This is a guest post from Adam, who is the founder of Offer Climb, with locations in Houston and Phoenix. With his co-founder Corey, they are driven towards finding the best deals and providing easy payout solutions for homeowners looking to sell their property fast. Adam takes pride in providing flexible offers to fit a home seller’s needs and providing fair cash offers to help sellers meet their financial goals. While I have a global view on real estate, I realize others may not share the same view. Adam offers a convenient infographic (see here) that summarizes the multiple investment types he covers in this post. You can download that as a quick reference after you read his interesting post. Take it away Adam…
Real estate investment can be a lucrative business for the savvy and self-motivated, but sometimes it can be confusing on figuring out where to start. There are four main strategies that most investors utilize to make money based on their resources, timeline for profit, and amount of work they want to invest. Read on to see which investment type is right for you.
The Lipstick Flip
The Lipstick Flip requires finding a home in need of minor cosmetic repairs, fixing them, and then selling the property quickly for a profit. The house should require $5,000 or less in repairs, and be flipped in 45 days or less. The Lipstick Flip is ideal for those looking to make a fast, small profit without the additional work of renters.
Flipping does require some resources in order to be successful. First, it is vital to have funding in a flip. The funding should include the purchase and improvement costs, as well as 6 months of holding costs.
Next, knowing what contractors you have for repairs will help with making sure that you will be able to get them done quickly and within your budget. Having MLS access and motivated seller leads are necessary in order to find a suitable property and sell quickly. Also, having a title company that you can use is important.
The Lipstick Flip is a short, but intense period of fixing up your home quickly, so being able to manage your home daily is critical in making a profit.
Having the right skills and knowledge are crucial in order to succeed in your investment. The flip formula below will also assist you in making sure that you will be making a profit off your property. Also knowing the local real estate laws and regulations will help keep your investment secure and not cost you any fines or other legal ramifications for your accidental misconduct. Having accounting skills is critical in order to assure a profit, as well as possessing minor construction and project management skills.
In order to accomplish a Lipstick Flip, you will need to have financing lined up, a good understanding of what you are doing (so do your research!) and professional network and connections (such as realtors, contractors, etc.).
The sort of property you are going to be looking for is going to be different from the average house hunter because you are looking for an unappealing, but solid home. Overgrown grass, newspaper and mail pileup are a huge plus because they are simple, cheap fixes that will immediately increase the resale value. Stained and worn flooring will also be something to look for in a potential home, as well as holes in the sheetrock, dirty siding and broken fencing.
There are a couple formulas that you should keep in mind when you are calculating your profit. When looking for what your total gross profit will be, take the average, comparative sales price you can get from the house, and subtract the acquisition cost, repairs, sales costs and carrying costs. When looking to make an offer, take 70% of the after repair value (ARV) and subtract whatever you (or your contractor) estimate what the repairs for the house will be.
Buy and Hold
The next option in real estate investment is buying a property and renting it out to make a profit. This has the benefit of being regular, passive income instead of a one-time profit and has potential tax benefits. It can take 30-45 days to secure the home, but after repairs, it is possible to start making money right away.
The process for the Buy and Hold option is simple: find a viable property, make any needed repairs to get it rent ready, market and secure a tenant, and start collecting rent.
Some resources need to be in place before acquiring a property. First, financing is crucial in order to successfully secure a property for renting. Not only will you need funds for the property, but also for repairs (including regular property maintenance) and a marketing budget in order to attract renters to your property.
Having motivated seller leads, MLS access, and a title company is, again, critical for finding the right property. Also having an LLC or business identity is an important legal step in renting out the property. It will be important that once you secure tenants, you have either a property manager or time to manage the property on your own. Awareness of the Buy and Hold formula below will also be necessary to make sure that you have a profit each month.
Your target property can be a wide range of types. From duplexes, condos, apartments, homes, and more, the only limitation is your budget. Typically, you will want a home in good condition so that it will not drain all of your profit in repairs.
When trying to find how much you need to charge in order to maintain a profit, you will want to consider the monthly rent minus monthly common cost for 12 months and then subtract annual taxes. All of that needs to be divided by your desired rate of return minus any brokerage (ERC) and/or wholesaler profits.
Although a more long-term investment, Buy and Hold investments are a great way to make passive income and a profit off your property.
Wholesale is an investment strategy wherein you flip contracts for cash. In wholesale, you buy low and sell low and fast by assigning real estate contract rights. It is ideal for those who want to get in and out and paid right away with minimal risk. The total turn-around time on a property is 20 days or less.
The process for flipping a wholesale property entails finding an underpriced property, and finding a buyer for your contract. You assign your contract to the new buyer and are paid. It is as simple as that!
The resources needed for this investment strategy is not as intense as the others are. You will need to have a buyers list already on hand, and motivated seller leads in order to find low-priced properties. MLS access as well as an LLC or business identity is also critical. Unlike the other investment strategies, it requires only a couple hundred dollars up front, and email, phone and transportation. It will also require some knowledge of the Flip and Buy and Hold formulas below.
The key in finding a home for wholesale is searching out an extremely motivated seller. You are looking for low priced properties, so one in distress is ideal. This will allow you to sell low, while still making a profit.
There are two separate formulas for making a profit based on which kind of seller you will be assigning the contract. For a flipper, you will be taking 70% of the ARV minus ERC. When offering for a Buy and Hold investor, you will take their monthly rent minus common costs over 12 months and subtract annual taxes, all of which will be divided by the desired rate of return. You will then take that number and subtract the ERC in order to get your profit number.
The fastest and easiest method of investment, flipping contracts can be great for those with a little expertise and the right tools.
BRRR&R stands for Buy, Renovate, Rent, Refinance and Return. Combining the Lipstick, and Buy and Hold methods, BRRR&R requires purchasing and rehabbing a property, then leasing your property, recouping your capital by refinancing and then doing it again. This has the upside of both short- and long-term gains and being replicable over again. The average length of a BRRR&R is about 60 months in order to refinance.
Several resources need to be in place in order to be successful in BRRR&R. First, having motivated sellers, MLS access and a title company are necessary to secure the property that are just right for your needs. Financing and an LLC or business entity are also crucial to have in place initially in order to make sure that you have what it takes to purchase and rent out a property.
Also having the right connections and professional relationships are critical in making a profit. Contractors are necessary to make sure that all needed repairs made to the home are on time and within your budget. Having tenants is an essential part of this investment strategy, so you will need have a marketing budget in order to attract renters. You will either need to have time to manage your property, or hire a property manager while you have renters.
It is also important that you have the time and correct skills. You will need to have time to oversee and manage the property daily, particularly while making the initial repairs. In addition, having some accounting skills will go a long way in making sure that your investment is profitable. Having knowledge of both the Flip, and the Buy and Hold formulas above are crucial in your investment. Also knowing your local real estate laws and regulations are essential, as well as minor construction and project management skills.
The properties you will want to target should be in gentrifying areas where property values are rising fast. They will need minor cosmetic repairs in order to make it more inexpensive and profitable in the long term.
An important aspect to the BRRR&R method of investment is finding the right property at the right price. You will need to find the right price in order to cash out and recapitalize when you are done with the property. You will also need it in order to stay profitable while you are renting out the property.
There are many strategies making money in real estate investment. The key is finding the right property, the right people, and the right method for you. Once you have acquired the skills and knowledge for your investment method your potential is endless!
Raman Venkatesh is the founder of Ten Factorial Rocks. Raman is a ‘Gen X’ corporate executive in his mid 40’s. In addition to having a Ph.D. in engineering, he has worked in almost all continents of the world. Ten Factorial Rocks (TFR) was created to chronicle his journey towards retirement while sharing his views on the absurdities and pitfalls along the way. The name was taken from the mathematical function 10! (ten factorial) which is equal to 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 3,628,800.