Types of Real Estate Investing Strategies
In this module, we will cover types of investing strategies. The purpose of this module is to provide an overview of the pros and cons of different strategies, and why an investor would choose each.
Ariel Herrera 0:00
In this module, we will cover types of investing strategies. The purpose of this module is to provide an overview of the pros and cons of different strategies, and why an investor would choose each. At the end of high school, we learned that in order to survive in this world, we need to have a job or career that makes us money. With money, we can afford shelter and food to sustain ourselves. How did you decide on what your job or career was? My strategy was threefold study business since I liked math, go to a state university with a good career center and get an internship for a finance company in New York City. This strategy was highly influenced by living closely to New York, and New York City being the finance capital of the world. Little did I realize at this time, as this was a strategy. By having a strategy, I was able to locate tools more quickly to achieve my goal. The tools I use included joining a business fraternity to make business connections, attending business school related job affairs, and applying to every business related job posted in the Career Center for an internship. Trust me, my route had a lot of bumps on the road, confusion, failure and embarrassment. But end of day I was able to achieve my goal faster than most with a focus strategy. So why do investors choose a strategy? As real estate investors, we need to choose a focused strategy to allow us to achieve our goals faster. If we are constantly pivoting to the next shiny object, like HGTV fixer uppers or short term Airbnb rentals, we will never be focused in on one area to excel. There are numerous types of real estate investing strategies. The first two on the list focus on short term gains over long term investing. Flipping is a process of purchasing a property that needs repairs, rehabbing or fixing up the property and then selling it at a profit. Depending on the level of distress the property needs to be purchased entirely with cash, which inhibits a lot of newbies from diving into this category. Live then flip is a low cost strategy to purchase the property for as little as 3.5% down. You live in it for two years while performing repairs. And then you sell the property at a profit with no to a limited tax hit. However, for this course, we are going to focus on strategies that present cashflow opportunities. Let's dive into each of these further. A short term rental or str is a property that has a lease term of fewer than 12 months. Short term rentals are popular for vacation homes and Airbnb is in popular tourist destinations, like siesta keys in Florida, which is my favorite West Coast beach in the state. However, they also work for renters who need a place to stay for less than 12 months, so a short term rental could include traveling nurses, although the returns can be high. These types of properties require property management and a good knowledge of local real estate market, such as short term rental laws. The long term rental buy and hold strategy is one that you've probably heard of the most. This strategy is used by real estate investors that seek to generate reoccurring rental income and build wealth over the long term. We buy and hold real estate and investor will typically purchase a rental property for 20 to 25% down, they hold it for at least five years and then refinance or sell when the time is right. An investor can also use a 1031 exchange tax code to sell and purchase a light kind asset, such as a multifamily property. This will allow them to defer the tax hit of selling the property and be able to get a rental property with possibly higher cash flow income. Short Term versus long term rentals have differences such as length of occupation for a tenant and income variability in terms of how much stable cash flow you receive. However, there are two key factors that are similar amongst each strategy. One you are the owner of the property and second cash flow, which is for me the top of the list. The next strategy is house hacking. House Hacking has been around for ages Is but the term itself has really become popular over the last several years. House hacking means living in a home that also produces income. By renting out part of your residence, you can reduce your total housing costs. There are different types of house hacking. This includes renting a separate unit like in a duplex triplex or four Plex or multifamily home or renting out a part of your single family home, like a basement, guest house or even a spare bedroom. House hacking is also an amazing strategy, because you learn the landlord business while living at your rental. And once you are done living there, you can move out and transition the property to a long term rental. I house hack my first property by renting out one of the bedrooms. My boyfriend also paid rent as well. With two additional income streams, I only had to pay $500 of the mortgage each month. This helped me to save even faster for my next property. But what if you don't want people living with you. And you also don't have $100,000 lying around to buy an investment property at 20 to 25% down, then the live in then rent strategy may be for you. ltr is simply living in a house that will eventually become a rental. This means the house must work as your home and an investment later on. But unlike house hacking, you don't rent the property while you live there. Doing the strategy a few times it's a great way to build a small portfolio, and you don't have to live next year tenants like house hacking. As of this recording, I've done this strategy two times now and I am living in my third ltr my first two ltr properties I only had to put down by percent for a conventional loan with a total of $40,000. From my own pocket across two properties, I was able to leverage the bank's money to own two rental properties each year after this is my favorite strategy for newbies. Burr stands for buy, remodel, rent, refinance, repeat, when done carefully. It's an excellent way to build a rental portfolio without running out of cash early in your investing career. Essentially, you look for fixer upper properties that you can buy below their full value. You use short term cash or financing to buy the property. And then after it's fixed and stabilized, you refinance with the long term mortgage. If done well, you can pull most or all of your original capital back for the next deal. This can be an advanced strategy for your first or second property that should be considered since you ultimately can recycle your own money and have a cash flowing property. You may be thinking, great, I know different investing strategies. But how do I choose one?
Let's take a look at a case study. We will set a goal and work our way backwards to set up a strategy and a plan of action. In that first line. You see, our goal is to achieve 10,000 a month in cash flow. This will allow us to passively make 120,000 a year, we could have the option to retire early when we meet our goal. Next, we choose a market to invest in either close to us or long distance. We can use data like in the real estate Data Analytics course to decide on what growing market to invest in. Here we choose a neighborhood in the Tampa Florida region that is 10 minute drive from the University of South Florida. So we have the option to also rent to professors and students. Homes in this area typically cashflow $500 a month. Therefore, in order for us to meet our goal of taking in 10,000 a month in cash flow, we would need to have 20 properties. Now we have a target to go after we plan to acquire our first 10 single family homes through the live then ranch strategy. Based on the median sales price in the area. We know that we'll have to save about 20 to $25,000 a year in order to afford a 5% down payment on a personal residence. After one year we will transform the property into a rental property. So now let's imagine we've done this 10 times we've saved up money each year and we've gotten a new property and then we rent out the pre previous one. Now, it's 10 years later, and we can't continue the strategy because we've hit our max of 10 personal home mortgages. What do we do next? Well, after 10 years, our equity has likely increased via appreciation and our monthly loan payment towards the principal, we can tap into the equity of the home. We will recycle the capital within our current investment properties by refinancing. This will allow us to purchase five more properties at 20% down, we will use cash flow to purchase the remaining five properties. Let's take a look. Starting with the chart on the left hand side. We can see via the LTR strategy, we acquire 10 single family homes over a course of 10 years. Each home makes $500 of monthly cash flow. After 10 years, this becomes $5,000 in monthly cash flow. In the second table at year 11. We decide to make a bulk purchase of five single family homes by using recycled capital from our existing rentals. This allows us to purchase additional investment properties without using our own cash. After the five purchases are complete, we now have cashflow of $90,000 a year. This will allow us to purchase a new property each year until we meet our goal of $10,000 of cash flow a month. Now it's year 16. And we've hit our target number of 20 properties, and $10,000 a month in cash flow. Now we can decide if we want to retire early or not. As you can see, it is important to select a strategy to achieve your goal. It is okay to deviate from the path if opportunities come however, deviating too far can throw you off course and make the path longer and more difficult. In the next lesson, we'll dive deep into why we invest for cash flow. See you there. Investors are tired of using spreadsheets to evaluate a real estate deal. But now they don't have to be with the property cash flow app, you can enter in a property address. And within seconds of all the data at your fingertips. You get relevant metrics like cash flow, cash on cash return, and expenses. parameters. You can toggle live to change your deal potential graphics to see where income and expenses are flowing, and much more property details. What are you waiting for? Sign up for an API key and get started evaluating deals today. Or take the course to build your own property cashflow app using Python.