With home values in the United States having increased by 7.2% over the last couple of years, it’s safe to say that real estate investment is one of the smartest ways to grow wealth. According to RealWealth, the stock market was the primary area of focus for around 66% of investors in 2007. That number has now fallen to 50%, with most millennials opting to invest in real estate instead.
However, the real estate investment umbrella is quite varied and diverse. There’s a wide variety of ways to make money (i.e. investment strategies), and if you’re new in the world of real estate investments, the vast number of different options can easily overwhelm you.
So to help you get off to the perfect start in your real estate investment journey, we’ll provide a comprehensive guide to what we think are some of the most effective real estate investing strategies over the course of this blog. Hopefully, it’ll give you a good idea of how you can build your wealth through real estate investments.
We’ve divided the strategies into different sets based on how they’re supposed to be used. The sets include:
- Starter strategies
- Wealth building strategies
- Business strategies
So without further ado, let’s get started.
The strategies we’ll discuss under this heading are the safest, most effective ways of kicking off your real estate investment career.
This strategy involves purchasing and moving into a home, fixing it up, and selling it for a profit after a period of two years or more. The best part of this strategy is that, according to IRS rules, you don’t have to pay any taxes on profits up to $250,000 – or $500,000 if you file jointly as a couple.
May real estate investors have used this strategy to amass hundreds of thousands of dollars early in their careers. Here’s an example.
BRRRR is short for Buy Remodel Rent Refinance Repeat. If used the right way, this can be a superbly effective strategy for building a rental portfolio without facing liquidity problem in the initial stages of your career.
It involves finding fixer-upper properties that can be purchased below their full value. You purchase the property through short-term financing or cash, and after it been stabilized and fixed, you use long-term mortgage to refinance. If done right, you can easily extract all or at least most of your capital out for the next deal.
While this is a good strategy, we think it’s best to use it in the initial stages of your career when you’re building your portfolio. Gradually, it’s smart to move to lower risk, lower leverage approaches rather than continuously leveraging as much as you can.
This strategy is great for individuals who’re starting off their real estate journeys with little capital. It involves residing on a property that also generates income, like a home with extra space that can be rented out, a duplex, or triplex. So essentially, you reduce the total cost of your housing by renting out a portion of your property.
The other notable advantage of house hacking is that it provides you the opportunity to learn how the landlord business works while residing at your rental. Moreover, when you eventually move out of the property, you can transition it to a long-term rental.
These strategies are more about doing business rather than investing, and can produce a steady source of income if used right. However, in order to get these strategies to work, you have to invest the upfront effort and time that you would with a business start-up.
Fix and Flip
Perhaps the most well-known and commonly used real estate investment strategy, fix and flip involves finding and purchasing properties that require work, repairing them, and making a profit by selling them for the highest price. If you’ve watched house-flipping shows on HGTV, that’s exactly what we’re talking about.
Many real estate investors use this models early in their careers to pay bills and amass savings for investments in the future. Although this strategy requires a lot of time and effort, the beautifully restored homes and large profits can be extremely rewarding.
The wholesaling strategy involves looking up great deals on investment real estate properties and the quickly reselling them for a small profit. How successful you are with this strategy depends upon your negotiation and marketing skills, and how good you are at finding those great opportunities.
If sales is your thing, wholesaling should definitely be right up your alley. However, if you cringe at the idea of sales, we’d suggest you opt for another strategy.
Wealth Building Strategies
The primary focus of wealth building strategies is to turn a small amount of money into a large amount of wealth, and real estate investments have long been considered an ideal medium for this purpose.
Short-Term Purchase and Hold Rentals
This strategy is comprised of purchasing and holding rental properties for a short period of time – typically between one and five years. In many cases, real estate investors opt for this strategy with a view to forcing property value appreciation by raising the rent, remodeling, or both of those.
This strategy is known for being superbly effective for turn-around multi-unit apartment projects. If used right, it can also be effective for rentals in appreciating, high-priced markets that don’t cash flow too well.
Long-Term Purchase and Hold Rentals
While this a slow and steady real-estate investment strategy, if done right, it can provide some great dividends, including a tax shelter from depreciation costs, a steady rental income, price appreciation, and amortization of loans.
This strategy is most effective when used with properties in prime locations. This is because they attract the best tenants, and tend to appreciate quickly in value.
Rental Debt Snowball Strategy
When it comes to predictable ways of building wealth and generating a steady income stream from through rental properties, this is easily one of the most effective strategies. The rental debt snowball strategy essentially involves collecting the cash flow from all your existing rentals as well as other sources, and then using it to pay off mortgage debts one at a time.
The true beauty of this strategy lies in the speed at which the debt payoffs start snowballing over time. It’s a great strategy if you plan on retiring within 10 to 12 years.
All-cash Rental Strategy
This strategy is quite similar to the rental debt snowball one since its purpose is to snowball rental income from growth. However, with the all-cash rental strategy, you use cash savings to purchase rental properties without any debt, rather than using mortgages.
Working under the banner of Fathom real estate, Philip Fehler is one of the most experienced expert realtors in North Carolina. He has extensive knowledge in terms of investments, buying and selling houses in Fayetteville, military housing in Fort Bragg, and more. For more information, you can get in touch with Philip Fehler online or give him a call at (910) 381-1341.