| Flipping | Live-In Flip | House Hacking | Turnkey Rentals | BRRRR |
Welcome to the fourth blog post of the Real Estate Investment Series! In this post, we will discuss five of my favorite real estate investment strategies.
There are many options when it comes to real estate investing, so how do you pick the right strategy? The best way is to educate yourself by reading books, listening to podcasts, and blogs. Understand your options and just start with the one strategy that calls to you the most.
The strategy you start with doesn’t have to be the one you stick to. More often than not, real estate investors focus on one main strategy while keeping their options open for any opportunities that may come along the way. Our investment strategy is focused on buying and holding rentals long-term using the BBBR strategy when possible.
In my case, I chose long-term rentals over flipping because I worked in property management and it was what I felt more comfortable venturing into.
Let’s go over the pros and cons of each strategy below.
House Flipping refers to buying a property that is distressed, meaning in bad condition and in need of repair, renovating it, and then selling it at a higher price for a profit.
How does it work?
- You find a house at a discounted price that needs repairs
- Run the numbers to make sure that the value after repair will be enough to cover the purchase price, the rehab, holding costs, sales commissions, taxes and your profit
- Once rehab is complete, you list the house for sale and repeat
- Higher short-term returns
- Great way to raise capital to fund more deals
- Do not have to worry about managing tenants
- Profits are taxed at the regular tax rate – as such, need to account for taxes in profit calculations
- There is a risk that the property does not appraise for its estimated after repair value – this is where it is important to have good knowledge of the market and sales comparables
- Have to include selling costs in your estimates
- The risk of not being able to sell the property
When it comes to flipping, multiple exit strategies is key to minimizing risk. For example, can the property be rented at a profit if unable to sell?
Flipping is a great way to raise capital so that you can fund the purchase of long-term rental properties. If you are a fan of BiggerPockets, you may have heard of Brandon Turner, book author of the best real estate books and host of the BiggerPockets Real Estate Podcast. He started house hacking (explained below) and flipping houses and now has a multi-million dollar real estate empire.
We have not ventured off to flipping yet, but we have plans to start in 2022. We need to obtain more money to buy the last set of properties we need to set us up for early retirement.
Who can flip houses? Anyone.
The biggest concern that new real estate investors have is on how to obtain the funds to fund the flip. This is a legitimate concern, but there are many sources out there. A common source is called a hard money lender. There are plenty of them. These are people that specialize in lending to real estate investors. Be warned, they are expensive. A hard money lender may charge upfront fees that range from 1 to 3% and charge anywhere from 8-20% interest. Even though it sounds outrageous, if you have a really good deal and you can get someone to lend you 100% of the money to get started, then it makes sense. You need to make sure to find a deal that can support the costs of borrowing and still be profitable. The more experienced you become in flipping, the more credibility you get which will help you get lower rates down the road. You have to start somewhere.
How can you find a hard money lender in your area? Ask in real estate investing groups, referrals from your network, or your local real estate investing association. Once you find them, start building a relationship with them.
Be warned of shady hard money lenders. There is also plenty of those. You want to make sure you are dealing with a reputable lender. One tactic used by fraudulent lenders is requiring cash up-front (before the closing or purchase of the house). I would highly recommend not paying anything up-front as all fees should be included at closing.
FLIP: How to Find, Fix, and Sell Houses for Profit
The Book on Estimating Rehab Costs: The Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs.
As the name implies, a live-in flip is when you buy a property using a conventional or FHA loan with the intent of occupying it, rehabbing, and eventually selling it for a profit.
How does it work?
- Similar to a standard house flip, you find a house in need of repairs that can be significantly increased in value with rehab
- Note that if you are financing with an FHA or conventional loan, the house needs to be in habitable conditions
- You occupy the property and make repairs while living in it
- After a year or two, you sell at a profit – remember that to qualify for capital gain tax exemption, you must wait two years before selling
- You get to take advantage of owner-occupied loans which are generally cheaper than hard money
- If you live in the house for two years, you will also get the benefits of tax exemption on the profits – up to certain limits
- Difficult to scale as you generally need to occupy the house for a certain period of time as your primary residence
- You have to live in a messy house while remodeling – probably with a makeshift kitchen
The Book on Flipping Houses: How to Buy, Rehab, and Resell Residential Properties.
There are three main long-term rental strategies: House Hacking, BRRRR, and Turn-Key Rental. I’ll go over each one below.
House hacking is when you rent part of your primary residence, which in-turn reduces your own housing expense. The most popular house hacking strategy is buying a multi-family property and living in one of the units. In a perfect House Hack, the rented unit(s) pays for 100% of the mortgage. House Hacks are popular among the FIRE community (Financial Independence, Retire Early) because the lower your personal expenses are, the faster you can retire.
How does it work?
- Look for a multi-unit property
- Run the numbers to make sure all but one unit of the property will pay for most if not all of the mortgage, taxes, and insurance
- Buy with an owner-occupied loan (VA, FHA) and put low to $0 money down
- FHA normally requires 3.5% down payment when a 1-4 unit property
- Live in one unit, rent out the rest
- You could also buy/build a house with a lot of bedrooms and rent by the room
- Low initial investment
- You get 1-4 units at once
- You should end up paying little to $0 in personal housing costs per month
- You build equity
- You gain investment experience with less risk
- At the end of the day, you still need a place to live – the worst that can happen is that you end up having to pay for the mortgage in full
- You are required to live in the property for a year
- You may not want to live with your tenants
- It may not be the house of your dreams
- Must buy a property that will be approved by conventional lenders meaning in habitable conditions (unless using a 203k FHA loan)
- A 203k FHA loan will lend on purchase price plus repairs of a property – the loan process can be a bit time-consuming, but may be worth it
Unfortunately, I didn’t get the opportunity to House Hack. We tried, but couldn’t find something we liked within the timeframe we needed it and at this point, we are not looking to move anytime soon. However, I am renting my front yard/backyard to store RVs/Trailers. Would that count as house hacking?
Case in Point
My dad house hacked his first investment property. He bought a duplex using an FHA loan and only put 3.5% down. He went from paying $1,000 in rent to paying $500 in mortgage with the help of the tenant rent. At purchase, the duplex was occupied, but we terminated the leases and he moved into one unit. While the units were in “habitable” conditions (if you can count roach infested units as habitable), they needed a lot of work. My dad moved into one unit first, renovated, leased it and then renovated and moved to the next one. He held the property for a year after with $50k in equity. Now that I think about it, he implemented a House Hack and a Live-in Flip as he sold this duplex after a year.
The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom.
Turn-key rentals are a great place for new investors to start. If House Hacking doesn’t sound like something you like and prefer to stay away from major repairs coming in, then turn key might be a good option.
You can say that our most recent purchases are somewhat turn-key. While, there is some deferred maintenance, we have not had to come in immediately and make repairs. We bought the houses occupied and paying rent on time each month. Eventually, they will need to be rehabbed and we might have the opportunity to make it a BRRRR (a delayed BRRRR).
How does it work?
- Look for a property that is ready to rent or already rented
- The property is in good shape and maybe just a little bit outdated, but nothing major is needed
- Buy with conventional financing (20% for investment properties)
- Do a few minor upgrades (or none)
- Rent it out (if not rented)
- No major rehab required
- You don’t need to live in the property
- You will start cash flowing immediately
- Great for appreciation strategy (property value increase)
- You may not be making the highest return on your money
- You will need a larger investment (20% of purchase price)
BRRRR (BUY, REHAB, RENT, REFINANCE, AND REPEAT)
BRRRR is when you buy a distressed property that will increase in value after rehab. You buy the property either with cash or a loan, rehab it, rent it to a tenant, and then go back to the bank and get a loan based off the new value of the property. In a perfect BRRRR, the new loan will cover 100% of the purchase price and renovation costs.
BRRRR is our favorite investment strategy so I dedicated a blog post that will go over one of our successful BRRRR instances in Blog Post number 5 of the series.
Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple.
There are other strategies out there like short-term rentals, wholesaling, syndications, etc. I highly recommend that you keep it simple to start. Don’t overthink it. Eventually, it will all come into place.
Real estate is a really great way to build wealth, especially long-term rentals. With a good plan, real estate can be your way out of the rat race and become financially free. Our plan is to retire early with rental income enough to cover our personal expenses.
I highly recommend reading the book Retire Early With Real Estate: How Smart Investing Can Help You Escape the 9-5 Grind and Do More of What Matters (Financial Freedom)
This book helped me come with a plan to retire early by investing in real estate. Even if you are not considering retiring any time soon, you may end up changing your mind after this reading.
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