Real-estate investing is a path to passive income generation and financial independence.
Every year, Gallup polls people on the best ways to build wealth. And almost every year, real estate comes out on top. Its 2021 survey showed that 41% of American adults said real estate was the best way to build wealth, an increase from 35% in 2019.
It’s because compared with other asset classes, real estate can have the strongest long-term growth potential.
Expected annual total returns on apartment investments have fluctuated between 6 and 15% since 2012, according to the National Council of Real Estate Investment Fiduciaries, while over the same period, the S&P 500 had an annualized return of about 10%. In 2019, one-year returns on real estate investment trusts (REITs) were 20%, outperforming all other asset classes, according to data from National Association of REITs.
Some real-estate investors employ strategies that turn a profit in the short-term, while others like to buy property, hold it, and collect rental income over many years.
Insider outlined a handful of strategies that make it easy to get started in real-estate investing. Picking one depends on whether you’re looking for a hands-off approach or want to be deeply involved in the process, as well as how much time and capital you have to invest.
House-flipping means identifying a distressed property, purchasing it, renovating it, and selling it for profit.
Popularized by HGTV flippers like Tarek El Moussa and Tamara Day, the strategy has been made famous by a number of television shows from “Flip or Flop” to “Bargain Mansions.”
HGTV star Tamara Day has flipped 14 houses in a single year. HGTV
El Moussa paid $115,000 for the first house he ever flipped, according to CNBC, spent $15,000 to renovate it, and sold it for $169,000: a profit of $34,000.
The process typically takes about three to six months, and entrepreneurs who are serial house flippers say the key steps are identifying the right property, mapping out a careful budget, planning an appropriate renovation, and orchestrating a resale for the highest price.
2. BRRRR, or “buy, rehab, rent, refinance, repeat”
A slightly longer-term strategy, BRRRR is a more labor-intensive version of fixing and flipping, with more steps in place. The process usually plays out over a longer period, typically six months to a year.
BRRRR works like this: Find a distressed property, purchase it, rent it, get a new loan that covers the initial loan and repairs (refinance), and do it over and over, Insider previously reported. The rental income helps you pay back the loans, too.
Take it from Palak Shah, a real-estate investor and former mechanical engineer who spent 17 years in corporate America before she decided to pivot to real estate, utilizing the BRRRR strategy to amass 26 units and a portfolio that generates $1 million in annual revenue.
She built her business in just three years, and said her strategy “supercharges” her deals with leverage and hard-money lenders. You’re left with a portfolio that generates a good amount of cash, Shah said, but at the same time, doesn’t leave cash in the deal.
Contracting a property with a seller, then assigning it to an end buyer.
Essentially, a wholesaler buys homes directly from a distressed property owner before reselling them to investors, landlords, or flippers for a profit. This approach doesn’t involve the actual purchase or sale of real estate because the wholesaler finds a new buyer to take over the contract.
One example is Dan Brault, a 31-year-old investor based in Rochester, New York, who told Insider his company averages about 10 wholesale deals a month.
Dan Brault. Courtesy of Dan Brault.
With a wholesaler’s fee of about $16,000 a property, he said he pulls in a revenue north of $160,000 a month. While finding sellers can be hard, and much of his business is focused on finding distressed sellers, his profit margin is about 55% — or $8,000 in profit per deal.
For investors who prefer properties with several units over single-family homes, multifamily investing is an attractive approach.
Purchasing properties with more than one residence can often mean multiple revenue streams from one investment, with several units generating rental income.
Multifamily tends to be long-term, with investors expecting to buy and hold in order to generate cash flow.
It’s a favorite for people like Anthony Angotti, a Pennsylvania-based investor who told Insider his portfolio grew to 89 units after he made an initial investment in a duplex. From there, he used the strategy, along with BRRRR, to scale his portfolio up.
5. House hacking
Investors use house hacking to leverage extra rooms or units within their primary residence to cover expenses. It starts with simply finding a tenant for a property you own and already live in.
Most often used with multifamily rental properties, investors live in one of the units while collecting rent from the others.
Mike Hills. Mike Hills
Denver-based investor Mike Hills, 42, told Insider he started out house hacking, and has developed a property portfolio worth over $8 million since.
In fact, he credits house hacking with his success, and has spent the last two decades developing an expansive portfolio, including a condo, a townhouse, a duplex, a quadplex, an apartment, a trailer park, and eight single-family homes.
Syndication is a strategy that pools capital from several people to invest in properties that would otherwise be unaffordable. It equates to crowdfunding for institutional-quality deals, and is a longer-term strategy with an expected investment period is about five to seven years.
But it’s worth it, according to investors like Bruce Peterson, who told Insider he spent 18 years in retail before using syndication to build a portfolio of about 1,000 units in central Texas.
Rather than start slow with single-family rentals, which are often cheaper and easier to manage, Petersen first set his sights on a 48-unit apartment complex. And the potential he found in that first deal — with attractive opportunities to scale, profit, and manage a multifamily property with ease — is what helped him build his business up.