Real estate is undoubtedly one of the most time-tested and potentially lucrative investments of all time. Even with the hype over cryptocurrencies, millionaires still say real estate is the best investment of today.
When you think about it, it makes sense. Everybody needs somewhere to live, the asset is tangible, and there are so many ways to earn from it. Well, that’s what we’re here to discuss.
Let’s talk about the different types of real estate investments and how to invest in them as safely as possible!
Developing and selling condos is a real estate investment for those with enough capital to do so. In most cases, this will require other investments or loans, as these are usually multi-million-dollar investments.
However, selling condos follows the same logic as most manufacturing businesses. You produce a product wholesale and sell it retail for a higher price. While the price to build a condo complex is much higher than what an average homeowner can afford, the price per unit is much less.
Even with the large payout after selling the unit, there are still ways to continue earning. If you develop a homeowner’s association, you can collect dues and fees from homeowners, which can offer a steady income!
Of course, everything has risks. The most obvious is that there are no guarantees that anybody will want to purchase a condo in your complex, but there are always ways to minimize these risks. Buying in the right location can help secure your investment, but it will likely cost more to do so.
Another great option for a lump-sum payout is flipping houses, which is much more attainable for the average investor. The idea is to purchase a home or property, make some renovations or repairs, and sell for a profit. Well, this method rose to the highest level since 2006 last year and is on track to beat it again this year.
If you want to buy a property and flip it for a profit, you can easily maximize your profitability by doing some of the work yourself. Building materials are not cheap but neither is labor. You could cut down the cost of renovations by up to 60% simply by taking on some tasks yourself.
Benefits of Flipping
The large payout that comes with a successful flip is a major benefit for certain investors. If you want a relatively fast return, you could see a profit within a year! Once you have that return, your buying power increases exponentially for your next real estate investment.
If you have the means or skills to work on a property yourself, then you can easily lighten the load for the repairs and renovations. This can make your investment significantly more profitable.
Also, if you buy in the right market, you can aim for a quick return. For example, flipping a house in Eastern Massachusetts is likely to offer a quick and profitable return. On the other hand, buying in a rural area with a low demand may take longer and be less predictable.
Risks of Flipping
Like all property investments, flipping comes with some risks. Nothing is guaranteed, not even an eventual sale. If you take out a loan or purchase a home and put in all of the renovations, there is no guaranteed return.
Also, there are risks that are out of your control. The building may require more repairs than anticipated, the housing market may change dramatically within your turnaround time, or you may have trouble finding a buyer in your area.
To remedy this, it’s important to know how to invest in flippable properties. You need a thorough inspection of the property, the right location, and a relatively stable housing market for the most security. If the property itself needs $50,000 worth of renovations, make sure you can profit even with another $30,000 worth of unexpected repairs.
Still, most investors don’t have the liquid capital available to purchase houses in full, especially the ones that would be most profitable. However, there are bridge loans available that are designed for this type of investment.
Essentially, you get a loan to pay for the property and you don’t need to make any payments until it is sold. From there, you just pay the loan back after the sale. This is much better than a mortgage where you would have to make payments while repairing the house.
This tried and true real estate investing strategy is still one of the most popular. While there are many strategies for investing in rental properties, we’re primarily going to discuss turnkey rental properties. These are the properties that you buy that are already livable and may have existing tenants in them, allowing you to start earning right away.
There are also short-term rentals, which could be more profitable depending on your location, as you typically charge by the night, not by the month. However, long-term rentals are typically more secure than short-term rentals, especially near major industrial cities.
For most investors, this will be in the form of multifamily properties of between 2 and 4 units. Buildings with more units than that are considered commercial property. Multifamily properties are taxed at lower rates and are substantially easier to start as a first-time investor.
Benefits of Rental Properties
For long-term profitability, this is arguably the best option. Let’s say you buy a 2-unit property for $300,000 and you net $30,000 a year from it. That’s a 10% return every year, meaning you would make your money back after ten years, barring any major expenses.
Even if you had to repair a roof in that time, had a 6-month vacancy, or some other issue, you would still have earned your money back after only 11 years. Once that’s happened, everything else is mere profit. To test this timeline with a specific property, use a rental property calculator.
Also, don’t forget that your building won’t magically disappear during that time, meaning that you can always resell it afterward. Given 10 to 20 years to maintain the property, adding small renovations over time could offer serious appreciation value, meaning you could potentially sell it for a higher price than you bought it for.
Not only that, but you can adjust rent prices, set policies for tenants, and everything else. As the owner, you have total control over the investment. What other investment offers you that level of control for only 15% down?
Risk of Rental Properties
We mentioned the housing market as a risk when flipping houses or selling condos. However, with a long-term investment like rental properties, these risks only increase. The chances of a dramatic housing market shift in 2 years are relatively slim, but in 20 years, it’s highly likely.
However, this is offset by the ongoing rent. If you hold onto tenants long enough to generate profit from your investment, then it doesn’t necessarily matter if the property depreciates.
Another risk is yourself. If you don’t have the necessary skills to become a landlord, a mismanaged property will not be as profitable. You can always hire property managers, but they will take between 8% and 10% of your rental income.
Funding for Multi-Family Homes
It’s unlikely that new investors will have $500,000 on hand to invest in a new rental property. Some will, but most won’t. While traditional mortgages are often the go-to, it’s difficult to get approved for such a large investment, especially if you have no experience.
If you want to invest in a rental property, then we recommend going with a multi-family mortgage loan. These allow you to choose between 5-year, 7-year, 10-year, and up to 30-year loans, unlike traditional mortgages. On top of that, these loans conform to your specific financial needs as an investor.
The BRRRR Method
BRRRR is an acronym for buy, rehab, rent, refinance, and repeat. It’s a popular strategy that outlines a step-by-step process to maximize your real estate investment. Essentially, you buy a fixer-upper and put in the work, much like a flip.
From there, you rent out your newly refurbished property, opt for a cash-out refinance, and use that cash to buy another property. This has become one of the most popular types of real estate investments for many reasons. Let’s talk about some.
Benefits of the BRRRR Method
In theory, the BRRRR method is the simplest way for new investors to maximize their real estate investment with only a relatively small amount of money as a down payment. Once you have one that’s fixed up and livable, there is a clear path to getting a second. Once you have a second, it’s even easier to get a third, and so on.
For new investors or small-scale investors, this is a huge benefit. You can start with as little as 15% to 20% down on an already marked-down property and potentially build a legitimate portfolio from there.
Also, the barrier of entry isn’t the only benefit. Often, the cost of buying and renovating yourself is less than the cost of a turnkey property. This means that (in theory) you’ll likely spend less overall, pay off your loan more quickly, and be able to refinance without many issues.
Risks of the BRRRR Method
The BRRRR method has become one of the most popular real estate investing strategies in recent years, receiving plenty of publicity. However, it doesn’t come without flaws.
On paper, it is certainly the best way for new investors to maximize their reach and grow their real estate portfolio as quickly as possible. In practice, it relies on several assumptions.
First, you can’t control the market or the property. Of course, you should always conduct initial market research and hire a thorough inspection before purchasing a property. Still, this doesn’t guarantee security.
Second, if there is an issue with one of these factors, then the risks of the BRRRR method are often higher than with other real estate investments. What we mean is that if a turnkey rental property needs major repairs, you can easily take out a second mortgage, HELOC, or cash-out refinance on your loan. If that happens in a BRRRR investment, you could be stuck in a hole of debt that’s difficult to climb out of.
Finally, this process is also more stressful than turnkey investments, in most cases. The process takes longer, funding is often more challenging, the payouts are slower than a flip, and a lot can go wrong.
With enough research, planning, and diligence, you can minimize these risks. However, it’s still important to keep these in mind before making such an investment.
Funding for BRRRR Investments
Funding a BRRRR investment is a little different from other investments. You need a large enough loan to cover the cost of the house and its renovations, much like a bridge loan. However, you can’t pay it all back in one lump sum, meaning you will need to make mortgage payments, much like a rental loan or mortgage.
Also, you don’t want to be stuck with payments while making repairs on the property. For that reason, you may need special rental loans that allow you a grace period if necessary, which not all lenders will offer. Fortunately, with the increase in popularity of this strategy, more lenders are offering this type of loan than ever before!
Types of Real Estate Investments
Now that you know some of the most popular types of real estate investments, you can make an informed decision as to what’s best for you and your goals. Regardless of the type of investment you pursue, it’s critical to understand the risks, take steps to minimize them, and acquire the right funding for your project.
Stay up to date with our latest investment tips and feel free to contact us with any questions or for help with your investment strategy!