What is Hybrid Real Estate Investing?
I’m currently in the market for a new car.
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I’m especially interested in the Toyota Prius Hybrid. I love the idea of getting 50 miles per gallon on the part gasoline, part electric engine. This “hybrid engine” takes the best aspects of the gasoline engine and the the best aspects of the electric engine and combines them into one piece of technological marvel that is going to save me a lot of money when I drive down the road.
What does this have to do with real estate investing? Let me explain.
You’ve probably seen the television shows: enthusiastic individuals buy a low-priced fixer-upper home and throughout the half hour show turn an ugly home into a stylish work of art, profiting tens of thousands of dollars in just weeks. Or perhaps you know someone who bought some rental properties years ago and simply paid them off, using the tried and true “Buy ‘n Hold” strategy to build wealth over many decades. Neither of these investing methods are incorrect or unprofitable – but both have serious weaknesses as well as strengths.
Just like the hybrid cars on the road today, the hybrid method of real estate investing seeks to use the benefits of two vastly different strategies – “Flipping” and “the Buy and Hold” – to take advantage of the benefits in both and leave behind the negatives. I call this method “Hybrid Real Estate Investing.”
It may not be as “flashy” as the flipping TV shows or as hands-off as the classic “Buy ‘N Hold” but the potential for maximizing profits makes it my favorite strategy.
Four Characteristics of Hybrid Real Estate Investing
Let’s take a look at the four characteristics present in hybrid real estate investing. If your goal is to build wealth – harnessing these four aspects will supercharge your business and result in the highest return on your investment. Let’s look at each of these briefly in more detail:
1.) Buy Homes in Good Neighborhoods That Need Help
The first step in hybrid investing is finding homes that need help. I’m not talking about a gut-job, down to the studs remodel. I’m talking about homes that need cosmetic fixes like paint, carpet, countertops, and other similar fixes. One of my favorite fixes is the smell. When I walk into a house and it smells like the world’s craziest Cat Lady lives in seclusion there – I’m instantly optimistic. Why? Because smell drives away 90% of the competition (casual home buyers,) driving the price down and allowing for a great deal. Besides – smell is one of the easiest problems to fix: bleach, oil-based primer, and new carpet almost always does the trick.
A house flipper or wholesaler needs to find incredible deals in order to turn a profit. As a “hybrid” investor – finding killer deals are still important. However – you don’t need to find a house at 50% of the value. In general – the houses that come at super steep discounts need a tremendous amount of work. We’re not going to worry about those. Let the flippers do what they are good at and pick up the pits. I typically look for homes that can be snatched up for 70-80% of the after repair value. Using a thirty-year bank loan gives the most security and puts the timetable in your hands, so I use this when at all possible. Also recognize that this method can be used with small multifamily properties – and is a huge part of my strategy I discussed last week in my article “How to Make a Million Dollars with Real Estate.”
2.) Rehab the Home Into Rentable Condition
Next, I am going to get the home into a nice, rentable condition. Again – a house flipper generally will want to remodel the home into the nicest house on the block. This is highly important to sell a home quickly – but a hybrid investor instead wants to rehab the home into a nice rentable condition. Unless most of the rental competition has granite counters and stainless steel appliance -you can avoid those upgrades and stick with basic. Typically, I don’t want to spend much more than $10,000 on the rehab.
3.) Hold the Property and Ride the Market Wave
Once the home has been rehabbed – it’s time to rent the home out. It’s important to study up and learn how to be a landlord – and a successful one at that. If property management isn’t your thing – hand the property off to a management company who can effectively manager your property. At this point – it’s time to “ride the market wave.” The real estate market is like a cycle – up and down, up and down, up and down. No one knows when the market will go up or down – only that it will. As a hybrid investor – you don’t need to know when the market is going to move, you just need to identify when it does. As the famous stock genius Warren Buffet always says, “Buy when everyone is selling and sell when everyone is buying.” Learning to “ride this wave” is key. You don’t need to be perfect, but having a good understanding of when the market is a “buyers” or “sellers” market is not difficult to grasp.
4.) Sell for Gain When the Market Peaks and Reinvest your Profits.
Finally – when the market is hot and everyone is buying – it’s time to sell. Don’t worry if you don’t hit the exact “height” of the market. You don’t need to “play chicken” with the real estate market. When it makes sense to sell – then sell. At that point, the chances are buying a property will be difficult due to the high prices. It’s okay – you aren’t in a hurry. Prices will start to fall, and when they fall you can re-invest your profits into more properties and continue the cycle again. You can also move to different parts of the country or to different investment types, depending on what the market is like in different areas or across different investment types. Just remember: buy low, sell high. The rest will fall into place.
This “hybrid” real estate investing method is nothing new or unique. Nor is it the only way to invest. It’s just common sense investing for the common person and just one more investing stream you may want to include in your investing tool belt. The goal of hybrid investing is to take the benefits of flipping (forcing appreciation through rehabs) and the benefits of the buy and hold method (loan paydown, appreciation, cashflow) and combining it into a secure investing method.
What do you think? Do you engage in real estate investing with the flip strategy, buy and hold strategy, hybrid strategy, or something else? Leave me a comment below about that or any questions/comments you have and let’s talk about it!