As you may know I like to make the beta reading of my book open sourced so the community that will be using them can actually gain the information and request changes or additional information to be added as the book is being written.
This post is One Chapter of my coming book, “GET THE DEAL”. Which the idea has it’s origins from the live training with the same name that I have taught to thousands of real estate investors all across the country and have had time to refine the information to answer the questions most asked at those trainings. Without further ado I want to encourage you to read this chapter and leave your suggestions in the comments below!
Chapter Five
Strategies In Real Estate
“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”
– Sun Tzu (The Art Of War)
My first few years in real estate I was so focused on the “tactics” that would get me to the next level and I was losing money without even know it, because as Sun Tzu stated tactics without strategy is the noise before defeat.
I remember being so focused on learning how to buy my first multi-family and thinking that if I just learned how to buy real estate without my own money I would eventually have a good sized portfolio and financial freedom. What I found is that yes, I was eventually very good at buying real estate with no money, but there was money slipping away from me because I hadn’t put enough time into building the tax right strategy to hit my goal faster.
What made me successful early on was that I chose a hybrid version of the BRRRR strategy which mixed in the Pyramiding strategy where I would buy a 3 family and then sell it to buy 2 more multi-families (trading 3 units for 6 units) and so I was always purchasing each property as if I was going to flip it. Without my “strategy” of buying a multifamily at an 80% discount and then renovating or raising rents to get an additional 20% I wouldn’t have had such a strong base to start with. This Hybrid strategy was effectively giving me a 40% equity position even though I put little or none of my own money into the deal, but I was still missing something.
By holding the properties I was able to avoid income tax and was only paying capital gains when I sold a property, but my strategy was flawed because I wasn’t utilizing the 1031 tax code to defer the capital gains into the future. This is something that slowed my growth in the beginning substantially costing me more than a year of my life.
So even though I did start with a good strategy and utilized many solid tactics that helped me buy houses with little or no money and very quickly have a strong equity position. I hadn’t included thought out my tax strategy well enough and lost over $100k to uncle Sam in those early years which would have allowed me to buy 2 or 3 more houses at the time! My father has always told me that, “hindsight is the full map son, you can’t know the best course until time has already passed”. My father has always been good at knowing the right thing to say to make me feel better about my decisions, and even though I am happy with how things have turned out I know you can do better with the right strategy upfront. That is reason I want you to take the time in these next pages to build your strategy right from the start.
We are going to dive into some of the strategies that are available to you and I want you to keep in mind that your tax strategy is going to be something you will want to consider as you are putting your ultimate real estate strategy together. I also want to point out the importance to “sticking to” your strategy and being open to improving it over time.
During the early years of my career my strategy was ONLY residential multifamily, but the couple of times that I got beat up on a deal was when I ventured into single families. I wasn’t equipped for single families. I was missing the right strategies and tactics, which by the way can be very different depending on your market. That said, I have always seen the most success when I stay in my lane and focus on locations and property types that I am strongest in.
I have since learned many of the other strategies discussed in this book and a few I still avoid. I will touch on good selection so you can decide something that will work for you in your market. These are just the most popular that I have either directly or indirectly utilized and is not a complete list of strategies. It is a good base to start from and it will ultimately be you who decides the best strategy for your market.
Long-term goals for real estate are key to your success.
Understand that there are multiple strategies and different locations that you can operate your business in. Before we dive into the strategies that are most successful and the locations that work the best, you have to first realize that these are going to be super personal decisions that you as an investor will have to make for yourself. No guru, coach or mentor can tell YOU what is going to be right for you unless you first understand what your goal is for real estate investing.
Another important distinction to make is that either your location is going to be the reason that you pick a strategy, or your strategy is going to be the reason that you choose a location. If you want to invest where you live, then location is going to be paramount, that’s going to come first.
If you want to have a certain type of retirement, a certain type of lifestyle, then the strategy you use is going to dictate the location and you may end up moving or operating out of state. So first you have to decide what are your long-term goals? How do you see yourself operating over the next 5, 10, 20 years?
Do you see yourself living in a tropical location? Do you see yourself living in a colder climate? How “hands on” or “hands off” would you like your investments to be? Do you want to be able to walk across the street and see them or are you fine with having your investments out of town or out of state? Here are a few questions to ask yourself:
Are you looking for passive income through rental property?
Are you looking to eventually just have a lot of cash that you can put into the stock market or sell financing notes?
Are you just looking for a large income, just a high amount of cash and not too concerned about having a high net worth? In that case you’re building a business, as an agent, wholesaling, doing flips, property management or one of the other many options in the real estate industry.
Ask yourself what is your long term goal? Because that’s going to dictate what strategies and locations you’re choosing to build your business. Choose wisely because once you’ve made this decision, there’s no easy way of going back until you have hit your goal of $1,000,000. At which point then you can look up and decide what the right direction to take is from there.
Overview Of Real Estate Strategies
Deciding on what your long term goals are, is going to dictate which strategies to use, how much exposure you are going to have to each one, whether you are all in or you are using little pieces of each one. Your retirement goal dictates what strategies you spend more time in.
There are five major strategies for real estate investing, Wholesaling, Real Estate Agency, Rehab/flipping, Buy And hold, and Holding Paper/Lending. We are going to dive deep into each one of them, giving you a better understanding of each. As I mentioned earlier it will ultimately be up to you to decide which strategy is best for you. Let’s start with lowest money required and highest time.
Wholesaling
Real estate wholesaling is not as easy as it sounds. The whole purpose of real estate wholesaling is finding properties for sale that are being offered for a lower price than they are actually worth in order to leave a margin of profit for you and the end buyer to benefit from after the final sale
Real estate wholesaling doesn’t involve the sale of multiple properties at lower prices at all. In fact in a wholesale deal you make your profit by finding a buyer willing to purchase the home at a price that is higher than the amount agreed upon by the end buyer. The difference in price paid for by the buyer, is your profit.
I buy a lot of houses from wholesalers, and some are happy with $5,000 per deal while others make $10,000 to $20,000 per deal. The wholesalers making more money per deal are very good at finding extremely motivated sellers, negotiating very well and have a large buyer’s list. With a large buyers list you can often get end buyers to pay more than your asking price.
Now on the question of what is legal and isn’t legal. Wholesaling houses can be illegal if you bring the buyer first, do not have a contract in place with the seller, or cannot prove intent to purchase. If you are worried about the legality of wholesaling houses you can always get your real estate license and earn a commission based on a set amount instead of percentage like most agents. I strongly suggest eventually getting your real estate license as a second stream of income anyway.
I often am asked if you can operate without forming an limited liability company (LLC). Yes, you can wholesale houses without a LLC. However, most attorneys state that it is advisable to create an LLC and then wholesale houses. Many wholesalers, unfortunately, make the critical mistake of not creating or procrastinating on setting up an LLC. With that being said I have to admit that I did most of my first real estate deals in my own name before forming an LLC.
There Are 5 Basic Steps To Wholesaling
- Research your local market before getting started.
- Curate a buyers list for your area.
- Secure a financing source that works best for you.
- Begin searching for potential wholesaling properties.
- Decide whether to sell the contract or work on a double closing.
A lot of new investors are attracted to wholesaling because it’s a “fast”, low-risk way of making income, or it’s perceived to be fast. I blame all of the gurus out there. It’s the keyboard warriors and YouTube trainers that are going to tell you that you should get into wholesaling, because it’s easy, and you’re going to make a lot of money or that there’s no risk on the table. Although there is significantly less risk in wholesaling, on the other side it’s much harder to find wholesale deals. So the amount of marketing you have to do is far more intense than any of the other forms of real estate income.
I just want to be very honest with you going into it that wholesaling is a very hard business and it is in fact a marketing business. You will find that most of the wholesaling conversation is going to focus on the art of finding motivated sellers. If you are serious about learning how to wholesaler then your whole world is going to revolve around your ability to find and connect with motivated home sellers.
One Of The Keys To Wholesaling Is Finding A Motivated Seller.
Without an extreme level of motivation, most sellers will not be able to fit inside the box that you need them to follow to. The second step after doing all the marketing to find out where the seller is booking the appointment, going out on the appointment, getting them to agree to a price that’s significantly lower than what another investor is going to pay. This way in between you can get your spread. Once you’ve gotten it under agreement, you now take that contract and you go and you sell it to another Investment buyer, and a buyer who is interested in that market, that type of property.
Building a buyer’s list ends up being a huge part of your success as a wholesaler. Having motivated sellers, connecting them to buyers who are also motivated, looking to invest, is the marriage between the two. You want to make sure that you’re focusing all of your energy on, first finding the buyers because without a good strong buyers list you could be finding properties that you’ll never be able to sell.
The motivated sellers is key but its secondary to making sure you have a buyer who’d be interested first, and then only hunting after properties that somebody you have connected with would buy. The only downsides that we see with wholesaling is that you go on many, many appointments and the amount of people who the deal actually works for is low. This is because it has to be bare-bottomed pricing, and the sellers are absolutely desperate people. Ultimately in the grand scheme of things there’s just not as many of them as some of the other categories .
For example when it comes to flipping, where instead of wholesaling you are just buying the deal for yourself and flipping it the extra money that would go to the wholesaler stays with the seller, or agency which again is selling to a retail buyer, (they can actually pay the most). Being able to take down a deal yourself or having your real estate license allow you to convert more transactions.
The positive of wholesaling a deal is you have almost no liability whatsoever and typically no money in the deal. You sign your contract, with a very low deposit (typically $100, but I’ve heard of wholesalers using $10), and then if you can’t close, all you’ve lost is your very small deposit. Whereas if you’ve closed on a flip and things don’t work out, you could lose tens of thousands of dollars and be stuck with a property you have to decide to rent out or invest more into the deal to sell it.
It’s a great way to get into the business if risk is your major concern. Also your income can be significantly higher because you’re negotiating not based on percentage like a real estate agent would, your income can be very high on the spread if you’re able to get the price low enough and you’re able to find a buyer whose price is high enough.
Depending on the size and quality of the network you build and how many people you’re talking to, will decide your amount of appointments. If you can get the spread between the seller and the buyers price really wide, you can actually in some cases make more money than a real estate agent would on that transaction. To counter that statement I want to be very clear about the other reality, which is that with your real estate license as an agent you will likely do far more transactions and in the long run probably make more income than by wholesaling alone. By having both the wholesaling option and the agency option, now that’s a double-shot.
Real Estate Agency
Being a real estate agent gives you more options as a real estate investor. When you’re investing for yourself and you’re buying your own properties, buying your own flips, selling your own flips, there’s a lot of money on the transactions where the agent would have gotten paid. If you’re operating for yourself you can actually collect those commissions and get paid to buy the deal.
On the other side, say you’re wholesaling and you haven’t gotten to the point where you’re doing your own purchases yet. There’s a lot of appointments you go on as a wholesaler that you’re just not able to actually do anything with it, you have to refer them out to an agent. You see, every 10 appointments you go on, you finally get a great wholesale deal. Where as a real estate agent every ten appointments you go on, you’re going to close three to four of those as listings and likely sell 2-3 of them for a commission.
So looking at this from a numbers point of view. If you are going on appointments and converting every 10th appointment earning the average $5K-$10K on a wholesale deal, and you add your license to this and start converting every 3rd appointment with the average agent commission of $3k-$6k. You can see that with this simple math you can double or triple your income just by getting your real estate license! You’re still doing the same amount of appointments you’re just getting another tool in the box that’s allowing you to do more conversions. Sellers have a higher likely-hood of working with the Investor who is also an Agent because the higher standard of ethics we have to hold as federally licensed agents. Use this to your advantage!
Agency is a phenomenal source of income if you’re already doing the work of marketing to sellers, seeking out sellers, seeking out motivated people, and if they’re not able to close with the low offer as a wholesaler, on the agency side, you now have another tool in your toolbox where you can go and list their properties at the price that they are actually looking for. This will be a price that is likely higher than an investor would be able to pay, significantly higher than a wholesaler and just a little bit over what a rental investor is going to be able to pay.
Agency is not just an extra form of income, it’s also going to provide an additional host of marketing tools designed specifically for our industry to attract buyers and sellers to your business. You also have the access to the MLS, which allows you to get a lot more research as well as the ability to build lists. As an agent you are instantly plugged into having a bigger network because of the trainings that are usually free for real estate agents. Most brokerages will provide free training, there’s a lot of education in this industry and so many opportunities in the realm of networking with other investors, mortgage lenders and attorneys.
Being an agent, now they have a reason to help you out because you’re doing deals and they see you as a partner and a source of income, especially lenders and attorneys. These professionals can connect you to the right people to know in your market and are a great resource.
Flipping/Rehabbing Real Estate
My first glimpse of the world of investing was on HGTV pumping out a ton of content, making everybody feel like flipping is where the money is. If I say I am a real estate investor, people immediately think I am flipping houses. This used to bother me because I have always been a buy and hold landlord, but I do have to admit that I have eaten of the forbidden fruit that is flipping/rehabbing property and yes, it does pay very well and can be a lot of fun. Anyway HGTV and flipping shows are a part of our culture now. For most people when you ask to think about how to invest in real estate they assume you mean to buy a single-family home, put some lipstick on it and then go and sell it for a higher dollar amount. This is the belief system in our country and it’s actually very accurate even if I do prefer to stick to and mostly flip multi-famlies we should discuss this section in the terms of the more common flip.
Flips are a great source of income. If I had to look back and say would I want to wholesale, be an agent or do a flip, I would absolutely just go and do a flip. The problem with flipping is it takes about three to six months to actually get paid, so you end up with this long term period of not making any kind of money, and that’s where wholesaling and being an agent fills the gap for you, fills the void so during those months of no money coming in, you’re able to pay your bills and keep the lights on.
Now, once you’ve closed a flip you’re talking a thirty, to sixty, to a hundred thousand dollar profit. A lot of people will just take it easy and believe they can go with the rest of the year on that cash. They pull back on their wholesale business, and pull back on the on the agency business thinking they can operate the flips as long as you’re saving and investing your money correctly. I fell victim to this for a while and didn’t notice a problem until my projects started not closing on time as the market made a minor correct in February 2018 and force many of our projects to take 3-4 months longer than expected. As a piece of guidance make sure you keep those smaller streams of income running until you have gotten into more passive forms of income like rentals or holding paper assets.
One of the benefits of flips is that money can be very readily available, if you get yourself a very good track record, you can easily have hard money lenders willing to lend to you with 10% down, 20% down, and in some cases no money down. If you have a good reputation with them and you’ve done a lot of deals, the lending terms can be very flexible on flips and the short term money gets a little cheaper over time.
On the other side of it, if you get stuck holding a flip, they can be extremely unforgiving assets. We touched on the subject when we were talking about liability with wholesaling which has almost none, agency you get a little bit, but flipping real estate is where all the liability is. This is where people lost their shirts back in 08, this is where the warning about “over-leverage” has to be mentioned.
It’s the people doing the single-family flips that are effected the most because in some cases even filling the house with a tenant will only reduce the bleeding. There can be a lot of risk attached to flipping. You’re using a lot of other people’s money at high interest rates, you’re putting it all into a project that could last three to six months, sometimes eight months depending on how things go. Refinancing them is not always an option, because the traditional lenders look at an investors income as unstable and can’t rely on much income from a single-family rental.
As an aside, my strategy for flipping small multi-families is very similar with the addition of having 2-3 tenants in the building paying rent and covering the carrying costs of the flip. If the project takes longer to sell its okay because we are making money from the rented out units and still able to show the vacant unit. In a situation where the market turns we can fill the showing unit with a tenant and refinance the building based on income from the asset.
So there’s some risks to flipping single family homes, but at the same time if I had the choice I could do one flip and make maybe fifty thousand to a hundred thousand, I’d rather do that then go and work all the hours of agency or wholesaling. The option doesn’t become available to you until you’ve been in the business for a little while. Until you’ve either saved up some capital or you’ve got a lot of relationships and experience where you’re now comfortable doing it. Starting with wholesaling, moving into agency and then doing your first flip is a very easy, very solid way of getting into the business. After that, you want to start getting into the rental properties.
If you also agree that flipping a house would be a good stream of income here is a quick overview of what we look for. There are some other niches, we’ll talk about in a little bit, but the concept behind doing a single-family flip is you buy it at 70%, after repair value, you subtract the repair cost, say they’re $40k or $50k, and then you deliver your actual offer.
The offer is based on ARV (after repair value), minus renovation costs, that’s what you can deliver. So if ARV is $200, you’re going to reduce the price by $60k for the 30% discount, and then take another $40k off for renovations. You are going to offer $100k dollars on a potential $200k sale. The goal is to walk away with $50k-$60k profit on this deal. That’s some basic math, and the short version of how flipping works on a single-family home. We will dive much deeper into evaluating deals in future chapters.
Flipping condos
Is a little different from flipping single-families. There are a lot of investors who actually do this, sometimes they’ll pick up a 3 family or 4 family and convert them into condos, then selling the individual condos to maximize profits. Some strategies run very similar to single family flips where you can actually purchase a condo at a cheap price and then go and sell it for more, after doing little renovations or helping the association get in better condition, better shape, and then selling the condo.
Sometimes with condos, just changing the management will actually increase the property value. One of the best deals I ever did was purchasing 24 condos and replacing the management company that controlled the condo association. Sometimes with condos just going in and doing a little bit of work and putting it back on the market is all you need. This will depend highly on your market and the fact that condos can be very sensitive to condo fluctuations. The reason people invest in condos is the lower barrier to entry, it’s easier to get in. One of the difficulties with condos is that the association makes or breaks the deal. Sometimes having other owners in the complex can actually make it difficult to rent out or do renovations as well.
In some cases the amount of “owner occupied” units versus “tenant occupied” units in the condo, can change the financing options available for first time buyers. Too high a percentage of absentee owners can hurt the financing of your condos on the future sale. There are a few different things to keep an eye on, and a lot of moving pieces in condos, but it can be a really easy product to flip because of the lower cost to purchase is a lot lower than single families homes.
Flipping multi-family investments
This is one of my favorite strategies for building wealth and offers more flexibility on timeline requirements. If you’re going to flip I’d rather have an asset that could carry itself indefinitely should the market take a turn for the worst. One of the biggest expenses with flipping single-families and condos are the carrying costs. Every month you’re paying interest, every month you’re paying taxes, every month are paying maintenance on the building on top of your renovation budget. Just because you bough the property well and renovated it right is no guarantee that it will sell right away. With multi-family flips the tenants will help pay for those monthly expenses, allowing you some breathing room.
There’s a lot of time that those two carrying costs can grow over the extended period. If you go past your three to six month threshold and you’re paying 1,500 dollars or 2,000 dollars a month for the carrying costs, that eats away at your profit. So with a three family, or a four family, multi-family your top two tenants are paying for those carrying costs and basically all of your carrying costs can be wiped out.
One of the other advantages to flipping multi-families is you don’t necessarily have to go all the way to the high-end with the renovation on at least two of the tenanted units. With single families you’ve got to make sure everything’s touched and looking high end. With condos you have to make sure everything looks right, you’ve got to pimp them out. Whereas with multi-families, depending on your location, you don’t always have to go to the nines on the units. Just clean and safe, making sure that the owner unit is the one you spend most of your time and budget on to make it look really nice.
One strategy we follow is to make sure we flip under four units, four or less, because it opens up the pool to more people with owner occupied financing options. Although you can absolutely pyramid 6 units, 12 units, bigger buildings, you’ll find the investors who are buying four units and less are willing to pay more. Typically because they’re going to owner occupy and they’re getting a much lower percentage down. Also they tend to be less sophisticated investors who are looking for a place to live, just as much as they are looking for an investment.
One of the dangers to investing in multi-family flips is sometimes indecisive action can happen. I have had situations where I would suddenly decide, “I’m just going to hold it forever” and end up refinancing the building. That means you now have to go out and find another project to flip to get the big chunk of cash, but it does give you cashflow after it is stabilized. This is fine unless you can’t find another deal and decide you want to sell the building again. Now you’ve now got the problem of not having a clean showing unit and the potential of having to evict a tenant for the sale. It’s not the worse thing, but if you buy a building to flip, stick to the plan unless you’ve got other forms of cash keeping your business running.
Sometimes tenants can cause issues and slow down the flip. We have had tenants slow down the sale by scaring new investors away or refusing to show their units. It’s not the end of the world and if you build a good relationship with your tenants this can avoid many of these issues. There can be logistical problems when dealing with a multi-family because you’re dealing with more people. In the long term these are a small price to pay for the benefits they provide. Especially when you look at the market and are concerned that it might take a turn. Multi-family is a great way to hedge against a down-turn because you know that you can always fill your units up and instead of breaking even you can cashflow more than a months rent on a small multi-family.
If the market turns you just put in tenants and the building cash flows instead of losing money, whereas a condo or a single-family it’s a little riskier. So flipping multi-family is safer at the height of the market, and in my opinion is one of the safest strategies you could do when getting into real estate. Worst case scenario, you had a flip that was going to make you $50k, but now you’re holding a rental property that’s making you 1,000 dollars a month. Cashflow is force that can hide all sins. In many ways it’s the safest form of flipping, but it really depends on your location. Do you have the multi-families to flip in your area? Are you willing to partner with a property manager to scale your business?
General Rental Property
Investing in rental property is one of the most rewarding stages of real estate investing. It’s one step from the top, and you are almost retired. It can be a relatively passive form of income and if you do it right and hold onto it long enough while the mortgages are paid down, you are going to get very, very wealthy. With the right strategies it can be done in a short period of time, relatively speaking, 3 to 5 years, 10 years. In the long scheme of things, if you are younger than 55 years old, committing 3-5 years to become a millionaire or reach financial freedom is a great return on time invested. The sooner you start building your rental portfolio the wealthier you can eventually be and the faster you can retire or at least have that option.
There are different forms of rental property and no one is better than the other, you have single-family homes, condos, trailer parks, trailers themselves, Airbnb, multi-family, small multi-family, large multi-family, commercial, office, warehouse, storage. It simply depends on your location and what is available in your market. There are a lot of different vehicles, strategies and tactics for investing in rental property. Let’s take a look at them, starting with short term Airbnb rentals.
AirBNB Rental Strategies
We can’t talk about rentals in this market without discussing the Airbnb strategy which many investors are quickly adopting or at least experimenting with. There are a lot of investors right now who are converting their longer term rentals and putting in Airbnb tenants. It is almost like running a hotel or operating a bread and breakfast, with the Airbnb platform helping you with managing the rentals for you.
There are other platforms coming out and if short-term rentals are something you are serious about then you should do more homework on the other options. For this book we will just refer to short-term rentals as Airbnb units. There are also investors who do not own a building but are leasing the unit from the landlord. They you can sublet the Airbnb under their lease with permission from the actual owner of the property.
Instead of owning the property, they’re just leasing the property, and using the unit to build an Airbnb business with it. This can be a very low-risk strategy, where you’re not actually owning the property and can create great cashflow for you. You’re overhead ends up being the cost to furnish the unit and the monthly lease with the owner. As long as you can get 2-3 times more through your Airbnb tenants than the cost of the lease, you’re doing okay.
There are a few negatives around this strategy and one of those is all the regulations around it. Right now Airbnb is still relatively new, we’re seeing cities like Las Vegas, Boston, Miami, locked down and tighten up by adding restrictions, licenses and requirements for Airbnb hosts. We have even seen some cities ban the company entirely, not allowing Airbnb in certain areas.
There’s also, the other side of Airbnb is that you’re constantly maintaining the property, instead of just having a lease that goes through once a month you’re getting a new tenant sometimes as often as every single day. This can create some higher cleaning and maintenance costs which can make it a high maintenance strategy for investing. The other deterrent when you’re doing Airbnb is you have to supply all of the furniture. Basically you’re taking a vacant unit and then putting furniture in and making it feel like a place someone would live.
If you already have a space in your house like a bedroom or in-law apartment that isn’t being used, then Airbnb could be a creative way to house-hack and help pay for some of your housing expenses. In that case the cost of furniture isn’t as extraneous, but as you start to scale this business and there are no people who are doing it, you’re buying a lot of furniture and you can get discounts for buying in bulk. It’s absolutely scalable, and unless you are very good at finding good and cheap furniture it can cost you anywhere upwards $5k to $15k up front on an Airbnb just to get the furniture in.
When you decide to scale down, the landlord terminates your lease or if the regulations of your area cut you out, now you have all this furniture to store or sell fast. It can be a complex system, but it can also provide you a way to get into the business without putting a lot of risk on the table. Because if any moment your lease expires you can just pack up the Airbnb and move on to somewhere else.
If you own a sizable portfolio in a desirable location you may want to experiment with a unit or two because on a monthly basis you get 2-3 times more income monthly for a well run Airbnb. This is one of the advantages these short-term rentals share over a standard monthly tenant, because they’re paying a higher rate per night. If you’re in a nice area with close proximity to an, airport or a place with a lot of travel going on, the Airbnb strategies potentially be a way to increase your monthly cashflow or build a flexible business around.
Depending on what you have, Airbnb is a great option and it’s a great investment for some investors. I know some people who have scaled it and that’s all they do, they don’t own any property, they just handle a lot of lease options and they do a lot of Airbnb and it’s been a great cash flow business for them. My long-term concern for these investors is that they are not building wealth and I would encourage them to take those profits and start putting their money into holding paper or rental property.
Condo Rental Strategies
Renting out a condo is almost like renting out a single-family, except now instead of the tenant doing all the exterior maintenance, now you have the condo association doing all the exterior maintenance for you. So you have a little bit of an extra help involved, with the condo association. On the other side there are other homeowners making decisions, but you have some help if the roof needs to be replaced!
You don’t have to worry about the exterior of the building, whether it’s shoveled or making sure the grass is cut. You have some elements that are removed from you, and as mentioned earlier the lower price means the barrier to entry on purchasing is a little bit lower as well. So you can buy a condo for typically less than a single-family in that same market would cost.
The negatives to condo can be dealing with other condo owners, dealing with an association and it’s rules. They can be a little bit harder to sell in a down economy, condos are one of the first property types to see a drop in price. The rental rates for a condo can be a little bit higher than on standard apartment rentals and typically are lower than the rental rates for a single-families.
Another benefit that can come with condo rentals is that in many cases the insurance for the unit is much lower than a single family rental and some association policies include a liability insurance that covers many of the major costs associated with insurance. Over all condos are a great way to invest and, many investors do a great job with this strategy.
As I mentioned earlier at one point we owned 24 condos and increased our net-worth by $1.6MM the day we closed. They created a huge cashflow and appreciation opportunity for us. Many accidental landlords started in this busines with their first property instead of buying single-family they bought a condo, and eventually ended up renting that out. That’s how some investors end up with a condo or a single-family rentals in their portfolio early on.
Some investors stay in this niche and run really, really profitable companies just doing condos. In fact, owning a large majority of the condos in an association can give you a lot more options and advantages. You may find that you have more opportunities, because when other condos come up for sale the association may offer it to you if they like the way you run your units. Also being on the board of trustees will give you access to know which units are behind on their association dues and in danger of foreclosure. You may be able to pick these units up at a discount.
So getting into the condo market and really staying in it can be a good long-term solution for building your investment portfolio without having to worry so much about the maintenance side of things. Whereas with multi-families you’re pretty much in charge of doing the maintenance. In both strategies I strongly recommend hiring a quality property management company to handle the day to day operations of your portfolio. This will allow you to continue seeking out deals and partnerships.
Single Family Strategies
Single family rentals also known in the industry as SFRs. These are the bread and butter for a lot of investors. I have some friends who operate in the midwestern states that just live off single-family homes. In fact I’ve even met people here in southern Massachusetts and Rhode Island who built their wealth by owning a bunch of single-family homes and they’ve done very well. The benefits to renting out single-families is that you have almost no maintenance, typically you can get better quality tenants who will maintain the buildings for you.
Whereas when you get into multi-family you’ll find the tenants tend to be less equipped for maintaining the building. Single-families you can pretty much rely on the tenant to cut the grass, to maintain the inside of the building, pay the water, pay the electric, pay the gas, the heating. In general there tends to be lower expenses on single-family homes. Now some of the downsides to them is that their cost per unit is much higher and you have more roofs, spread out which can make maintenance more time consuming if your buildings are older and need constant repair.
Your rents will tend to be a little bit higher on single families in nicer areas than apartments in those same areas. You end up with a higher rental per unit when you’re looking at single-families. If you can get them at the right price they’re a great form of investment and tend to appreciate faster than multi-family buildings. Due to the higher cost per unit the barrier to entry is a little bit higher than it tends to be on a multi-family or on a condo.
Single-family homes, for some investors, can be a very great strategy and most people do tend to at some point have at least one in their portfolio, whether it’s the first house you lived in then you rented it out or it happens to be snuck in on the purchase of a portfolio.
There are the benefits, and there are many differences. You’re going to get a higher rent but you also have a higher purchase cost. The maintenance on them can be a lot lower but at the same time you do have only one roof per tenant and vacancy can hurt in a major way. If one tenant is missing now the entire building is vacant. Now lets move onto my favorite property type!
Multi-Family Rentals
Investing in real estate is one of the most lucrative ways to earn a passive income. In particular, multifamily housing offers the most benefits as you look to diversify your investment portfolio. If you’re looking at investing in the long-term, you have to look beyond stocks and bonds. Stocks lose as much as 30% in the average recession, which makes it hard to keep your head above water.
Multi-family housing, on the other hand, provides an opportunity for growth and wealth. Depending on your market multi-family housing investors earn an annual total return of 10-12% cash-on-cash. This makes it one of the top real estate investment options available today.
When you’re looking for passive income, you may not think about real estate investments since they do require upkeep and management. However, overall, they require less work than a business or job you’d have to attend every day.
Multifamily units make managing multiple units much easier as they require less time and money. You don’t have to travel far or deal with multiple contractors to repair or renovate the units because everything is in one location, making it easy to cut costs and increase your cash flow.
If you’re looking for financial freedom, consider multifamily investments. Real estate doesn’t fluctuate as much as stocks and overall it has a higher cash flow, giving you greater annual returns year over year. Of course, any investment, including real estate has its risks, but with the right research and analysis, you can find the real estate that helps you realize the financial gains you hope to achieve.
My Deep Look At Multi-Family Versus Single Family
So, you’re considering real estate investing and don’t know whether multi-family residence (MFR) is more attractive than single family residence (SFR). It’s a good thing you are reading this book! I’ll break down the advantages and disadvantages of MFR’s and SFR’s.
Before we dive into that, let’s take a look at five reasons why real estate investing is one of the smartest ways you can build wealth and achieve financial freedom, if not THE smartest; after all, while statistics vary, most say that 90% of the world’s millionaires achieved that status primarily through real estate:
1) Cash flow – simply put, debt service aside, rental revenue minus expenses puts money in your pocket every month. It’s an asset that pays you monthly.
2) Appreciation – as you hold the asset, it is very likely to go up in value over time. If you decide to sell, you pocket the capital gain.
3) Tax breaks – the expenses you pay out of pocket, as well as the “paper” loss of depreciation, will help to reduce your taxable income (though there are limits on each tax return as to how much you can claim, unless you can claim “real estate professional” status).
4) Leverage – as you build equity in a property, pay down any debt service, and enjoy potential appreciation, the more opportunity you have to borrow against the property’s equity to then buy more property, all without ever selling the original property or liquidating it into cash (you essentially are pulling cash out of the property without giving it up as an asset).
5) Inflation Hedge – while official statistics often put annual inflation around 1-3%, essential goods are much more sensitive to inflationary pressure. So, things like food, gas, and lodging – items that cannot be eliminated from a person’s budget – can be highly susceptible to inflation, outpacing the average amount.
Now that we’ve established why real estate is a great way to build wealth and establish financial freedom, let’s take a look at the pros and cons of MFR real estate investing.
PROS:
There are distinct advantages that come with investing in MFR properties. One of the most obvious is the fact that you instantly establish multiple streams of rental income, from the collection of units under one roof. From a cash flow perspective, you’d have to assemble a SFR portfolio of an equivalent number of units to match the same amount of revenue. This can be a tall order, depending on how many units are in the MFR.
Building on that point, MFR properties will allow you to scale your portfolio much faster from a time perspective. Think about it this way: let’s say your goal was to accumulate 10 units (or “doors” as some people like to call each unit) that are cash flowing monthly. From a MFR versus SFR perspective, here are the two scenarios you’d be facing:
- Locate one 10-unit MFR property, conduct one inspection, close the one contract, hire one property management firm, manage one building; or,
- Locate 10 different SFR homes, conduct 10 separate inspections, close 10 contracts all at separate times/places, hopefully hire one property management firm (but could be more if your properties are not geographically clustered), track 10 sets of maintenance issues
Another big advantage of MFR is the fact that maintenance issues and costs are consolidated under one roof. An improvement to the property benefits all units, both from a monthly cash flow perspective (you can eventually raise rents assuming the improvement is substantial enough) and from an appreciation perspective. Continuing the example from above (one MFR vs. 10 SFRs), you’re responsible for one roof versus 10, one shared yard versus 10, and so on.
Vacancies are the bane of a real estate investor’s existence. Vacancies can be so costly it sometimes makes more sense to allow even partial rent-paying tenants a break versus evicting them. When you throw in rehab costs and marketing, on top of a potential eviction, it gets very costly and can wipe out your profitability for the year. However, multi-unit portfolios absorb vacancy expenses, since the cost gets distributed across all of the units. An advantage of MFRs is you automatically have a “portfolio” once you own even one MFR property. If you have nine MFR units paying rent and one that isn’t, you effectively have 90% revenue-generating capacity still in place to handle maintenance, property management fees, property taxes, etc. and thus share the load.
Another great strategy for enhancing the value of your MFR (an option not available to you with SFRs), is to make common area improvements, and leverage those to charge higher rents and enjoy greater appreciation down the road. For example, you could install or improve an existing laundry service, provide Wi-Fi throughout the building, upgrade the common areas or business center, and then add an extra charge for those amenities to the rent.
CONS:
Probably the biggest hurdle you’ll face when buying a MFR property is securing financing. Obviously, MFR properties are more expensive than individual SFRs, so you’ll need a solid strategy for putting together the deal from a financing perspective. Consider the following:
- If the MFR is 5 units or more, you’ll have to get a commercial real estate loan, which almost certainly will command a higher down payment, usually on the order of 25-35% down. This adds up quickly on a $1M MFR property, for example.
- You may need to show a track record in successful real estate investing to give the bank confidence you know what you’re doing. If you’re just starting out, this can be a difficult one to get around.
- Many banks will also look for you to show 6-12 months of cash reserves to cover maintenance costs, unexpected repairs or expenses, etc. Add that to the down payment and you could be looking at a large cash requirement to have a shot at financing.
From a risk perspective, as convenient and cash flow favorable as it can be to have all your units under one roof, it can also present a downside given that a systemic problem (or worse) with the building jeopardizes all units simultaneously. Ironically, a 10 SFR portfolio, while harder to assemble, leaves the investor with a diffuse set of risks, where one house being compromised has no effect on the others. This may be an issue in places more prone to natural disasters (hurricanes, earthquakes, etc.).
From a market dynamic perspective, MFRs bring unique challenges. Consider the following:
- It’s often harder to exit a MFR property versus a SFR since there’s a greater pool of buyers for SFRs, which are attractive to both homebuyers looking to live in the house as well as rental real estate investors. MFRs will likely only be appealing to investors.
- SFR rentals are growing in demand since the national trend is towards renting versus buying. The “sharing economy” has resonated with younger generations who don’t see the need, nor have the ability, to put large down payments into houses they own – they’d rather rent instead.
- SFR tenant lifespan is, on average, 3 years in the property, whereas MFR tenants usually only stay about 1.5 years; given how vacancies can affect a portfolio, this higher rate of turnover can quickly impact profitability.
Lastly, a challenge with MFRs that will almost never be a problem for you with SFRs is the lack of inventory. It’s simply harder to locate deals on the MFR side, especially when investors are holding them as assets for cash flow purposes and tax reduction, versus looking to flip them over for appreciation-based capital gains.
That said, multi-family is where my heart is and I love owning great cash-flowing properties that tenants love to live in. In the last chapter of the, “Deals” section of this book we will discuss how to evaluate a multifamily property. We will also discuss how to raise all the money required for the right deal in the, “Money” section of this book.
Alchemist Insights
Whether you pursue MFR, SFR, condos, or airbnb, the key is to assess your risk appetite, your personal financial goals, and your time horizon for expecting the desired results from your investments. Once you’ve done that, you can confidently narrow down the type of deals you’re seeking. I think that once you’ve taken a close look at it and compared it to other types of investments, you’ll agree that real estate is the preferred way to build wealth, achieve financial freedom and fast-track your retirement.
Holding Paper For Passive Income
Being someone who is eager to seller finances and holds the note on a property I have owned and managed I can tell you some of the benefits of why it makes sense. Let’s get the obvious out of the way, it is a great source of passive income, you can get 10%, 12%, 14% interest in some cases.
By holding some or all of the paper on a deal you can sometimes get an above market sales price for your property if you are willing to finance as low as 3-6% interest, making your money on the sale side, instead of on the interest side.
There’s also the option for you to become a hard money, lending hard money between 10-14% interest with 2-4 points. Private money can be similar and interest rates can range from 8-12% interest. There’s a lot of money that can be made on lending money, and it is the ultimate passive form of income that the banks love to position themselves with.
Hard money lenders tend to service lending on flips. Your money comes back to you at the end of the project, then you re-deploy on another project, and you are back to every single month collecting interest. You’re getting points upfront and then collecting interest to the mortgage.
On the seller finance side, these notes could last 1-2 years, and some investors prefer terms as long as five or more years. The terms will be up to you and will also depend on the deal as well as the investors goals. Just by being the bank, and offering someone with a good reputation the option to put your money to work at 6-8% interest for a long period of time, can sometimes actually make a lot of sense for some people.
Depending on the level of risk you are willing to take on you can actually rent your money for 20% and 30% interest rates! In fact I know someone who is doing just that. She recently told me that her business model is based on lending out smaller amounts of $15k-$20k for the renovations on a project, but she gets a hundred percent return on investment by the time the project sells.
She lends out fifteen thousand dollars, if she doesn’t have her money back in two to three months she has a second mortgage on the property and can foreclose. She’s doing it in smaller properties but she’s getting her all of her money back and doubled. So sometimes, depending on the options you set up and how desperate the person is, you can actually get a much higher rate of interest by lending your money out to another real estate investor.
I’ve included a chapter in the last section of this book called, “BE THE BANK” where I go into a much deeper explanation of how to get access to money you might not know about as well as many more strategies for lending and the tactics for protecting yourself while getting a good return on your money.
Alchemist Insights
If you want to be a successful real estate investor, you need to educate yourself and create an outstanding strategy prior to making a move. Without the right strategy, chances are that you might face a huge loss that could have been prevented with a little strategizing.
