Disclaimer: This is not professional advice. These are simply my opinions of how I see real estate and how you may be able to get into real estate investing in any shape or form. Please use your own judgement before getting into any type of investing whether it be stocks, real estate or a small business.
If you’ve been following this blog there’s a good chance you might be into real estate or are already into it. I have made it known that I am currently househacking my first investment property and will continue to do so until me and my significant other move into investment property #2, find that “forever home”, or until I convert my childhood home into a 8-unit apartment building (that’s another topic for down the line, I have HUGE plans for my childhood home). So you want to get into real estate investing right? But what are the different types of ways you can invest in real estate? Can you get into real estate investing with little money? I want to walk through the different types of real estate investing so that you may be able to figure out what it is you want to do in this business. I also will dish out some tips on how you may be able to get a deal without gutting your life savings. It may take some creativity and strategies you’re typically accustomed to, but there are ways and many people have done it. I mean, I did it without gutting my savings, why can’t you?
So let’s jump into the different ways of investing into real estate:
Active (getting down and dirty and putting in the work):
- Buying Rental Properties/HouseHacking
- Flipping Houses
Passive (set it and forget it):
- Investing in REITs
- Real Estate Crowdfunding
- Become a Private Lender Or Partner
Buying Rental Properties And/Or Becoming A Househacker
That’s me! That’s what I’m doing!!! The Book on Rental Property Investing by Brandon Turner jump started my goal to purchase a two-family and househack my way into real estate. When me and my significant other decide to move out of this property after at least one year (mortgage requirement), the home will instantly become an investment property and I will pocket the monthly cash flow.
Here is how you make money by buying rental properties:
White Tee Jay buys a two family home for $450,000. White Tee Jay decides to put a down payment of 20% and take out a mortgage on the home. His total monthly mortgage payment (principal, interest, taxes, insurance) is $2,800.00. White Tee Jay rents out the units of the home as following:
- Unit #1 – $2,000/month
- Unit #2 – $1,300/month
White Tee Jay receives $3,300/month in rental income, while paying $2,800/month for his mortgage. White Tee Jay receives a monthly cash flow of $500/month after all the expenses are paid.
Buying a rental property is an active way to get into real estate, however understand that it is another full time job. When you buy a rental property, you also take up the title as a landlord. Here are things to ask yourself before you want to jump into buying rental properties or becoming a househacker:
- Are you ok with managing properties?
- Are you ok with dealing with multiple tenants?
- Are you comfortable with living in a property with multiple tenants?
- Are you prepared financially to pay a full mortgage payment if the rental units are vacant?
- Are you willing to invest your free time, cancel plans last minute or miss out on certain events due to obligations to the property?
If you answered yes to all these things, buying a rental property may be within your near future! If you decide to live in one of the rental units of a multi-family home, please refer to my experience of becoming a house hacker at Let’s Talk House Hacking: The Pro’s And Con’s + How My Business Makes Over $400 Per Month. With Help From Me, A “Tenant”!
Chip & Joanna Gaines, Property Brothers, every HGTV show that goes Cinderella on these homes. Flipping a home one way of racking up some big bucks if done correctly. If you have not heard of the concept of flipping homes here is a summary:
Buy a beat up, un-renovated home for a cheap price, renovate the home and then sell the home for a higher price than what you bought it for + renovation costs.
Simple concept right? Let’s add in a mathematical example:
White Tee Jay buys a home for $200,000 with a mortgage and decides he wants to flip the home after renovating it. He puts in $100,000 worth of renovations into the home. So White Tee Jay now has $300,000 in on the home. White Tee Jay then puts the house up on the market and the home sells for $400,000. After fees and paying off the mortgage, White Tee Jay comes away with $60,000 after selling the home.
Not bad right?
I want to flip a home one day, it’s a hard working and rewarding experience. It takes a lot of time, work and grit to be sure the home gets renovated to code and sells for the right price so that you come away with a nice payday (especially if you paid cash for the property). Before deciding you want to flip a home, ask yourself these questions:
- Are you prepared to make mortgage payments in case the house has delays in renovation? Or if the house sits on the market for too long?
- Are you prepared to deal with all the headaches of renovating a home? General Contractors, plumbers, electricians, etc.?
- Are you prepared to spend more than what is on budget? Are you organized and doing the numbers correctly when analyzing a flip?
- Do you have access to plenty of cash to finance the deal? Are you willing to partner with others to get the flip done?
- Again, are you willing to invest your free time, cancel plans last minute or miss out on certain events due to obligations to the property?
If you answer yes to all of these, then flipping a home may be in your future! If you don’t have the liquid cash, having the right amount of capital is one of the toughest things when deciding to flip a house. You have to get the property, renovate the property and then wait to sell the property! Be aware, the longer a renovated property that is meant to be a flip sits on the market, the lower your profit margins will be! So it’s important to do your numbers correctly, analyze your worse case scenarios and make sure you are prepared. Flipping a home is rewarding if done correctly, I hope I can share an experience with you in the future!
Think of being a middle man or selling a lead/contract. You go to a seller and agree to a contract with a seller for a certain price with an assignment clause on the contract. Then you go out and find an interested buyer to buy the contract or rights of the contract from you at a higher price. At the end, you keep the difference between the price you contracted with the seller and the price you contracted with the buyer. That is wholesaling real estate in a nutshell. Wholesaling is a hustle and grind, but very rewarding for investors! If you are into trading, think of wholesaling as trading options contracts! You could see yourself getting $10,000+ paychecks without ever physically owning the home and having to renovate and rent it.
However be aware:
Wholesaling can be frowned upon and maybe even made illegal in certain states. Check with your state laws before deciding you want to get into wholesaling. You are simply acting as a middle man selling the sellers contractual rights to a buyer. Language and what the law states in your area is crucial to being able to wholesale without scrutiny. I see no problem with wholesaling, but others may. It’s similar to options trading as you are buying and selling contracts.
We’ve talked about active ways to get into real estate, now let’s look into the passive ways to benefit off of real estate!
Better known as Real Estate Investment Trusts. This is a completely passive way to invest in real estate through the stock market. Open a brokerage account (you can even do Robinhood from your phone) or a Roth IRA and invest in real estate through REIT’s passively. These are companies that own big commercial buildings and properties throughout the country. The price volatility of these securities aren’t as wild as your typical stock and they offer dividends that range from 5%-10% annually! A $5,000 can net you an extra $250-500 per year in dividends alone! It may not be a lot, but if you don’t want to deal with tenants or physical deal estate in general, REIT investing is completely okay, I even have some REITs!
Real Estate Crowdfunding
Similar to REITs, real estate crowdfunding let’s you directly invest in actual complexes throughout the country. It does not follow the stock market or any index, it’s based on the performance of the company managing the properties! You can own part of a 100-unit apartment building in San Francisco or Phoenix. Average return on investments for real estate crowdfunding is around 10%-12% annually! The biggest difference between Real Estate Crowdfunding and REITs is the accessibility of your money. If your money is in crowdfunding, it may be harder to take your money out if you need it. With REITs, all you need to do is sell the stock and get the cash.
Become A Private Lender or Form A Partnership
If you have access to a large amount of cash and don’t know where to invest it in general, you could become a private lender (also called a hard money lender) or partner with investors that need cash to fund down payments on homes.
Private Lender Example:
White Tee Jay has $50,000 in excess cash, his friend Red Tee Ray wants to invest in a multi-family home but is $50,000 short of the down payment. White Tee Jay offers to loan Red Tee Ray $50,000 to be paid back in 12 months with 8% annual interest that will be paid monthly. Red Tee Ray accepts and gets the multi-family property. After 12 months Red Tee Ray opens a home equity line of credit and withdraws $50,000 from the equity and pays back White Tee Jay the principal $50,000. White Tee Jay received 8% of $50,000 for 12 months + received back the $50,000. That’s a total of $4,000 in one year, without lifting a finger!
White Tee Jay has $50,000 in excess cash and wants to get into real estate, but he hates managing properties and doesn’t want anything to do with it! Red Tee Ray loves real estate, is a contractor, but doesn’t have enough money for a multi-family property! White Tee Jay and Red Tee Ray decide to form a partnership to invest in a property together. White Tee Jay will put up the financing and Red Tee Ray will cover the management of the property and all renovations since he already has the skills. Both a White Tee Jay and Red Tee Ray decide on a fair return on investment for both. Both White Tee Jay and Red Tee Ray receive a monthly cash flow and both parties have succeeded in getting into real estate! In White Tee Jay’s case, he got in without actively managing a property! In Red Tee Ray’s case, he got the property without destroying his savings and is doing what he already loves, so it’s no work for him! It’s a win-win!
After going through all these, do you see yourself getting into real estate through one of these methods? What suits best for your situation? It doesn’t have to be active, it can be passive and vice versa. Or shoot, do both like me! I actively have an investment property and own REITs. Talk about double dipping into two different ways of investing! We’re not limited to one, but do your due diligence, learn the ins and out of that method and crush the game once you get in! We all have options, don’t think cause you only have $5,000 in the bank that you can’t get into real estate in any shape or form. $5,000 can do a lot in real estate! You just have to think, plan and execute. Be sure to do your due diligence and always prepare for the worst. Be creative, there is more than one way.