As a real estate investor the first thing you should be doing is to decide on your investment strategy and investment goals.
Real Estate Investment Models
As a property investor you should know that there are many different ways to invest in real estate and all these methods have their pros and cons. In this article today I will discuss three of the most popular real estate investing strategies for building your real estate portfolio.
- Buy and Hold through the BRRRR method
- Buy and Hold through a new construction
The word “Flipping” has been made popular in recent years. Flipping basically means to buy a property which is in need of repairs and renovation, renovate it and then sell it for a profit.
Typically the figures would be like this:
Keys to Success in Flipping
- Buy the Worst house in the Best neighbourhood. If you can buy a C property in an A plus neighbourhood, renovate the property to the standards of the neighbourhood you can achieve great results. The main idea behind this strategy is to have good sources of inventory such as bank foreclosure properties, good networks with brokers in your local area etc.
- You will need access to private money lenders or hard-cash lenders since banks will not loan on distressed properties and you will anyways not be holding the property for 30 years.
- Reliable renovation contractors who don’t overcharge and rip you off.
- Being in a real estate market where prices are rising would be an advantage. If you overrun your renovation costs then rising home prices can help you cover your overages.
Pros of Flipping
- Good potential for healthy gains
- Good for investors who are hands-on and can roll their sleeves up and get their hands dirty in the middle of a renovation site.
Cons of Flipping
- High Risk: The losses on one bad lead can erase what you gained on many good deals.
- Inventory of distressed properties is quite less and you are also competing with many other property investors who may get to such properties before you do.
- No more free time: Since Flipping is pretty much a hands-on job requiring you to be personally involved in the renovation of a property, you have pretty much taken on a new full-time job.
The BRRRR Model
Another strategy that is quite popular in the US where I used to work earlier is called the BRRRR model. It stands for Buy, Renovate, Rent, Refi, Repeat. Let us see how this model works through the below example:
Let us say you start with 80 lakhs in your bank account. You buy a distressed sale property for an all cash deal for 60 lakhs and put 20 lakhs in renovations into it for a total all inclusive cost of 80 lakhs. You then rent out the property to a tenant and after a year your refinance the house with a conventional lender. If you don’t know what refinance means. Read this article – https://bit.ly/3jsTEIZ
But here’s the catch: You did not just pick any property. You in fact strategically picked up a property that was suitable for upgrading. Maybe you purchased a 2 BHK with one bathroom with a terrace that you converted into a 3 BHK with 2 bathrooms. The fact that you added an extra bedroom and an extra bathroom is the key. Because after renovation your house is no longer worth 80 lakhs. It is now worth 1 Cr because you strategically upgraded the property and increased its value!
Now your lender expects you to have 20 % skin in the game – basically a 20% down payment. So when you refinance the property you get your 80 lakhs back. You started with 80 lakhs and you ended up also with 80 lakhs in your pocket plus an upgraded house! It may feel like you got the house for free but you in fact simply added more value to it.
You take the 80 lakhs and follow the same cycle again with another property. If you can do this once in a year you can churn your 80 lakhs into a portfolio of multiple properties over a period of time.
If it works as planned, the BRRRR model can become a powerful tool for increasing your wealth. There are of course times when things do not go as planned. Maybe the after-renovation value of the property is only 90 lakhs so you could get only 72 lakhs (80 % x 90 lakhs) back from your refinance. Inspite of that you received forced equity in your property and can always add more funds if required in your next deal.
The BRRRR model works well in theory but in practice its hard to find good deals on a regular basis.
The Buy and Hold Model
The buy-and-hold investment strategy is when you buy a property either through a real estate broker or from a builder with the intention of renting out the property for a number of years of indefinitely.
This approach does not take as much personal commitment and time like the other two models and is perfect for corporate professionals who already have busy day jobs and prefer a low-risk lesser-work model.
The disadvantage with this model is that you do not get immediate equity but it is good for building long-term wealth. As an investor you do need the ability to pick good markets and also have a property manager to manage all your property investments including rents etc. You also need a good credit score to apply for a home loan.