Real estate investment can be a mysterious subject. There are so many strategies, niches, and ideas to learn and try. It’s best to start out with expert guidance and simple advice that will give you direction and focus in your investing career.
Continue reading to learn 4 essential strategies that will help you get started as a real estate investor, and keep you profitable for the long-term.
1. The ‘Lipstick’ Flip
One of the most essential investment strategies is the ‘lipstick’ or light cosmetic flip. This type of project involves less than $5k of work, can typically be completed in around 45 days, and involves less risk than flips that require significant repairs.
The process involves finding a suitable property, making minor cosmetic repairs, reselling quickly, and then cashing out and repeating the process. This will help you build the capital to expand operations and grow your portfolio.
Some of the resources you’ll need to get the job done include purchase and rehab financing, reliable contractors, access to property data, and the assistance of real estate professionals.
Once you have your financing in place (typically hard or private money), and you’re educated on the process, you’re ready to go out and look for properties that show physical signs of distress such as weathered siding and paint, tall grass, piles of newspapers, broken garage doors, stained flooring, holes in the drywall, cars with spider webs, and any other signs of neglect.
How do I know how much to pay for the property?
The most common formula for preparing your offer is to take the after-repair value (ARV) and multiply it times .7, or 70%, and then subtract your expected repairs costs; this is sometimes referred to as the 70% rule (although more of a guideline in practice).
2. Buy & Hold
Buy and hold is a more traditional investing approach that allows you to build passive, on-going income for the rest of your life. This investing approach involves finding properties like those we discussed before, repairing to making them suitable for renting, leasing the property out, and collecting rents. The lower the price you buy the property at, the higher your potential long-term cash flow.
You’ll need a reliable source of financing such as a convention loan, personal cash, or funds contributed by a partner. To reduce your legal risk and minimize your taxes, consider forming a legal entity such as a Limited Liability Company (LLC) or Corporation.
Unless you’re local to the property and have the time to manage it yourself, it’s a great idea to hire a personable and professional property manager to handle maintenance requests, oversee repairs, screen tenants, maintain financial records, and collect rents.
Wholesaling is a less common approach that is becoming more popular as investors are looking for minimal risk, and maximum returns in the shortest possible amount of time.
The process here starts with finding distressed properties and getting them under contract using the 70% rule as the basis for your offers. Once you have negotiated with the motivated seller and acquired their signature on the contract, you can sell or ‘assign’ that agreement to another investor for an agreed upon ‘wholesale’ fee.
An advantage of this approach is that it requires only the money to market for motivated sellers and buyers. After you have a property under contract, you can get paid in as little as 10 days. Depending on home values in your market, you could walk away with $5-30k, and even more. There are many opportunities out there, and the more marketing you put out, the greater you’re chances of hitting a Home Run.
The final approach we’ll discuss here is another form of rental investment. It combines short and long-term strategies to help grow your rental portfolio more quickly than traditionally possible. The BRRR&R stands for Buy, Renovate, Rent, Refinance & Repeat.
To get started you’ll need to find a great deal on a property (one that needs repairs and is priced under market). After you close the deal, renovate to the finish level expected by renters in the community. When you’re planning the repairs, select durable paint, flooring, counters, and other materials that will withstand tenant abuse, and minimize long-term maintenance costs.
After the property is repaired, screen and select quality tenants with solid employment and rental histories. The property will need to season for a period of 12 to 24 months, depending on the standards of your selected refinance lender, to demonstrate the financial stability of the property. Lenders will look at the positive cash flow that the property produces, and the quality of the tenants. With the refinance you pull cash out of the property’s equity and use the money as a down payment or rehab funds for your next acquisition.
Putting it into Action
Using these methods will allow you to start with very little money and grow your bank account and portfolio. A combination of these approaches will provide you with numerous investment opportunities and greater financial stability by diversify your strategies and portfolio.
If you need more guidance to absorb these methods and get started putting them into action, reach out to an experienced investor online or in your local community. Working with a mentor will help you define your strategies, give you the tools to succeed, and build your confidence in negotiations.
Here’s a useful infographic from Phoenix based home buyers, Offer Climb on Real Estate Investment Strategies for New Investors.