
Historically, the wealthiest people in the world made their money through owning their own business or through real estate. Today, we’re talking about several of the many ways to build wealth with real estate.
If you’ve watched TV in America over the last few years you may think that the only way to make money in real estate is to do fix and flips. The concept is pretty simple. Find the worst house on a street, buy it for cheap, fix it up and sell it for more then what you paid for it. Voila! You’re making money in fix and flips!
The reality is that fix and flips is a great way to make money in real estate but it’s a lot of work and definitely not the only way. The amount of effort it takes to find a deal, buy the property, hire contractors to fix your property, market your property and then finally sell for a profit is too much for a lot of people to take on. Not only that but you need money to buy the property, pay mortgage, taxes and property insurance while you own the property. Then when you sell you will pay agents commission and taxes.
Another consideration when doing fix and flips that is very important and more nuanced is assessing what repairs need to be made and how much they will cost. You don’t want to under “fix” the property because you may turn off potential buyers. Also, you don’t want to over “fix” the property because you need to make sure you make money on the “flip”.
A good rule of thumb for most newbies is to pay for a good property inspection before you purchase any property. This way you can hopefully get more of an idea of any challenges that must be addressed in your “fix. Property inspections usually run between $250 - $750 depending on the property and the geographic location.
It may seem like a lot of money but a good property inspection can go a long way in helping you understand the property and ultimately whether it makes sense to buy or not. Sometimes the best decision can be to not buy a property. You want to make sure that you include a buffer in your budget for your “fix”. The reason being is that even the best property inspection can miss serious concerns. If you are in the middle of a “fix” and come across a serious concern or an upgrade doesn’t go as planned you may need more money to get to the finish line. It’s better to account for those possibilities before you start then being totally off guard during your “fix”.
It’s very important to buy right. That means you need make sure to have a plan for how you see your “fix” and “flip” before you sign on the dotted line. You should try to account for as many whoops and learning experiences and just know you won’t get it right the first time. Even seasoned “flippers” make mistakes so just know you’re not alone. The bottom line is that there is great money to be made with “fix” and “flips” but you need to be smart about how you go about it.
Buy and Hold
Another popular strategy for real estate investing in buy and hold. This is pretty straight forward. You identify a property, negotiate the price and then purchase. The intent is to buy the property and not sell it. At least for a long time. Most folks will then turn around and rent out their property and with any luck make a monthly profit from those rents. The advantage of the buy and hold approach is that your tenant will be paying off your mortgage every month thereby increasing your equity in the property.
If the rent pays for all expenses of the property and still has money left over you’re doing great. Think about it, after 30 years your tenants will have completely paid off your mortgage, assuming a 30 year mortgage, so you have a paid off asset. You own it free and clear and the best part is, someone else paid it off for you. At that point you will have more monthly income because the mortgage will be paid off. Or, you could sell the property and use that money for whatever you like. A common theme in all investing is to make sure you buy right. That means paying a price that allows you enough room to make a profit even when unforeseen challenges arise.
The Brrrr method of investing in real estate goes like this. You Buy the property, then rehab it, rent it out, refinance the mortgage and repeat. Let’s go in to a little more detail. With this approach you are first buying a fixer-upper that you will ultimately rent out. It’s very important when buying your fixer-upper that you have a decent margin so that the property will be worth a lot more once you are done rehabbing it. Now that you found a great deal it’s time to fix it up and make it look pretty so you can rent it out.
Once your rehab is complete and you have great tenants it’s time to refinance your mortgage and pull the money you put in to the house out. For example, let’s say you found a fixer- upper for 100k and you put down 25% or 25k then you put 20k of repairs in to it. After your repairs the property is now worth 175k.
The goal is to refinance now that the property value has increased and get the money you put down and the money you put in to repairs back in your pocket. This way you now have a property that has equity in it and is hopefully cash-flowing with your awesome tenants and most importantly you have all of the money you put in to the project back in your pocket. This allows you to do the most important thing which is to repeat the process.
This strategy, although it is a lot of work to accomplish, is great because you never run out of money to use for investing.
Something to keep in mind with the Brrrr method is that your ultimate goal is to buy and hold. Meaning tenants. So when you are doing your rehab make sure to use materials that are as “renter” proof as possible.
Make sure the place is going to stand up to the rigors of having people live there for many years. What’s really cool about this approach is the fact that since you are doing a rehab the need for repairs in the near future should be very low because you just fixed everything. Whoo-hoo….
Even if you don’t make a lot of money on a monthly basis from your renters it’s not that big of a deal because the one great thing they will be doing is paying off your mortgage over time. In the end you will be able to sell it and make a huge profit.
If you can refinance your loan in to a 15 year vs. 30 year and still have a little profit every month that is ideal because your asset will be paid off 15 years sooner. Most lenders will allow you to refinance 70% of your investment property. Let’s look at our example again. We put 25k down and purchased for 100k and then put another 20k in rehab to give the property an after rehab value of 175k. 70% of 175k is 122.5k. If you refinanced for 120k you would get all of your 45k you put in to the property and still have 30% equity. Now it’s time to take your money and repeat the process.
Mortgage notes can be a very passive source of real estate investing. When you invest in notes you are investing in the actual loans that are on properties. You won’t actually have possession of the property but you will act as the bank. To get the best deals you need to purchase a non-performing note. Non-performing means that the owner of the property is not making the required payments on the mortgage. Banks used to go straight to the foreclosure process and take the home away from the owner if they didn’t pay their mortgage. Nowadays the banks, in many cases, would rather sell the non-performing note to someone else and let them deal with it.
In this scenario you may be able to purchase a non-performing not for 20-50% of it’s value. Once you have purchased the non-performing note it’s time to make it perform. You can do this by going to the owner of the property and renegotiating terms that work for you and the property owner. If things don’t work out you may be able to foreclose on the property and essentially get it at a steep discount.
Another possibility is to re-sell your note once you turn it around and make it a performing note. After your note has been paid on for 6 months to a year you may be able to then sell your note to someone else who buys performing notes.
Let’s say you purchase a 100k note for 20k and then you create a new agreement with the homeowner. You give the homeowner a reduced note for 80k and get them back paying you monthly. After 6 months to a year you know have what’s called a seasoned note for 80k. You could turn around and sell that note at a discount to someone else. Let’s say you sold it for 40k. Now you have made your money back plus an additional 20k for a 100% profit. The note buyer who purchased it from you is happy because they just paid 40k for a performing note that is worth 80k. It is a win-win for everyone. The homeowner saves money and you and the future note buyer make money.
A very popular investment strategy is building new construction. This is not for the faint of heart because the complexities of building new construction can be overwhelming. However if you are building a community of homes there are redundancies that can actually make the investment easier to manage. With new construction you are starting off with a raw piece of land and you will need a solid general contractor to oversee all of the different aspects of the process and to act as the project manager.
The benefit of building new is that it can be much easier to project costs since you know exactly what you are getting in to before you start. If you are building a community of 21 houses, for example, you may only have 3 different styles that you are building so there will be redundancies since you are basically building the 3 houses 7 times. Although there may be greater risk due to the scale of building new construction the rewards can be amplified with the leverage of redundancies.
Have you ever been driving down the road and see a store and wonder who owns that building? Most stores don’t actually own the building that they use to sell their goods and services. Many times they are owned by individuals or corporations.
With commercial property you rent out to companies or small businesses and they pay you monthly, just like with apartments or homes. One advantage to commercial property is that many leases are long term. Sometimes as long as 25 years. With residential property most leases are for 1 year whereas a business will most of the times want to stay in one place so their customers come to rely on them at that location.
When the housing crash of 2007 came it produced many opportunities to purchase homes at a discount directly from banks. As many peoples mortgages reset they were no longer able to afford the mortgage payments. Consequently they lost their homes to foreclosure. The banks aren’t in the real estate business so their goal is to get the foreclosed homes off of their books. They are in the lending business. This is the reasoning they are willing to sell the foreclosed properties at a discount. There aren’t as many foreclosures as there was at the height of the foreclosure crisis. That doesn’t mean there are no deals out there though.
Another great place to look for deals besides banks are auction sites and HUD. Auction sites like auction.com and hubzu.com are a couple of the most popular real estate auction sites out there. There is a caveat with buying property through auction sites. Typically you have to pay the entire amount at the end of the bidding. The same goes for HUD homes. https://www.hudhomestore.com/Home/Index.aspx is the place to find HUD homes for sale. These are government owned homes that can be bought for deep discounts.
A REIT is a passive way to invest in real estate. Your broker can help you purchase these stocks. A REIT is a real estate investment trust. Basically it’s a company that buys properties and pays the rental income back to investors through dividends. To learn more about REIT’s check out Get Wealthy Investing in a REIT
Wholesaling is where you basically act as a middle man between a seller and an investor. Let’s say you find a seller that is not on the mls. They are offering their property for a great deal. You can talk to an investor who could buy it. Then fix it up a little and flip it for a profit. In this example the investor is incentivized to pay you a fee for sharing the deal with them. After all you are the one who did because you did the work of procuring .
Do you have a second or third home that is in an area people like to vacation? If so, you can make good income renting it out while you aren’t using it.
Short Term - VRBO or airbnb
With that same second or third home you could rent it out for shorter stays. Sites like vrbo.com or airbnb.com are good ones to check out. There are companies that specialize in cleaning your place between rentals. There are other companies that will help fill vacancies for a fee.
There are so many ways to invest in real estate. There are many tax benefits that come with it as well. For instance as a single person up to $250k of profit on a primary residence is tax exempt. That is an insane benefit! As a married couple up to $500k combined profit on a primary residence is tax exempt. Think about it, 0% tax.
If you made $500k at a job in a year you would pay at least 35% in federal taxes. Depending on what state you live in you could be paying another 10%. Can you imagine making $500k and paying almost 50% of your income in taxes? Ouch. By selling your primary residence and not paying income taxes. It’s like you get a whole year of income without working. Remember, “It’s not how much money you make but rather how much money you keep”. Wise words to live by indeed.
All smart investors look at what the tax burden will be on their investments before they choose to invest. There are many tax deductions available to real estate investors. Check with your cpa or accountant to make sure you’re taking all of the legal deductions allowed.
In conclusion real estate can be a wonderful way to build wealth in any economic environment. We all need a place to live or buy our goods and services. That will never go away. Whereas a business may come and go, real estate will always be a viable investment. Make sure to plan for the worst, buy right, be smart and always have multiple exit strategies.