Your long-term success is determined by how well you know and continue to know the strategic landscape in Real Estate.
Know little, and you won’t know how to expand or pivot over time as you increase your experience, team, capital, and risk appetite.
Know more, and you will likely see exponential growth.
Exponential growth is very uncommon and mostly only temporary. Most investors grow logarithmically or linearly(see pic below) instead because of two reasons.
1) They pick a random strategy that is not a great fit, which creates the drag.
2) They don’t keep in sync with the ever-changing world to spot new alpha with the global macro trends.
Today I’ll just touch on #1 and present all the options to consider to set a great launch pad.
Knowing what options you have available today will help you find a better problem-solution fit and prevent you from wasting time, effort, and money.
Everyone has different strengths and constraints at different times, so picking one from the option pool should be a deliberate choice.
My goal is for you to know what you do not know, so I will just be presenting meta options with a little brief and then you can double-click on your own if it sounds interesting.
Let’s begin!
Real Estate Investing Trusts
The most straightforward and hands-off approach to investing in real estate is through a mutual fund proxy, which holds a stake in numerous real estate properties. The amount of capital required is based on investor appetite, and the passivity = High.
Syndications, PE Funds & Crowdfunding
Investing in a transaction or a fund that purchases various assets is a popular technique for high-net-worth individuals who wish to stay passive. The right operator could produce a sizable return and constant cash flow income. Capital required to invest could be prohibitive, with most funds or syndicates requiring > $25k checks.
Discounted Note Investing
Create or buy delinquent real estate debt(loans) at a discount. Eg - Buy an existing debt at 50k, which is really valued at 60k. Instant value!
Could be lucrative with more experience.
Passivity: High Capital Needed: Depends on investor appetite
Hard Money Lending
If you pursue this strategy, you will be lending others money for a short period. Although there are greater risks and due diligence is required, it would be rewarding. Again, since it’s a debt instrument, you are mostly passive, and the required capital depends on your risk appetite.
Buy-Sell-Buy Bigger
It is a scaling method that is widely used. By using the 1031 Exchange rule, you can sell a home without paying any capital gains taxes, giving you extra money to spend on a larger property. This is a very popular strategy to scale your portfolio if you are solving for capital to buy more.
Rental Snowball
Here, one mortgage is being paid off at a time using the existing rental cash flow. Since you are paying down the mortgage, your overall ROI will decrease, but your cash flow basis will increase. This is suitable for folks who do not like too much debt and don’t care about the ROI as much as the cash flow.
Buy All Cash
Buy properties with cash every time.
Good for investors who are not fans of using leverage but might have the cash to invest.
Best for: Discounted prices with all-cash offers! Also, an advantage in a seller’s market. Con: Need huge capital upfront!
Long-Term Buy and Hold
Most used strategy!
Buy a property and rent it long-term for the cash flow income. This applies to all asset types, from single families to multi-families.
Learning Curve: Med to High
Effort Upfront: High
Passivity: Low to high(Depends on the property management company)
Capital Needed: At least 20 - 30k
Short-Term Buy & Hold Rentals(Not Airbnb)
This entails purchasing and retaining rents for comparatively short periods like less than a year. Think corporate housing or housing for traveling nurses. You can refurbish a rundown place, increase the rent, cut costs, and subsequently sell for a significant profit.
Live-In-Flip
You pay a cheap price to purchase a damaged house, move in, make necessary repairs, and then wait two years or longer to sell it for a profit. If you abide by IRS rules, you pay NO tax on earnings up to $250k for individuals and $500k for couples filing jointly.
House Hacking
A common low-money-down strategy. House Hacking means living in a home that also produces income, like in a duplex, triplex, etc. Or a house with extra rentable space like a basement, guest house, or spare bedrooms.
By renting out part of your residence, you can reduce your total housing costs. You can also get an FHA loan which is a very low percentage(3.5%) down product so the strategy is used by many with low capital on hand.
Live-In-Then-Rent
Simply put, it means residing in a home that you plan to rent out once you vacate. Therefore, the home must serve as both your current residence and future investment. In contrast to house hacking, you do not rent out a portion of the home while you reside there.
BRRRR Investing
Buy-rehab-rent-refinance-repeat is what it stands for. A very popular and distinctive approach utilized by full-time investors that requires little initial capital. The method involves flipping distressed property, renting it out, and then cash-out refinancing it to fund further rental property investment.
Wholesaling
A more active strategy if you want to use your time to make money. It is the business of locating affordable investment homes and then selling them soon after for a profit. To get an edge, you need to be skilled at marketing and selling.
Fix-and-Flip
You buy a run-down, outdated, etc. house, spend money modernizing it, and then list to sell for enough more than expenses.
eg- Buy a house for $300k. Spend $100k to repair/replace worn-out roof/HVAC, replace kitchen and baths, paint, refinish/replace the flooring, etc. And sell for $500k, making a $100k profit in ~ 6 months.
Disclaimer: All the above math is simplified.
Vacation rentals like Airbnb
A more hands-on but higher return strategy where you buy or rent properties and then rent them out as vacation rentals.
A very popular strategy lately with the Covid tailwinds inspiring people to travel more.
Those are just the mainstream ways to invest in Real Estate.
Other more sophisticated asset types and business models exist, including mobile home parks, strip malls, self-storage, retail, offices, rental arbitrages, renting by room, and more, but they are story for another time.
You can also get creative and combine one or more of these strategies.
Or if are a serious alpha chaser, you can think a level or two higher and fuse multiple trends like creating a web3 token layer to raise money instead of the traditional fund model.
Investors can put in small checks so a lower barrier to entry and can also exit without the usual long hold periods, as tokens will have secondary market liquidity.
All to say that the growth is only limited by the ceiling you put on your imagination.
That’s a wrap.
Thank you once again. I really do appreciate people reading.😊
