Part 1: How to get started in real estate investing
Real Estate has endless opportunities. What trips up most investors is the desire to chase every investment strategy out there…at the same time!
Confucious said: If you are chasing two rabbits that are running in opposite directions, you won’t be able to catch either of them.
The most important thing you can decide before you start investing is deciding what your goals are with investing in real estate. In other words, what is your exit strategy?
Let’s start by reviewing a few strategies that will help you decide.
Strategy 1: Rent
BRRRR method: Bigger pockets coined this acronym that stands for Buy, Remodel, Rent, Refinance, Redo. This is a strategy that we encourage our owners to implement if they are looking to scale the number of homes they own in a shorter period of time. Those that have more cash/time can simply not refinance and wait until they have more capital to put down on their next investment property.
Pros: You can put leverage on steroids with this model. So if you want to scale your portfolio quickly, this is a great strategy…Especially in an appreciating market where once you have the property remodeled and leased out, you have a good chance of being able to pull ALL or a Majority of your funds out of the property, allowing the bank to finance the home completely and you are able to then buy your next project.
Cons: Depreciating markets can squash the second half of this strategy and people may end up stuck with a home they were hoping to do a cash out refinance on but no longer have that option.
Cash flow is also very minimal if you use too much leverage which will leave you exposed to coming out of pocket for large capital expenditures that were unforeseen and you will be forced to use outside funds to cover those repairs because the monthly rent barely covers the expenses.
Property management can also be a source of great frustration and can ultimately ruin an investment property. Everyone has heard nightmare stories about having the wrong company manage the asset which results in huge financial losses. I personally have spent multiple six figures over the years due to poor property management companies. DO YOUR HOMEWORK and make sure you can trust the management company to take care of your property as you would. (This was the #1 reason why I started our own management company…Because I needed to have quality control).
AIRBNB’s were all the rage since 2020 supercharged the returns as people flocked to the short term rentals for both work and play…However, the 2022 cool down in real estate put a damper on the party and now many owners of short term rentals are struggling to keep occupancy rates up to cover their mortgage.
The other issue is with interest rates doubling from 2020 rates, it is very difficult to find a home that will cash flow. With that being said, another great alternative that has gained popularity over the years has been MID TERM rental options.
The target market for these properties are your traveling nurses and white collar professionals who are relocated for 3-6 months and are in need of a fully furnished property that allows for flexibility on the rental period.
Generally speaking, mid term rentals can charge anywhere between 20-30% higher rates per month than a traditional annual lease that is unfurnished.
Wrinkles to the mid-term strategy include:
Rent by the room rentals: PadSplit is one company that has taken the market by storm over the last few years in this space. They will essentially screen your property to determine if it is a great fit for their model and then they will manage the property for a fee including screening and placing tenants and managing repairs that come up. On average, they say they can charge about $200 per room per week.
You should Airbnb, they said…It will make you rich, they said…You can travel the world and quit your job while receiving checks in the mail every week, they said…Until you actually bought your first Airbnb and realized it is a whole lot more work and effort than anyone told you it would be. Airbnb’s are for the do it yourselfers…The people that enjoy utilizing their elbow grease as they clean up the throw up from the party that was thrown by the people they screened and approved who said they only needed it for their small little family of 4…
Understand that every reason why people do not like buying rental properties (repairs, getting calls from tenants all hours of the night, turnover, people treating it like a rental property), all occur with airbnb’s just multiply that by however many times you rent out your airbnb and you will quickly realize if you are cut out for AIRBNB’s or not.
Like any investment strategy, it is best to specialize in ONE strategy and this could not be more true with AIRBNB investments. You MUST buy the right type of property, in the right type of neighborhood (that will even allow you to do a short term rental…Which by the way they can change at any given time) and you better be a stellar host who answers their phones immediately and has a great cleaning crew on staff willing to work Holidays and weekends because those are your most profitable time to rent your home.
Pros: Potential to 3-4x your rental return vs long term rental
Cons: Sensitive to laws/hoa’s, hot and cold seasons, must be equipped to answer questions and concerns from occupants 24/7, must be a great operator to be successful.
Strategy 2: Short Term Investment
How many people watched HGTV or any fix and flip show and though to themselves, I could do that! If they can do it…I definitely can do that!
How many people see the gross margin spread of what people bought a home for 6 months before selling it for double the price and think, how hard can that be? They do not deserve to make THAT much money in such a short period of time!
Flips are where most people are introduced to real estate investing but I assure you that the savvy investors ALL eventually graduate from fix and flipping and start to realize the real money is made from the good old buy and hold strategy that people like Warren Buffett are known for.
A good friend of mine always says “real estate is better bought, and never sold.” This took me well over a decade to fully understand and appreciate.
I like many of you LOVE the rush of the deal. Buying a property at a deep discount, walking it with contractors and getting excited about the potential profit I am about to make is intoxicating! But I promise you, the feeling fades and it turns into another full time job that you fire yourself from once you sell it.
Fix and Flips are great if you love to constantly chase after the next deal and you enjoy unforeseen repairs popping up on every job and haggling with contractors and vendors every week, only to then have to haggle with a Realtor or buyer on price and terms all the way up until closing day when you are so burned out from the stress that the money that just hit your account doesn’t have nearly the same effect you thought it would the day you closed on the property.
In great markets however, you feel on top of the world…Homes sell for much more than you anticipated and you are ecstatic about your bank account growing…Until you have a call with your CPA and they inform you that 35% of your bank account now needs to head on over to the IRS. OUCH. Every single fix and flipper knows where they were when they had that first call with their CPA and suddenly realized all of that “profit” definitely was not YOUR profit! You actually had a silent partner who absolutely LOVES it when you take on all the risk to mortgage your home equity to buy a home and fix it up only to improve the area, increase future taxes and oh by the way, they get to share in the great returns you just made for them.
Sure wish I could trade spots with the IRS…
When I first learned about wholesaling, I honestly thought it was a scam. In fact my brother in law who practices law called me up one day in 2018 and asked me that very question.
He was blown away that someone could simply negotiate a contract and sign that agreement only to turn around and find another investor who would be willing to pay MORE for that contract than you agreed to pay and use THEIR money to buy the deal while paying you a “FEE” (difference between the price you negotiated originally with the seller and the price you negotiated with the new buyer).
I truly have no idea how long wholesaling as we know it will last in each State…But what I do know is that it is legal in the States that I buy Real Estate in and the profits can be phenomenal!
In 2020, we began wholesaling all of our contracts. WHY? Because I was tired of the headaches of flipping the home and wanted to leave that to someone else! I was ok taking a little less knowing that I would get the check and closing and would never even have to drive to the home! We made multiple 7 figures from this strategy and in a rising market like we saw from 2020-2021.
The downside of this strategy is that once again, these homes that we sold for a quick profit, we knew we were leaving in some cases six figures of potential profit on the table. That adds up!
BECOME THE LENDER
Fix and Flippers and in some instances wholesalers or short term rental investors are always looking for capital. Some markets the economy is flush with cash (2020-2021), while other markets cash is very hard to come by (2008-2015).
The availability of capital will influence how much leverage you will have as a lender as far as how aggressive you can be with rates & points that are charged for originating loans…But needless to say, if you have cash, there will be a 10-1 ratio of opportunities to capital options so you will always be in the driver seat.
We often utilize private lending when investing for the short term. Reason being is we skip the red tape that banks and brokerages require and in return we will pay a premium interest rate.
Banks do not like it when you sell a home in 2-3 months…So going with a private lender is a great alternative.
If you have a lot of capital sitting in a bank account making .001% interest, it might be worth your time to consider lending to an experienced investor who can show you their buying/selling history.
Due diligence is key with this…You must understand the underlying asset and be confident it has equity and has been appraised and you also should ask for skin in the game…At least 10% of the purchase price or more depending on the situation. We are at a point where we will never put more than 10% down on a project and our capital partners will fund all of the rehab costs as well. This is because we have never defaulted on thousands of loans and can show a track record of paying our partners back no matter what type of market we are in.
You can expect to make anywhere from 8 – 12% on your money along with some fees that are negotiable at the front or back end of the deal.
Being a “loaner not an owner” can be a great strategy for someone looking for consistent returns backed by a real asset with equity so if they default, you inherit the property through foreclosure.
Which investment option is best for you?
You will need to answer that for yourself, but I can say that for us, we have realized the benefits of the boring, plain vanilla strategy and buying and holding great assets in great neighborhoods, in States with low taxes, business friendly environments, high growth areas where demand will always be strong.
Investors who work with our team in Georgia & Tennessee are similar minded individuals who are not looking to get rich quick and understand the benefits of owning real estate for the long term far outweigh trying to time the market and sell assets prematurely.
Having tenants in place to pay down your debt, while maximizing your depreciation with your taxes each year all while your property appreciates is a strategy that will yield great returns over the long term.