We all know that real estate is a great investment, but how does one start the process of investing and building a real estate portfolio? There are many ways to invest such as house hacking, house stacking, flipping homes, or using the BRRRR method. These are all modern terms used by real estate investors to break down and describe traditional methods to invest and make money with real estate.
One of the many advantages of investing in real estate is the power of equity. When you own a home, it naturally appreciates in value. As you pay your mortgage and allow the house to appreciate, you build equity. Equity is an asset part of your net worth, making it one of the most straightforward ways to build wealth.
The most common and popular real estate investment is your own primary residence. Over time, your house will appreciate in value and in turn increase your equity stake. Some people have coined a term called “wake up money” describing the process of earning equity with your primary residence passively. Breaking it down in simpler terms, this means that you can potentially wake up each morning earning more equity in your home due to an appreciating market.
With equity, you have multiple options to generate cash flow and receive a return on your investment (ROI). If you sell the home at the height of the market, you can generate a large profit. You can also leverage your equity by building your investment portfolio and purchasing a rental property with your returns to generate income and double your gains.
Investing in real estate can mean different things for different people. You can buy single-family properties, multi-family homes, vacant land, or commercial real estate. The right type of investment will depend on your financial abilities, financial goals, and lifestyle. Rental properties are the most common and favored assets to investors. Not only do property values naturally appreciate, rental properties generate regular monthly, passive income.
Now that we’ve built a foundation on general investing terms and knowledge, let’s get into some specific and achievable ways to break into the world of real estate investments.
House hacking is a modern-day term for old school ways of generating income on real estate; typically, we see this happen with multi-generational homes or property with no more than four units. It is a strategic way to generate an income generally used to pay your mortgage or even generate monthly income. All you need to do is buy a property with more than one dwelling unit and rent out the units you’re not living in. Doesn’t sound like a bad deal, right?
House hacking when done correctly can be a great strategy for first time home buyers or people looking to build their real estate portfolio. It does, however, take some work to get there. You still need to have good credit, income, and a down payment to get a lender to give you a loan.
The reason it is beneficial to have four units or less for “house hacking” is because loans offered for two-four units are the same as for a single-family home as long as you live in one of the units for a period of time. This allows you to most likely get away with a smaller down payment rather than the typical 20% when buying an investment property.
House Stacking is another modern term that describes investors utilizing the method of “house hacking” every year until you build a sizable real estate portfolio. After living in your first investment for at least one year, you can then purchase your second property. Continue to rinse and repeat!
Flipping houses involves buying a house, renovating it, and selling it to make a profit. Typically flipping houses is done by seasoned investors who have been in the business and know the ins and outs of the real estate market i.e. what type of investment properties to look for, good times to buy, good times to sell, lenders to use, contractors to get the jobs done etc. There is a lot that goes into buying, flipping and selling. Big risk, big reward…the profits from flipping do not come without risk as profit is never a guarantee. Also, the tax obligations are different on a flip than a primary residence or a rental. Make sure to review this with your accountant.
BRRRR Method. BRRRR stands for buy, rehab, rent, refinance, repeat. This is an investor strategy that involves buying a home, flipping it (or rehabilitating it), renting it to tenants, building equity, refinancing then buying another. Renting the property to tenants allows an investor to pay the mortgage with the rental income creating sizable equity that then can be pulled out to purchase another home by refinancing.