John Stuart Mill once said, “landlords grow rich in their sleep.” And then Andrew Carnegie said, “90% of all millionaires become so through owning real estate.” You had me at sleep. And then again at millionaire. Just take my money.
Obviously, real estate investing is an attractive proposition. Make that a drop-dead gorgeous proposition. Just consider the following:
- Home values in the U.S. have increased by over 50% since 2016.
- The U.S. property management industry exceeded $88 billion in 2020.
- The biggest year-over-year national home price index increase took place last year at 7%.
- Nearly 6 million homes were sold in the U.S. in May 2021, a 45% increase from May 2020.
Attractive or not, it can also be challenging to get into the real estate market. Coming up with a hefty down payment is a common barrier to entry. Skyrocketing material prices (to the tune of a 320% increase for lumber and a 198% increase for steel) have led to heightened housing prices. Even qualifying for a mortgage from a traditional lender can be out of reach for some novice real estate investors.
Real Estate Investing Strategies
Thankfully, there are many creative and unconventional ways to get into the real estate market. Here we share 11 real estate investing strategies to get you into the market during these unprecedented and competitive times.
Fractional shares of real estate
Leading the charge of creative and unconventional ways to get into the real estate market are fractional shares. Fractional real estate allows investors to get involved in real estate investing without:
- A sizeable down payment (or any down payment at all).
- Mortgage pre-approvals.
- The hassles that can come along with homeownership.
- The even bigger hassles that can come along with being a landlord.
- The need for overseeing renovations or major remodeling work.
- The stress of cash flow concerns.
Fractional ownership is the true democratization of real estate investing. Through a user-friendly app, investors can purchase shares of a property—with the ability to set the price of your spend, as there are no minimum investment requirements. Fractional real estate investing allows participants to own property they never envisioned, from a multi-family home in Memphis, Tennessee, projecting a 16.39% return to a single-family home in Chandler, Arizona, projecting a 27.13% return.
BRRRR isn’t just the sound one makes when one is cold. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. Simply put, the BRRRR method is a real estate investment strategy that involves buying, renting, and selling real estate. The BRRRR method in real estate can be an excellent buy-and-hold investment strategy for people looking for a systematic approach to growing and expanding their rental property portfolio.
The basic idea behind the BRRRR strategy is to buy a property with cash or credit, make improvements through renovations or remodeling, and then refinance the property as it appreciates. After refinancing your property using the BRRRR strategy, your cash flow may be reduced, but you’ll have more liquidity to buy more properties. With this method, investors can refinance their real estate investments and get most, if not all, of their money for future investments. Cash refinancing allows you to pay off your current loan and use the residual income as a down payment to buy a second real estate investment. Once your property is refurbished and rented out, you can proceed with a cash refinance, which essentially converts the home’s equity into cash.
Crowdfunding campaigns have been used for everything from fundraising for Candwich, the sandwich in a can, to raising $6,000 for a comedian to have a skywriter draw “How Do I Land?” over Los Angeles. So, why not for real estate investing strategies?
In a broad sense, crowdfunding is a funding method in which money is raised by attracting relatively small individual investments from a large number of people. Platforms like Kickstarter, Indiegogo, and GoFundMe have brought crowdfunding to the mainstream. In the real estate realm, crowdfunding allows real estate investors to use capital from a pool of like-minded people to buy projects that would otherwise be unavailable. One of the downsides of investing with crowdfunding is that many projects require investors to be accredited, meaning you’ll need to meet specific income and net worth criteria to be eligible to participate.
Fix and flip
The fix and flip strategy could be worth considering for the handier and tool-savvy prospective real estate investor. This strategy, when done right, consists of buying a property at a lower than market price, improving the property through strategic rehabilitation, and then selling the same property for monetary gain. Typically, the home being purchased is in poor condition and therefore available for a price point lower than the typical market value. The buyer will make the necessary repairs as quickly and affordably as possible before reselling the property at a higher price. Ideally, they’ll receive a high enough price to compensate for the original purchase price, the cost of all repairs, any legal or realtor fees, plus a tidy profit.
No, house hacking doesn’t mean taking an ax to your walls in hopes of getting an insurance pay-out. Instead, house hacking is a strategy that involves renting out a portion of your primary residence to generate income. The income is used to offset your mortgage costs and other costs associated with owning a home. This could be a basement, a spare room that doesn’t get much use, or a suite overtop of a detached garage. It could even be your pool house if you happen to be someone with such a luxury (in which case, want to hang out?). Another house hacking option is to purchase a duplex or triplex, live in one section, and rent out the remaining spaces.
While house hacking can help compensate for homeownership expenses, it can be unpredictable and it can come with a loss of privacy component that isn’t a fit for some. Plus, who wants to be relegated to watching others use their pool house while sitting indoors secretly resenting them?
Wholesale real estate is a strategy in which the investor will find a property (usually from a motivated seller with a distressed property), make a deal with the seller, and then find a buyer to buy the property while making a profit in between. The return on investment with this investment strategy tends to be lower than with some of the alternate real estate investment strategies we’ve reviewed here.
A real estate syndicate, commonly referred to as a real estate investment syndicate, brings together a group of individuals—usually anywhere from two to ten people—to pool their money and buy real estate. Real estate syndication is a way for investors to pool their financial and intellectual resources to invest in much larger properties and projects than they couldn’t afford or manage on their own. Syndications differ from REITs in that the asset has already been identified in a syndicate, and investors are raising capital for that particular opportunity. By owning a piece of the syndicated property, investors receive a monthly (or quarterly) distribution of passive income from the business, as well as a return on investment at the time of sale, while receiving capital return, value appreciation and property tax benefits in the interim.
A discount note is a short-term loan, typically sold to investors in order to raise capital for various projects, including real estate ventures. Real estate investment or mortgage notes means owning real estate without property management or landowner’s right in which the homeowner pays the investor and not the bank. An investor can buy a bad note from a lender and change the loan terms so that the borrower can afford to keep making monthly payments. If the borrower makes timely monthly mortgage payments to the lender, the investor can purchase a mortgage note from the lender and receive monthly payments from the borrower.
There are two winter-themed approaches to tackling debt that are common vernacular in financial circles: the snowball method and the avalanche method. With the snowball method, the debtor focuses on paying off the smallest loan first before moving to the next highest loan debt. The avalanche method first focuses on paying off the debt with the highest interest rate before tackling additional debt.
Within the context of real estate investing strategies, the debt snowball method looks a little like this:
- Save up money for down payments on the properties you wish to procure.
- Purchase properties using low-interest loans.
- Turn properties into income properties by renting them out.
- Use all the rental income, plus additional savings or earnings, to aggressively pay one of the loans until it’s paid off early.
- Continue with remaining loans, applying the additional income to the pursuit of paying down debt as expediently as possible.
- Repeat until all loans are cleared up.
The long-term potential for strong earnings is there with this real estate investing strategy. However, substantial upfront savings are required there, plus the discipline to stay on track with paying off the loans.
Hard money lending
Finally, there is hard money lending, which may be an option for someone looking to purchase real estate who might not qualify for a mortgage through the usual means. When considering a cash loan, most lenders confirm the real estate value of the assets, assess the financial history of the borrowers, and in most cases, require 30% to 40% closing costs to secure the loan. As an alternative to a regular loan, a cash loan is another way to lend money to a borrower who wants to pledge their investment property as collateral for a loan. Traditional financial institutions don’t offer cash loans, so this loan option is only available through private lenders and individual investors. A hard money loan is also an option for investors who need to make a quick fix to increase the property’s value and then get another loan based on the new value to pay off the hard money lender.
Do you have aspirations of growing rich in your sleep? Of course, you do—we all do. The right fractional real estate investing platform can help you get there. Learn more about Ark7, a full-service real estate investment platform designed for investors looking to diversify and grow their investment portfolios. As we’ve seen, real estate investing is attractive yet fraught with barriers to entry. Fractional real estate investing strategies will get you into the real estate game with minimal investment and even less stress. So, you can kick back, catch some zzz’s, and let that truly passive real estate income grow while you sleep.