How to Build Wealth Through Real Estate
What Are the Best Strategies to Build Wealth through Real Estate?
Real estate can make you wealthy in a few years. It is comparatively a safer investment than some riskier adventures, but you need to know the strategies in detail that can help build your wealth. As someone new to the real estate industry, you will have a plethora of options, and the choices are always overwhelming. However, you shouldn’t allow your emotions to overturn a logical decision. That decision should be based on market conditions which can change quickly. So, here are a few strategies you can follow to build wealth through real estate:
As the name suggests, you need to find profitable deals on investment properties. Compare the rates of different buildings, houses, and apartments, to get them under contract and then sell them quickly to other investors at the closing table. This will allow you to “flip” the property without having your own money invested in the deal. Your next step is to find people who want to buy similar properties (most likely flippers/other investors who can pay cash) and resell them for a small mark up. With excellent marketing skills, you will be able to build your wealth in no time at all. This type of strategy is ideal for someone who has experience in sales but not a lot of upfront capital to start with.
The idea here is to work like wholesalers who buy for a great price and sell in small profit margins. Since you are buying and selling quickly, you end up making a considerable amount of profit. Moreover, wholesaling in real estate involves some amount of money. It is not like buying and selling potatoes or onions. You need to have a small amount of capital for your initial investment. Once you make a profit from your deals, you can use a part of your profit to increase your capital. This will only lead to building more wealth in the process.
Fix and flip
This is probably the most common strategy that every real estate investor goes to if they enjoy renovating properties. The concept is simple. You buy an old house at a low price. You renovate the house and make it look like new. You sell the house at a high price that buyers can afford. This is one of the most tried and tested investment models among real estate investors. However, you need to remember a couple of things.
• Always make sure that you renovate the house according to the neighborhood. Don’t over improve the house for the street your selling it on. You want your house to be a little nicer than the others to get the most profit out of a flip.
• Try to keep your renovation costs on the lower side so that you can make more profit to build your overall wealth.
Many people buy old mansions and renovate them into condos. These babies sell for millions in the right markets. So, always prepare a budget before even investing in the property so you dont make a bad purchase.
The concept works exactly as it sounds. Suppose you live in a well-known neighborhood where buying a house is costly. Not many people can afford to buy a property in that location. However, if you already have a house there, you can live for a few days and rent it. People always look for a good neighborhood to shift to, but they can’t because they don’t have enough money to buy their dream home.
You can make their dream come true by renting your place. There are a few advantages of this strategy:
• You earn your investment back in the form of rent. For example, if you buy the house for $100,000, you can make more than that if you rent the house for a few years. If the family pays $1000 per month as rent, it will only take 10 months to recover your investment. What you earn next will only add to your wealth.
• You don’t have to worry about maintenance because the family will take care of it as they live in the house. All you need to do is come over occasionally to see if everything is in order or not.
BRRRR stands for Buy, Remodel, Rent, Refinance and Repeat. This may sound similar to fix and flip, but there are a few differences. In this investment model, you should search for fixer-upper properties. These are usually available at prices below their full value. You can use your short-term cash to buy the property, fix it and make it livable and stabilized, rent the property, make refinances from the amount you accumulate from the rent, and repeat the process.
One thing that you should note here is the time for which you rent the property. Fix and flip only involves renovating and selling the house. It is a one-time affair. On the other hand, BRRRR investing is a continuous process. You can use the same property to remodel and rent or use the cash you accumulate to invest in another property and do the same thing.
It is a very profitable investment model, especially if you can remodel a few properties together. This will help to create a fund that you can keep aside for refinance and the other part of the profit to build your wealth.
Short-term buy and hold rentals
With the real estate market on the rise, this investment model will allow you to grow your wealth within a few years. The strategy involves buying and then holding rental properties for short periods. For example, you buy a house in a posh neighborhood where the property prices are relatively high. You hold that property for a few years. The prices of houses in the neighborhood will increase. When you see that the market is in a favorable condition, sell the property.
Short-term buy and hold rentals usually last from one to five years. It is a profitable investment strategy for multi-unit apartment projects. Since these properties can accommodate many families, the amount of rent will gradually go up in the next few years. Some people prefer to sell the entire apartment at a much higher price so that they can make a significant profit within a short time.
The advantage of this strategy is you don’t have to fix and renovate anything. It is almost like investing in a new house and keeping it intact so that you can sell it later. Only, instead of selling, you also have the option to rent the apartments.
Long-term buy and hold rentals
Although this strategy sounds similar to short-term buy and hold rentals, the purpose of investment is different. Your objective here is to build your wealth. It doesn’t necessarily have to be through the process of buying a property for a low price and then selling it at a higher price. Long-term buy and hold rentals don’t work that way. In this process, you keep the property for the long haul.
This investment model is ideal if you can buy properties in some of the best locations in your city. Instead of immediately renting it away, you can keep it to attract tenants that can pay more than the average people. Sometimes, long-term buy and hold rentals also help to shelter taxes from depreciation expenses, price appreciations in the long run, amortization of loans, and earn significant rental income.
Since you are already investing in a high-priced property now, you can expect the price to go up a few notches in the next few years. When you think the time is ripe for renting the property, pick from the tenants that showed genuine interest.
Rental debt snowball plan
This is one of the most underrated strategies that can help to build the wealth of any real estate investor. It is like the duck that lays golden eggs. You invest in this model, and the chances of incurring a loss are almost negative. Most importantly, it helps to create a steady income stream. Again, building wealth is not just about buying and selling properties; it is about how you invest, where you invest, and how you manage your finances.
In this plan, you collect all the cash from your existing rental properties. For example, you have several short-term buy and hold rentals and live-in-then-rent investments in your city. Imagine the amount of investment you already made. You may not have the necessary cash to pay all the debt together. So, you should accumulate the cash you make from the rents every month. Create a fund where you focus on paying off one mortgage at a time.
The difference between your bank balance and debt is your wealth. So, once you pay off the debt, your wealth will automatically grow. When you concentrate on one debt at a time, it allows you to distribute the cash on other investments accordingly.
Investing In Apartment Buildings
At some point if you are very successful you may graduate to investing in apartment buildings. I would say “this is where the real money is made”. The purchase of a sizeable apartment building or complex can enter in to the millions of dollars. You’ve heard the saying, “it takes money to make money”, well that holds true with these big, bad, boys. If you can put together a deal on a larger apartment building, your profits could potentially be quite large. On the other hand, if you overpay for a property and the cash flow from the rents are not sufficient to pay the debt, then you could end up losing all of your investment. If you do not have the experience or cash to properly invest in large apartment buildings you can always partner with someone who does.
Investing in apartment buildings is not something you want to take lightly. Dealing with a high volume of tenants can be a monumental task when you imagine all the types of issues that could come up such as repairs & maintenance, move in & move outs, late rents, cleanliness issues, pets not approved through management, and parking issues just to name some of them.
Location, Location, Location
To quote a very successful real estate investor, Grant Cardone- I dont buy any apartments unless there is a Starbucks close by! For Grant, he equates that to one part of his determination that it is a good place to rent and where people will want to live. Of course, there are many other aspects of deciding if a property is in the right location such as school district, access to highways, grocery stores, entertainment and many others. Location is a factor you will want to take in to account immediately when assessing the value or desirability of any property you are looking at whether it be a single family home, an apartment building or even a commercial property.
All-cash rental plan
This plan should ideally come after you paid off all your debts. Most investors go through the rental debt snowball period before moving to an all-cash rental plan. In this format, you don’t have to pay off any debt. You collect the cash from all your rentals and reinvest that money in buying another property without any mortgage or debt system. This money will only add more zeros to your bank balance, thus building your wealth slowly and steadily.
With so many investment strategies, you shouldn’t have a problem setting the ball rolling in your real estate investment journey. Make sure you get your calculations right to build a wealthy empire.