What Investing Strategy Should I Use When Getting Into Real Estate?
This is a question I hear alot, and people are usually wondering if they should start flipping properties or if they should buy and hold properties to rent them out.
The answer to this question depends what your goals are. Both options have their pros and cons.
There’s actually a 3rd option that uses a hybrid of the 2 options mentioned that I like even better. Read below to find out what it is!
Option 1: Flipping Properties
Pros: This strategy is a good way to build capital quickly. As quickly as you can purchase the house and renovate it and sell it again, you can make your profit. You also have some control of how much money you will make by what level of finishes you renovate the home with. If your main goal is to build capital that you can further invest with, this is a good option.
Cons: There is nothing passive about this strategy. It is still a full time job. As soon as you stop finding deals, or renovating and selling properties, your income stops. It requires you to keep working in the business. There is also no income coming in during the renovation, and if the home takes a long time to sell, or the market turns bad while you are in the middle of a flip, you may be stuck with the home
Option 2: Buying and Holding Property To Rent
Pros: This is a great way to create passive income for yourself. Other than the regular maintenance (which you can hire out) you can get the property rented and not have to do too much work. Once it is rented out, the tenants rent payment covers all the expenses including the mortgage payment with some extra cash for you (if purchased right!)
Cons: This can be a slower way to get wealthy. Yes, the home creates some cashflow for you, but you will need several homes to create enough cashflow to live on. You can also run out of capital quickly as you are using all of your capital for the downpayment(s) with only a small amount of income coming back to you each month
Option 3 (MY FAVORITE): Buying, Rehabbing, Refinancing , Renting, Repeat!
Pros: You find a house that needs work and create value buy renovating the house. You then refinance the property after it appraises at a higher value. This gets your capital back because you just mortgaged it at the new higher value. You pay out the original loan and the remainder of the cash is yours.
Purchase price $200,000
Loan amount $160,000
Appraised value $350,000
You have $90k of your own money in the deal (downpayment plus reno costs). You refinance at the new appraised value of $350k so you get $290k back ($350k minus downpayment) to pay off the original loan of $160k and cover the reno costs and the downpayment.
This ends up that you get into this prperty for free PLUS you have $40k profit besides. You still own the house and are collecting rent payments. The tenant is still paying off your mortgage for you!
You can repeat this process forever! Even if you can get into the deal for free without the 40k profit, (which is common) you can grow quickly
Cons: Requires a smart buyer. If the property isnt bought correctly to start with, this situation could turn out negatively. It also takes a fair amount of work, but very worth it for those willing to make it happen!