So you want to get into real estate investing but aren’t sure how? This is when you turn to the knowledge of those who have done it before. There are several ways you can jump into it. Everyone will tell you their favorite, and today I will be advocating mine. I will touch on other ways you could do it, but ultimately, the choice is up to you and how you would go about it. As long as you educate yourself and surround yourself with the right people, you should be successful.
No matter the strategy, there are only two ways to make money in real estate: equity and cash flow. Equity is how much you own minus how much you owe and cash flow is income minus expenses. Understanding this is paramount and will be the foundation on which you will build. It will help you understand and choose strategies to help you meet your goals.
I will talk about two ways I would get into real estate investing and then conclude with which is my favorite and why. Two ways I would get into real estate investing would be renovating properties, and house hacking.
Renovating properties is an equity strategy to build up capital in order to reinvest into more long-term cash flowing properties, which is usually the end goal. While house hacking is more of a cash flow strategy aimed at reducing people’s biggest living expense: a place to live. However, renovating a property can be used in conjunction with a buy and hold or house hacking strategy in order to maximize cash flow and does not necessarily have to be just a quick cash equity strategy.
Let’s start with renovating a property. The wonderful thing about this strategy is it can be used by itself as an equity strategy for quick cash or it can be combined with a hold strategy to maximize cash flow and allow you to refinance in the future. This strategy works well if you are in the trades or even if you are just semi handy. Of course, you do not have to be handy as you can hire a good contractor, but it does help in saving money, especially for your first few. The first way to utilize this strategy is to find and purchase a property, make renovations to it, and sell it for profit. Usually these profits are used for buying more renovation and long term hold properties.
The second way to utilize this strategy is to purchase a property, renovate it, live in/rent it and then refinance it if and when you choose. This way, whether you decide to live in it, rent it, or even both in the form of a multi family, you will keep expenses low in the way of a mortgage and have a great starting equity position.
If you are not the handy type, make sure to take time to ask around for a good contractor. Knowing a good contractor will be the key to this strategy. Remember you will only get two of the three desired things when searching for a contractor. The three things to look for are quality of work, timing, and price. NEVER sacrifice quality of work. So, the question you must ask yourself is: do you have time or money on your side?
If time is on your side, a busy contractor may be acceptable, however, if you have the money, paying a bit more will ensure everything is done in a timely fashion. Of course, just like any strategy, this too has its drawbacks. As with the ownership of any property, any and all maintenance issues or extra repair items that may not have been anticipated are your responsibility. This means you will have to deal with surprises that may cost you partial profit or even the entirety of your profit. You may lose money on these deals if you are not careful. Being that these properties have the potential for the most reward, they also carry the most risk and most control, so make sure you do your homework.
The second strategy that I would use to get into real estate investing is what is known as the house hack. It is where you buy a multi-unit, duplex, triplex, or fourplex and live in one of the units while having the rent help pay down your mortgage. This is a wonderful strategy to learn with as you get a taste of real estate investment without overwhelming yourself. You buy one property so you can live while getting to experience everything real estate investing has to offer. If something goes wrong with the property, you are right there to deal with it and it gives you experience with collecting rent, dealing with tenants and repairs. All of this, while giving you a place to live and keeping your living expenses low. As long as the rent covers your mortgage, then you are just responsible for taxes, insurance, and utilities. Now imagine if the rent covers your taxes and insurance as well. Then you are only responsible for utilities. Now we are talking!
You are now saving money in rent every month, while paying down your mortgage, two built in savings programs. That is really what this strategy is about, saving money. This strategy also utilizes all four wealth building strategies real estate has to offer. It produces cash flow while you pay down your debt and will likely appreciate during your ownership. The icing on the cake is you can write off some of your expenses in your tenant’s units and not pay taxes on that money used to upkeep the property.
Of course, like all of the other strategies, there are some cons, such as being responsible for the management of the property. You will have to find good tenants, sign leases, and care for the property. This means when a repair comes up, you must be ready to fix it or know someone who can. You will be responsible for collecting rent and dealing with tenant disputes. If you happen to get the wrong tenant, you will have to deal with evictions, lawyers, and the like. Of course, you could avoid some of these headaches by hiring a property management company, but that too comes at a cost. You will have to pay them a portion of the rental income, meaning you have less profit.
At the beginning of this article, I said I would advocate for my favorite way to begin your journey in real estate investing. Well in my opinion it is a combination of the above strategies. I believe buying a property that you can renovate and house hack is the best starting strategy. By doing this, you can build in great starting equity, minimize payments and repairs, and learn firsthand what it is like to own and manage a property, all while having a place to live. If I had to pick just one, it would be the house hack, but I believe combining these two strategies would totally change your financial future in ways it is hard to imagine.
After all, real estate investing is about securing your financial future, not only for yourself, but for the ones you love. If that is not enough reason to get you started, I don’t know what is! No matter what strategy you choose, remember to educate yourself first, surround yourself with good intentioned, intelligent people, and don’t be afraid to start small. If you do these things, you will be hard pressed to fail!