There are lots of different ways to make money in the real estate industry. When people get started in real estate, they typically have some idea of what direction they’re moving in and what kind of real estate professional they want to be.
Some people, however, might not be so sure. Maybe you’re one of these people who is drawn to the prospect of financial freedom, enjoys real estate and business pursuits in general, but have no specific focus to get you started.
Maybe you’ve been in the industry for a couple years investing in multi-family rental properties and want to get your feet wet with some office investments. This article will give a general overview of some of the more popular strategies that you will typically see used today in the real estate industry.
Keep in mind that there is some overlap between these categories, but the idea here is to give you an idea of some possible paths you might take in your real estate career:
1. Multi Family Repositioning / Buy, Renovate, Refinance:
This has become one of the most popular strategies used by beginner investors because, when pulled off correctly, this strategy can allow you to build a sizable portfolio with very little or none of your own money in the deals.
You’ll need cash no matter what to get the ball rolling and purchase your first property, but the beauty of this strategy is you will pull that down payment back out when you refinance at the end. You end up owning the property with none of your money in it!
The key here is to view properties in terms of their NOI and cap rate, which we discussed in our previous article 10 Key Metrics Real Estate Investors Care About.
We’ll use an example with rough numbers to make it easier to understand.
Say you spent $50,000 in repairs to a neglected three family rental to bring the quality level up to what you would need to achieve competitive rents for your market.
Previously, the NOI for the property was $35,000, but due to your repairs and finding better tenants at higher lease rates, you have increased the NOI to $42,000. If the going cap rate for buildings in your market is 7%, you can easily see that, in theory, you increased the building’s value from $500,000 ($35,000 / .07) to $600,000 ($42,000 / .07).
Beginner investors will combine this strategy with one known as “house hacking” where they occupy one of the units in order to obtain a low money down FHA loan. If they put in 5% on the down payment for the original $500,000 purchase, they would have $25,000 in their down payment + $50,000 in repairs into the deal, so $75,000 total. That is less than the $100,000 in value they generated, meaning they could in theory refinance and have none of their own money left in the building!
2. Short Term Cosmetic Flips, Single or Small Multi-Family:
These are a bit simpler than the renovate / refinance strategy, but are also a bit riskier. Your goal here is to purchase a property, fix it up, then quickly sell it to an end-user.
Please check out our The Importance of Comps in Real Estate Development Explained article for a comprehensive overview of how to use comparable properties to determine what the end value of your property will be.
You need to make sure that the sale price you obtain is enough for a sizable profit after subtracting your purchase price, renovation costs, and all other soft and closing costs associated with the endeavor.
The key with these projects is generating the most possible value from your renovations while being restricted by a tight budget. Remember that you will be paying capital gains taxes on these type of projects and to keep that in mind when calculating your profit.
3. Larger Multi-Family New Construction (possibly needing entitlement):
Similar to the above “flipper” model, larger new construction multi-family projects are one of the most effective ways to generate high amounts of profit in a short time frame.
In our 5 Tips for Targeting High Density Zoning Areas for Long-Term Real Estate Investing and 5 Tips for Understanding Zoning in Development articles, we explained how to evaluate the potential for maximizing the zoning profile for a property or obtaining special entitlement permission to build larger than the by-right zoning.
This is perhaps the riskiest type of real estate investment a novice may consider getting themselves into. Just remember that, when done correctly, these also have the highest profit of any short term real estate investment as well.
4. Passive Syndication Investments:
Some investors would prefer not to operate the property themselves, but rather find a professional operator that pools together funds from a number of investors and operates the property on their behalf.
These are usually more expensive or larger properties or complexes. As our company has grown this has become one of our most common strategies, as it allows us to acquire larger properties while providing our investors with a completely passive vehicle to receive consistent returns from the real estate market. As an operator, make sure you are working with a securities attorney and file with the SEC as either a 506(b) or 506(c) offering. We will discuss the differences between those offerings in their own specific article.
5. Turnkey Investments:
Turnkey properties are typically recently renovated or constructed residential rental investment properties that have been made “fresh and new” for the investors who eventually purchase them.
When done properly, they should be up to par with the “renovated” standard of quality for the market and are already stabilized with existing, reliable tenants and a solid property management company in place.
These are a perfectly sensible option for many investors who do not have the time or the risk tolerance to pursue more complicated deal structures like the renovate / refinance model. You just have to purchase them for the right price. Do not expect to hit home runs with these deals, but if you slowly build up a portfolio of turnkey properties over the years it is absolutely possible to live off of the cash flow from them.
Stay tuned for our next article where we’ll go into five more proven strategies to consider for your real estate investments.
10 Tried and True Real Estate Investment Strategies Explained Part 2
There are lots of different ways to make money in the real estate industry. When people get started in real estate, they typically have some idea of what direction they’re moving in and what kind of real estate professional they want to be.
Some people, however, might not be so sure. Maybe you’re one of these people who is drawn to the prospect of financial freedom, enjoys real estate and business pursuits in general, but have no specific focus to get you started.
Maybe you’ve been in the industry for a couple years investing in multi-family rental properties and want to get your feet wet with some office investments. This article will give a general overview of some of the more popular strategies that you will typically see used today in the real estate industry.
Keep in mind that there is some overlap between these categories, but the idea here is to give you an idea of some possible paths you might take in your real estate career:
1. Multi Family Repositioning / Buy, Renovate, Refinance:
This has become one of the most popular strategies used by beginner investors because, when pulled off correctly, this strategy can allow you to build a sizable portfolio with very little or none of your own money in the deals.
You’ll need cash no matter what to get the ball rolling and purchase your first property, but the beauty of this strategy is you will pull that down payment back out when you refinance at the end. You end up owning the property with none of your money in it!
The key here is to view properties in terms of their NOI and cap rate, which we discussed in our previous article 10 Key Metrics Real Estate Investors Care About.
We’ll use an example with rough numbers to make it easier to understand.
Say you spent $50,000 in repairs to a neglected three family rental to bring the quality level up to what you would need to achieve competitive rents for your market.
Previously, the NOI for the property was $35,000, but due to your repairs and finding better tenants at higher lease rates, you have increased the NOI to $42,000. If the going cap rate for buildings in your market is 7%, you can easily see that, in theory, you increased the building’s value from $500,000 ($35,000 / .07) to $600,000 ($42,000 / .07).
Beginner investors will combine this strategy with one known as “house hacking” where they occupy one of the units in order to obtain a low money down FHA loan. If they put in 5% on the down payment for the original $500,000 purchase, they would have $25,000 in their down payment + $50,000 in repairs into the deal, so $75,000 total. That is less than the $100,000 in value they generated, meaning they could in theory refinance and have none of their own money left in the building!
2. Short Term Cosmetic Flips, Single or Small Multi-Family:
These are a bit simpler than the renovate / refinance strategy, but are also a bit riskier. Your goal here is to purchase a property, fix it up, then quickly sell it to an end-user.
Please check out our The Importance of Comps in Real Estate Development Explained article for a comprehensive overview of how to use comparable properties to determine what the end value of your property will be.
You need to make sure that the sale price you obtain is enough for a sizable profit after subtracting your purchase price, renovation costs, and all other soft and closing costs associated with the endeavor.
The key with these projects is generating the most possible value from your renovations while being restricted by a tight budget. Remember that you will be paying capital gains taxes on these type of projects and to keep that in mind when calculating your profit.
3. Larger Multi-Family New Construction (possibly needing entitlement):
Similar to the above “flipper” model, larger new construction multi-family projects are one of the most effective ways to generate high amounts of profit in a short time frame.
In our 5 Tips for Targeting High Density Zoning Areas for Long-Term Real Estate Investing and 5 Tips for Understanding Zoning in Development articles, we explained how to evaluate the potential for maximizing the zoning profile for a property or obtaining special entitlement permission to build larger than the by-right zoning.
This is perhaps the riskiest type of real estate investment a novice may consider getting themselves into. Just remember that, when done correctly, these also have the highest profit of any short term real estate investment as well.
4. Passive Syndication Investments:
Some investors would prefer not to operate the property themselves, but rather find a professional operator that pools together funds from a number of investors and operates the property on their behalf.
These are usually more expensive or larger properties or complexes. As our company has grown this has become one of our most common strategies, as it allows us to acquire larger properties while providing our investors with a completely passive vehicle to receive consistent returns from the real estate market. As an operator, make sure you are working with a securities attorney and file with the SEC as either a 506(b) or 506(c) offering. We will discuss the differences between those offerings in their own specific article.
5. Turnkey Investments:
Turnkey properties are typically recently renovated or constructed residential rental investment properties that have been made “fresh and new” for the investors who eventually purchase them.
When done properly, they should be up to par with the “renovated” standard of quality for the market and are already stabilized with existing, reliable tenants and a solid property management company in place.
These are a perfectly sensible option for many investors who do not have the time or the risk tolerance to pursue more complicated deal structures like the renovate / refinance model. You just have to purchase them for the right price. Do not expect to hit home runs with these deals, but if you slowly build up a portfolio of turnkey properties over the years it is absolutely possible to live off of the cash flow from them.
Stay tuned for our next article where we’ll go into five more proven strategies to consider for your real estate investments.
10 Tried and True Real Estate Investment Strategies Explained Part 2
