In the last post we went over a great technique to get started in real estate investing with limited funds. If you haven't already read it, check out the good and the bad of Wholesaling. In this addition we are going to dive into another technique that most people are somewhat familiar with. Fix and Flip is the "sexy" technique that has spawned a plethora of TV reality shows and brand building moguls. While fix and flips can be profitable and fun, there is a lot going on that the TV shows aren't showing you. Let's take a look at the basics. Definitions: Fix and Flip - Fix and flip investing is simply the act of purchasing a property, renovating it, and then selling at a profit. ARV - After Repair Value (ARV) is the estimated value of the property after all of the renovations are completed. The ARV value is based on comparable sales (comps) in the same neighborhood. Holding Costs - Holding costs are the expenses related to holding on to the property during the rehab and sale period. Holding costs would include such things as; property taxes, insurance, loan payments, utilities, and lawn care. How it works: To accomplish a successful fix and flip project, you must be able to sell the property for a greater amount than your "all-in" costs, which are the purchase price, rehab expenses, and all holding costs. Obviously, this starts with purchasing a property at a discount compared to what other comparable properties that have already been rehabbed are selling for. You can then either perform the rehab work yourself or hire a contractor to tackle the job. Once the rehab project is completed, you will list the property at it's ARV value which should provide you with a nice profit upon sale. A general rule of thumb is that your purchase price should not exceed 70% of the ARV less the rehab costs. For example, if rehabbed comparable properties in your neighborhood are selling for $120,000 and the estimate to rehab your property to the level of those properties comes in at $20,000, you shouldn't pay more than $70,000 to purchase it: $120,000 ARV less $20,000 rehab costs $100,000 x70% $70,000 max purchase price The 30% that is left should cover your holding costs, selling expenses, and profit. As you can see, margins can get pretty tight especially if holding costs are high and/or the property doesn't sell right away. These are the little details that they usually forget to disclose on the TV shows. How to invest: There are many ways to work the details of a fix and flip project, but in general you need a plan around:
Where to get more information: Download from Bigger Pockets How to Flip Houses: The Ultimate Guide How to Flip a House: A Step by Step Guide for Soon To Be Succesful House Flippers As we near the end of our Eight Proven Techniques we will go over the BRRRR strategy next week. This is one of my favorite real estate investing techniques that really blew my mind the first time someone explained it to me. Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me.
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Last week we went over the most well known of all real estate investing techniques; Long Term Buy and Hold. This week we will look at a technique that has been a stepping stone for many successful investors but can also be used for a full-time real estate career. One of the reasons that wholesaling is a great place to start is because if done correctly, it requires very little up front capital and rewards those that are willing to "hustle" and put in some hard work. Definitions: Wholesaling - In real estate wholesaling, a wholesaler contracts a home with a seller, then finds an interested party (usually an investor) to buy it. The wholesaler contracts the home with a buyer at a higher price than with the seller, and keeps the difference as profit. Real estate wholesalers generally find and contract distressed properties but do not perform any rehab themselves. Wholetaling - Wholetaling is very similar to Wholesaling but the wholetaler may do some very light rehab just to get the property presentable and then sells it on the retail market to an interested buyer (usually someone that wants to live in the home). Simultaneous or Concurrent Close - A simultaneous or concurrent close is where the wholesaler or wholetaler closes on the property completing their purchase transaction with the seller and immediately closes with the investor or buyer to complete their sale transaction with the purchaser. This creates a situation where the wholesaler never really takes possession of the property and is able to profit instantly by keeping the difference between their purchase and sale price. How it works: A wholesaler gets a property under contract (generally distressed) and then immediately finds a buyer for a higher price, profiting from the difference in sale prices. Wholesalers spend the majority of their time scouring their market for under-priced properties that they can sell quickly at a profit. Some sources for acquiring these properties include:
How to invest: Wholesaling is not something that you really "invest" in per se. You just get out there and do it. Of course, there is some investment in education and the time of putting a team together. Good wholesalers are willing to work hard looking for deals and not afraid of some rejection as many or most of the offers you make will not be accepted. While wholesaling can be perceived as a dishonest practice of trying to screw someone out of their property, the good ones that I know focus more on solving a sellers problems in a way that is beneficial to all. Maybe that is offering a quick close, or some other type of terms that help everyone feel that they got a decent deal. Wholesalers also need to spend some time building a Buyers List. Once you have a property under a contract, you want to have a network of interested buyers so you can dispose of it quickly. Pros:
Where to get more information: Wholesale Real Estate for Beginners: Understanding the Process and How to Get Started What is Real Estate Wholesaling? Next week we will go over another very common technique known as Fix and Flip. This is the stuff that popular TV shows are made of but we'll look at the more realistic way it works and list some pros and cons. Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me. Last week we went over the basics of investing in real estate through Private Lending. This week we will move into the most well known technique in real estate investing, Buy and Hold Investing. This technique has created generational wealth for millions of people worldwide and continues to grow fortunes for people ranging from small mom & pop landlords to multi-billion dollar real estate corporations. Definitions: Buy and Hold - Buy and hold investing is pretty self explanatory; an investor purchases property that they will own with the intent of renting it to a tenant for positive cash flow and/or holding on to the property long term in hopes of price appreciation creating a profit at sale. There are lots of "sub-techniques" to buy and hold investing but we are going to cover the basics of residential rental properties. Residential Real Estate - Residential real estate includes vacant land, houses, condominiums, and townhouses. Residential real estate can be either single family or multifamily dwellings. (For lending purposes complexes consisting of more than 4 units are typically considered commercial but we are going to lump these into residential for our discussion) Commercial Real Estate - Commercial real estate includes non-residential structures such as office buildings, warehouses, retail buildings, or storage units. How it works: Buy and hold investing is just it like it sounds, you buy a property and then hold on to it while earning passive cash flow and growing the equity (difference between the value of the property and what you owe on that property). There are five major ways that you will profit from a successful buy and hold real estate investment:
How to invest: Investing in buy and hold real estate requires you to decide what type of property best suits your style (i.e. single family home, small apartment complex, etc.) as well as what market you want to be in. It has become increasingly easier to invest in distant markets so don't fret if your home market doesn't make sense. You will need to assemble a team consisting primarily of a real estate agent, mortgage broker, property manager, and contractor (if you plan to do any rehab). Look for properties that can purchased at a price that allows you to make some cash flow after all of the expenses are paid. I also recommend looking in markets with a stable or growing economy and diverse job base. In another post, I will go through the basic underwriting you need to do to see if a property will cash flow. Pros:
Where to get more information: Bigger Pockets Guide to Buy and Hold Investing Buy and Hold Real Estate An Investors Guide Next week we will go over a technique known as Wholesaling. Wholesaling is a great way to get started in real estate investing when you have very little cash but have the time and hustle to find great deals for other investors. Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me. In the last post we learned the basics about Investing in Real Estate Notes. This week we continue with another technique for investing that doesn't require the actual ownership of the physical property. This technique is known as Private Lending and is becoming a very popular to make a solid return that will beat most of the banking products and be secured by the physical asset. Definitions: Private Lending - Acting as the lender to other investors for the purpose of purchasing real estate
How it works: Private lending is simply the act of loaning money to an investor per agreed upon repayment terms. In most cases, you will have no active role in the real estate investment but will receive payments from the investor per the terms. You can (and should) have a security interest in the property that you are loaning on, meaning that if the investor doesn't pay you, you can foreclose on the property. How to invest: There are many ways to become a private lender. Here are some of the most common methods:
Pros:
Cons:
Where to get more information: millionacres.com nuwireinvestor.com Next week we will go over the most well known technique and still one of the greatest: Long term buy and hold real estate investing. Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me. Last episode we took a look at how to invest in REITs, real estate mutual funds and ETFs as part of the series of eight proven techniques for investing in real estate. This week we are going to look at a technique that is still very passive from the management side but a little more complicated. That techinique is: Investing in Real Estate Notes. Definitions: Promissory Note: A signed document that contains a legally enforceable promise to pay a stated sum to a specified person at a specified time.
How it works: This chart shows the simple basics of how a note investing transaction would occur: How to invest:
There are five primary sources for purchasing notes:
Pros:
Where to get more information: Bigger Pockets Blog Udemy.com Next week we explore how you can become the bank through the lucrative technique of Private Lending. Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me. This week we will kick off our Eight Proven Techniques for Investing in Real Estate series with a more detailed look at Real Estate Investment Trusts (REITs), Real Estate Mutual Funds, and Real Estate Exchange Traded Funds (ETFs). These three techniques are very passive, meaning that once you purchase the investments, there is very little effort needed on your part to manage the asset(s).
We will follow a similar format for each of the eight techniques in the series so here we go: Definitions: Real Estate Investment Trust (REIT) - A company that owns and sometimes operates income producing real estate such as apartments, warehouses, self storage facilities, malls, hotels, etc. Real Estate Mutual Fund - An actively managed fund of multiple REIT firms. Exchange Traded Fund (ETF) - A passively managed group of REIT firms generally based on an index. How it works: REIT - A Real Estate Investment Trust (REIT) is basically a corporation that owns and operates real estate assets that are purchased using capital raised from selling shares in the corporation to investors. The REIT generates income from rents, capital gains, and mortgage interest and is required to return at least 90% of taxable income back to the investors in the form of dividends. An easy way to think of it is as a middleman that pools lots of investors money to purchase large real estate assets and then returns most of the income to those investors. The REIT itself makes money through some more complicated accounting principles such as Funds from Operations (FFO). Basically, the taxable income that has to be returned to investors is less than the actual positive cash flow due to factors such as depreciation. Some of the FFO may be returned to investors as dividends and the rest is used to fund the corporate operations and purchase more assets. There are three primary types ot REITs.
Real Estate Mutual Fund - A real estate mutual fund is simply a fund with a group of REIT stocks inside of it. These provide greater diversity and potentially less risk since a professional actively manages the group of REIT stocks. Real Estate ETF - Like a real estate mutual fund, an Exchange Traded Fund (ETF) is a fund with a group of REIT stocks inside of it. The big difference is that ETFs are not actively managed , meaning that the REIT stocks inside of the fund mimic an index and remain the same. There are many indexes for sectors such as residential, commercial, European, North American, etc.. ETFs also trade slightly different as they are bought and sold in real time on the markets instead of being closed out at the end of a trading day like a mutual fund. How to invest: REITs, Mutual Funds, and ETFs are extremely simple to invest in since they are traded on the public markets. There are private REITs but we will save those for another day. A public REIT stock can be purchased and sold through your broker just like any other stock. It is wise to do some research or work with your financial planner to ensure that you purchase an interest in a REIT that matches your investment profile. Pros:
Cons:
Where to get more information: If REITs, Mutual Funds or ETFs sound like your kind of investment, here are a few sources to get more information and get started on your journey to financial freedom through real estate: Investor.gov REIT.com Nerdwallet.com Next week we will dig into the world of Real Estate Notes to see how they work and if they are right for you. Please reach out to me with any questions or comments using the comments button or through the contact page on my web site. If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me. Investing in real estate is one of the greatest wealth building activities one can engage in. According to a Feb. 2020 report from the College Investor, over the last two centuries about 90% of the world's millionaires have been created by investing in real estate. Unfortunately, many investors never utilize this profitable avenue because they have heard horror stories about tenants, toilets, and termites. They think that real estate investing is all about getting late night calls for backed up toilets or dealing with unscrupulous tenants that don't pay rent. Taking a closer look at real estate reveals that there are many different ways to participate ranging from extremely easy and passive to full time employment commitments. Over the coming weeks, I will take a deeper dive into eight proven techniques and discuss the advantages vs. disadvantages of each. The goal is to get you thinking about which technique makes the most sense for you based on your commitment, goals, risk tolerance, and personal situation. The question should not be "should I invest in real estate?", but rather, "how should I invest in real estate?". Here is an overview of eight popular and proven techniques. Follow along in coming weeks as I dig deeper into each.
Every one of us has been affected by the Covid-19 pandemic in some way or another. For some, the impacts may be minimal disruptions to every day life, while others may be undergoing serious health concerns or major financial turmoil. These are unprecedented times for most of us and it often feels like we have very little control over the outcome. Rather than spending time watching the barrage of daily headlines that often offer conflicting information, it is important to maintain mental and physical health by focusing on what you CAN control and taking action on those items. Here are some things that I have done to greatly increase my opportunities for coming out of this financially stronger and recommend others can replicate in their own ways.
Stay safe my friends! Jim Rohn was one of the greatest and most influential speakers of our generation. He had a knack for saying things that you knew were true but still gave you an "a-ha" moment. Whenever I need some motivation, I fire up a Jim Rohn seminar on YouTube or read some of his great quotes that inspire taking action to make yourself better. With all of the negative news surrounding Covid-19, world economies, and unemployment, I thought that a selection of my favorite Jim Rohn quotes might bring everyone some joy.
There is a lot going on in the world right now that is creating a tremendous amount of uncertainty in the investment world. The US stock market has been a roller coaster ride with huge daily swings and a precipitous plummet from record highs to bear territory in a matter of weeks. With fears swirling around the worldwide COVID-19 virus, economic uncertainty, and political instability, many people are wondering when the real estate market will follow in a crash and burn similar to 2008. These are legitimate concerns and not even the experts can agree what the future of real estate looks like. As a real estate investor with a sizable portion of my nest egg tied up in residential rental properties, I have spent some time analyzing my risks and making sure that I have followed the rules to mitigate risk. Since a lot of people have been asking me what I think about the risk and if they should stay away from real estate investments right now, I thought it would be a good time to highlight some of the rules that I pay close attention to in order to minimize my chance of losing big. I think that we can all agree that real estate is cyclical just like most investments and there will be a downturn, possibly significant, in the future. That doesn't have to be all doom and gloom if you are prepared for this and can use it as a buying opportunity. Every downturn in history has eventually changed course and headed back up to new highs that exceeded where we were before the drop. The key to staying out of trouble is to be able to ride out those downturns, or even benefit from them, so that you are still in the game when things get better. I can't take credit for coming up with these rules, but I strictly model my investment strategies after them in order to keep myself and my investors out of the red.
By following these five rules, we are confident that we can survive and provide excellent returns to our investors throughout the ups and downs of the overall real estate market. We aren't going to base our plan on "market timing" or speculation on pure market appreciation. If times get a little rougher, we may have to delay a sale, refinance, or major rehab project but we are going to preserve our investors capital and avoid the whip saw fluctuations of the equities markets. |