Three Real Estate Strategies for New Investors

The world of Real Estate Investing can be endlessly fruitful. On the flip side, it can also be incredibly frustrating, exhausting and overwhelming at times. For me and many new investors, getting into Real Estate can be the most challenging part!

                                     Should I buy Residential or Commercial?

                                               Long Term vs Short Term?

                                             Self Manage or Hire a Team?

                                                 Local vs Long Distance?

In this week's Blog, our goal is to simplify this big and scary world of real estate into three simple strategies. These strategies are not for everyone and not without risk as should be acknowledged with any investment.

Three Real Estate Investment Strategies for New Investors

You may find yourself browsing Zillow or Googling a Mortgage calculator to see what you can afford but this is NOT a viable strategy for most.

You are NOT a window shopper… YOU, are committed to becoming a Real Estate Investor.just haven’t quite decided on what type of strategy to deploy.

All of the following strategies, we have used ourselves throughout our own investment journey and hope that touching on some of the pros and cons of each can help you find your own way.

                                       Live In - Two Year Fix and Flip ($)

                                                     House Hack ($$)

                                                      BRRRR - ($$$)

Live In - Fix and Flip

This is a Residential home buying strategy that can get you into Real Estate for fairly little money out of pocket and executed over a two year timeframe.

With a proper W2 job or credible self employment income over a two year period, there are programs out there that allow you to put as little as 0% down to acquire a home you plan on living in.

Just because it is possible, doesn’t mean you should do it though… You should consider your comfort with risk, confidence in your ability to earn income into the near future and lastly your time horizon.

Lets simplify this strategy into three main points -

1. Buy an Average to Below Average Home Using Leverage
2. Live on the Property and Renovate Over a Two Year TimeFrame
3. Sell After Two Years to Ensure Tax Free Gains - IRS Section 121 Exclusion

Now it sounds simple, and can be at its core but like anything takes time, discipline and a fair amount of creativity. The hardest part can be finding a home worthy of a high leverage loan like FHA, VA, or HomeReady Loan as many of them have fairly strict criteria as to the condition of the property.

If this strategy ends up being for you! Tell everyone you are looking for a fixer upper for yourself. You never know who in your network may have a grandparent moving or a loved one who has recently passed. It may sound morbid to look at this way but one of our best deals came from a family in desperate need to sell their fathers hoarder house that had been sitting vacant for two years. It helped them out greatly and gave us another project to tackle.

Pros:

Ability to Use Leverage

Potential Tax Free Gains

No Tenants

Cons:

Time - 2+ Year Timeframe Until ANY Profits

Market Cycle Risk

Private Mortgage Insurance Cost

Spoiler - This strategy would be my suggestion for 90% of new investors looking to get started.

I would recommend this strategy to new investors because it gives you a nice introduction into Real Estate. As a renter, you probably have never had to replace a Hot Water Heater at 11PM at night. You’ve also likely never had to navigate finding a realtor, an attorney, an insurance agent, an electrician, a plumber, etc.

The ability to navigate two years worth of issues and headaches without tenants can give you the confidence in buying bigger and bigger projects over time.

House Hack ($$)

Very similar to the Live In - Fix and Flip strategy above, you may be able to use leverage to fund almost 100% of these deals. Again, should you? That is a question you alone can answer.

The goal with this strategy is to have other people help you pay down your mortgage faster while putting cash in your pocket as early as day one.

You can buy a Two, Three or Four unit residential building using traditional financing or by using the high leverage products mentioned above. Banks and lenders will typically consider 75% of the rental income when looking at you as a new investor.

Example - If the building you are buying makes $100,000 a year in Rental Income, the bank would normally view you as making $75,000 a year more than you do from just your W2 job alone. This can help you buy a bigger property than you could on your own!

You can also buy a residential home and rent out your extra rooms as well which could give you more flexibility to go back to life without tenants if you find out being a landlord isn’t all it is cracked up to be.

Why then, are there two money symbols next to House Hacking above? In the example above,

Pros:

Ability to Use Leverage

Some Potential Tax Free Gains***

Ability to Buy Bigger Projects

Potential Cash Flow Earlier On

Cons:

Market Cycle Risk

Potential PMI Cost

Tenants

***Must live on the property for 2 of past 5 years before sale (IRS Section 121 Exclusion)

We went from our first Live In - Fix and Flip right to buying a House Hack with our Tax Free Capital Gains and I am very glad we did. We learned a lot over the two years in our own home which helped us hit the ground running day one when we inherited a new property and tenants.

BRRRR ($$$)

What the heck is B.R.R.R.R. and why is everyone talking about it?

Buy, Renovate, Rent, Refinance, Repeat

If I offered you a fully renovated cash flowing Real Estate Investment for absolutely FREE, would you take it? Of course you would! If you said no, call me, I’d sure as hell take it.

Ultimately, a free building is the goal of this strategy but to do so may take a bit more capital which is why we are ending this week's blog in this manner.

To explain this topic, it may be better to use a real life example from 2024.

Purchase Price - $420,000

10% Down Payment - $42,000

Closing Cost - $3,500

Renovation Cost - $123,000

Nine Month Carrying Cost - $30,000

Cash Out Refinance Appraisal - $790,000

LTV at 75% - $592,500

Refi Cost - $11,000

What does this all mean… It means we bought a tired building in a great town, kicked all the headache tenants out, completely renovated every apartment, rented out each unit at a much higher rate and then refinanced. We invested $195,000 (Closing, Renovation & Carrying Cost) and had the ability to pull out $204,000 only nine months later. We chose to leave $50,000 in our business accounts as a safety net even though the building after expenses nets us almost $3,000 a month.

If someone offers you a FREE fully renovated, cash flowing building, why wouldn't you take it?

Pros:

Ability to Use Leverage

Potential Big Payout

Shorter Time Horizon than Live In - Fix and Flips

Cons:

Market Cycle Risk

Renovation/Carrying Cost

Transitioning Tenants

Managing Tenants

I certainly hope this has been helpful. If you know what route you are leaning, tell everyone! You never know what will fall into your lap as a new investor. Five of the last six deals we have done have come from word of mouth, not a Zillow search.