The Three Easiest Ways to Start The Investment Journey as a New Investor
By Christopher Levarek
“You don’t have to be good to start … you just have to start to be good!”
- Joe Sabah
Investing in real estate is a journey. A marathon in which it is not the immediate outcomes that are the target but the long term benefits and advantages in financial freedom, wealth and passive income. With each investment, an investor learns, grows and improves whether investing passively, in other people’s deals, or actively, finding and managing their own investments.
Today we look at three most common and easiest ways for a new investor to actively control and get started. Each of the methods listed allow an easier barrier to entry in the investment world for people of all backgrounds. Whether you are a single mother of two, a recent high school graduate or a senior citizen over 60, any of these three methods will open the door to investing but more importantly, alter the mindset of I can’t invest into how can I invest.
The House Hack
Commonly called “house hacking”, this investment strategy is one of the fastest and best ways to get started in owning a piece of property. In a house hack, an individual finds a property whether a Single Family Home or Small Multifamily of 1-4 unit size, ie. Duplex, Triplex, Quad. The goal is to find a property which the owner can live in one of the units or bedrooms and rent out the rest of the bedrooms/units.
Why is this method so powerful?
This strategy allows an investor to benefit from the loans specific to a primary residence or where the borrower lives in the property. These loans typically have the lowest mortgage rates and lowest money down to acquire the property.
This strategy allows an investor to have other people possibly cover the entire mortgage meaning the investor/owner lives for free! Living for free means the investor can save up for another investment property and/or pay down other debts with the saved additional money.
Example:
Bob finds and purchases a Duplex at $200k. He puts down 3% or $6,000 with an 30 year FHA Loan at an interest rate of 4%.
Bob finds his total payment for mortgage including, PMI, taxes and insurance is $1100.
Bob rents out the other unit for $800.
Bob now only needs to pay $300 to cover the rest of hist mortgage. This allows him to save the additional saved income he would otherwise spend on rent for another purpose or investment at a later date.
As you can see, this strategy offers great potential to get started with very little money and build long term wealth to allow for future investments or opportunities.
The Live In Flip
The “Live-In-Flip” is a very common strategy which is usually being done without out many the single family home owner even knowing it. This method involves acquiring a property as a primary residence, again SFH or small multifamily, which needs renovations or has value-add potential. The investor/owner of the property then lives in the property and slowly renovates or improves the property over a two year period.
This allows the owner/investor to spend renovation money slowly over a two year period and not have to come up with all the capital right away. Once the property is upgraded and renovated, the owner/investor then sells the property after the two year period for a profit and moves to another property with value-add potential to repeat the process. By selling the property after the two year mark and the property being a primary residence, the profits or gains on the sale are not taxed as they would normally be in a property investment sale.
Why is this method so powerful?
This strategy allows an investor to benefit from the loans specific to a primary residence or where the borrower lives in the property. These loans typically have the lowest mortgage rates and lowest money down to acquire the property.
This strategy allows an investor to avoid paying property gains tax meaning more capital to be invested in the next purchase or property in the investment journey.
This strategy allows for renovations to be completed by the owner representing savings or capital for renovations to be spent over a two year period, allowing for owner to fund personally easier.
Example
Mary buys a house with her husband David which needs new carpets or flooring, a new coat of paint and some interior repairs. The purchase price was $250,000 and the property was purchased with a FHA loan with 3% down.
Over the next two years, Mary and David add value to the home by finding renovation DIY(Do It Yourself) repairs/upgrades that they are able to do through watching Youtube and searching Google. Anything they can’t do, they outsource to a contractor with savings they accumulate over the two year period.
After two years, the property has risen in value due to appreciation/renovations and is appraised at $320,000.
Their previous loan had a balance of 233,000 and they spent $25,000 in renovations over the two years through savings and a personal loan taken to finish the bigger renovation costs with a contractor. Their Financials look like this upon the sale:
Sale of Home : $320,000
Previous Loan Balance on sale : - $233,000
Renovations & Personal Loan Costs : - $25,000
Closing Costs for Sale : - $19,200
Total Gains/Profit (Non-Taxable) : $42,800
Mary and David sell the house and move to another single family home needing renovations with the same strategy in mind. However, this time they now have $42,800 to spend on renovations, as a down payment for a larger property or even invest in another opportunity.
As you can see, this strategy also offers great potential to get started with very little money and build long term wealth to allow for future investments or opportunities.
The BRRRR
This method coined, “BRRRR” is one of our favorite investing strategies and is a great way for someone to scale or increase the number of rental properties acquired over a period of time. BRRRR represents the five following action steps :
Buy : An investor/owner acquires or purchases a value-add property or a property needing work/renovations with all cash. The investor/owner partners with a private lender or hard money lender or another partner to be able to have all the cash for the purchase. The property is acquired at a great price below market value due to the needed work.
Renovate : After acquisition, the investor renovates or works with contractors/partners to upgrade and renovate the property.
Rent : After renovations are complete, the investor works with a property manager or self manages to rent out the units if not rented at new market rents.
Refinance : After renting the units, the investor refinances the new property at the newly appraised value due to the renovations. The bank finances a loan and sends a check to the investor at 70-75% of the appraised value. The investor uses the refinance check to recoup any initial cash spent and renovation costs.
Repeat : With a investment property being rented out and 100% or near 100% of capital recouped, the investor searches for a new property to repeat the process.
Why is this method so powerful?
This strategy allows an investor to purchase property and upon the refinance, recover all investment capital if done correctly allowing the cycle to be repeated endlessly with the same capital. The return on investment is infinite.
This strategy allows for scaling the number of rental properties much faster then purchasing a property, ie. by savings alone every X amount of years .
This strategy does require some partnership, if roles or capital are lacking for the investor, and the property analysis/numbers must be correct for success. However, it is one of the strongest, repeatable processes for reaching investment goals or scaling rental property acquisitions.
In Final
Investing in real estate is not out of reach for anyone. First, change the mindset and then find the way. If the desire is strong enough, the way or method to use becomes visible. We encourage everyone to continue to educate and find the most appropriate method for your life. Whether using a method listed here or even simply passively investing to gain further insight through another person’s deal, action is key to goal attainment. Invest Smart!