- Real estate investors buy, sell, manage, return and rent property for profit.
- Choosing the right investment strategy is essential to achieving your investment goals.
- Insider has outlined six tactics that are popular with both seasoned and newbie investors.
Real estate investing is a path to passive income generation and financial independence.
Every year, Gallup asks people about the best ways to build wealth. And almost every year, real estate comes out on top. His 2021 survey showed that 41% of American adults said real estate was the best way to build wealth, up from 35% in 2019.
This is because compared to other asset classes, real estate may have the highest potential for long-term growth.
The expected annual total returns from apartment investments have fluctuated between 6% and 15% since 2012, depending on the National Council of Real Estate Investment Trustees, while over the same period, the S&P 500 had an annualized return of around 10%. In 2019, one-year real estate investment trust (REIT) returns were 20%, outperforming all other asset classes, according to The data of the National Association of Real Estate Investment Companies.
Some real estate investors use strategies that generate short-term profits, while others like to buy a property, hold it, and earn rental income over many years.
Insider has outlined a handful of strategies that make it easier to get started with real estate investing. Choosing one depends on whether you are looking for a hands-off approach or want to be deeply involved in the process, as well as the time and capital you need to invest.
1. Correction and reversal
Changing homes means identifying a struggling property, buying it, renovating it and selling it for a profit.
Popularized by HGTV pinball machines like Tarek El Moussa and Tamara Day, the strategy has been made famous by a number of TV shows from âFlip or Flopâ to âBargain Mansionsâ.
El Moussa paid $ 115,000 for the first house he returned, according to CNBC, spent $ 15,000 to renovate it and sold it for $ 169,000: a profit of $ 34,000.
The process typically takes around three to six months, and contractors who are serial home pinball machines say the key steps are identifying the right property, budgeting carefully, planning a proper renovation, and orchestrating a resale at the end of the day. highest price.
2. BRRRR, or “buy, rehabilitate, lease, refinance, repeat “
A slightly longer-term strategy, BRRRR is a more labor-intensive version of fixation and flipping, with more steps in place. The process usually takes place over a longer period, typically six months to a year.
The BRRRR works like this: find a struggling property, buy it, rent it, get a new loan that covers the original loan and repairs (refinancing), and start over and over again, Insider previously reported. Rental income also helps you pay off loans.
Take it from Palak Shah, a real estate investor and former mechanical engineer who spent 17 years in corporate America before deciding to turn to real estate, using the BRRRR strategy to amass 26 units and a portfolio that generates 1. million dollars in annual revenue.
She built her business in just three years and said her strategy “supercharges” her deals with leveraged lenders and high-priced lenders. You end up with a wallet that generates a fair amount of money, Shah said, but at the same time leaves no money in the deal.
Contract a property with a seller, then transfer it to an end buyer.
Essentially, a wholesaler buys homes directly from a distressed homeowner before reselling them to investors, homeowners, or pinball machines for a profit. This approach does not involve buying or selling real estate because the wholesaler finds a new buyer to take over the contract.
One example is Dan Brault, a 31-year-old investor based in Rochester, New York, who told Insider that his company averages about 10 wholesale transactions per month.
With wholesaler fees of around $ 16,000 per property, he said he made an income of $ 160,000 per month. While it can be difficult to find sellers, and much of his business is focused on finding distressed sellers, his profit margin is around 55%, or $ 8,000 in profit per trade.
For investors who prefer multi-unit properties to single-family homes, multi-family investing is an attractive approach.
Buying properties with more than one residence can often mean multiple streams of income from a single investment, with multiple units generating rental income.
Multifamily tends to be long term, with investors expecting to buy and hold in order to generate cash flow.
It’s a favorite for people like Anthony Angotti, a Pennsylvania-based investor who told Insider his portfolio grew to 89 units after making an initial investment in a duplex. From there he used the strategy, along with BRRRR, to increase his portfolio.
5. Home hacking
Investors use home hacking to leverage additional coins or units in their primary residence to cover their expenses. It starts with simply finding a tenant for a property you own and already live in.
Most often used with multi-family rental properties, investors live in one of the units while collecting rent from the others.
Denver-based investor Mike Hills, 42, told Insider he started home hacking and has since developed a real estate portfolio worth more than $ 8 million.
In fact, he attributes his success to home hacking and has spent the past two decades developing a broad portfolio, including one condo, townhouse, duplex, quadplex, apartment, trailer park, and eight single family homes. .
Syndication is a strategy that pools the capital of several people to invest in properties that would otherwise be unaffordable. This equates to crowdfunding for institutional grade transactions and is a longer term strategy with an expected investment period of around five to seven years.
But it’s worth it, according to investors like Bruce Peterson, who told Insider he spent 18 years in retail before using syndication to build a portfolio of around 1,000 units in the center. from Texas.
Rather than starting slowly with single-family rentals, which are often cheaper and more manageable, Petersen initially set his sights on a 48-unit apartment complex. And the potential he found in that first transaction – with compelling opportunities to scale, profit from, and easily manage a multi-family property – is what helped him grow his business.