What is Hybrid Real Estate Investing?

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I’m currently in the market for a new car.

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.

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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. Screenshot 12:16:12 1:18 AMWhy? 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.
Screenshot 12:16:12 12:50 AM

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.

Final Thoughts

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!

Photo: Robert Scoble,  Marya, and Andrew Enright 

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

30 Comments

  1. Brandon:
    We started the first 4 years of full time investing with buy-and-hold only – no flips, no selling. Our buy-and-hold strategy was always long term for retirement and for our children.

    Over time, we morphed into the hybrid strategy of holding as well as flipping/selling. We purchased 67 properties this year and continue to hold most of what we buy.

    In the process, we also added to our hybrid by adding a full-service real estate company as well as a property management company. Our business changes, the economy changes, and regulations change – but we’ve never found a bad time to be in real estate!

    Thanks for your article.

  2. I do steps 1, 2 & 3 but not 4.

    For instance, two years ago I bought a SFH in a nice neighborhood that had mold for $123K. I spent about $40K remodeling it into a gorgeous place. It is worth over $200K now. I command the highest rent, and best tenants, in the neighborhood.

    I did the same thing last year on another SFH.

    This year I just got a SFH under contract at a price I was happy with – about 10% below comps. The place will need less than $1K of repairs. Competition is tough now and supply low so I have given up on trying to land the absolute best deal. Because the rents are so high and mortgage rates so low I can afford to be lazy 🙂

  3. Hi Brandon, I agree with your strategy on almost all points. However my strategy is to purchase discounted multi-family homes, rehab them, and hold/rent them. There is great cash flow in my area, roughly $300-$400 a door with prices/rates where they are at now. I also look to flip single family homes to simply add “cash” to my personal income and to reinvest.

  4. Brandon, I think I just picked up a new term to describe my real estate investing style. Although I do house flips more than anything else, I always look at any new deal as a potential for cash flow. The flips are great for the short term infusion of cash, but if hte numbers are right and the neighborhood is good, then no flip – its on to buy and hold. I never really knew what to call it though “house flipping/real estate investing”??? Voila. Hybrid it is.

    Also, I love smelly houses – it just smells like money to me. LOL The last house we flipped in Onset smelled so bad I almost couldnt even stand being in it – but loved it. That ended up being one of the top two most profitable flips I ever did!

  5. My first goal was to do Wholesale to make money in order to have Rentals. But after reading this, Flipping the homes seem like the way to go. What I would like to know now is how do you:
    1. Figure out if the property is in a good neighborhood, good area, etc (the researching of the area)
    2. And Birddogging, <— very interested, as a learning phase so I can know how everything works, any legal documents you have to provide etc..
    What I really want to see is the whole process of an Acutal deal being found, then the deal being negotiated, and then the deal being closed, with all the legal documents and things shown to me that I would have to file so nothing happens when trying to close on the deal.

    P.s is there a birddog article/ blog anywhere? I used search function and couldn't find any.

  6. Brandon – reading this article makes me feel very optimistic about my decision to get started in investing at this point in time! Being young & open to learning from the best truly opens up many doors for me. I love reading each article one at a time to fully grasp what the business is about.

  7. I’m definitely loving your version of hybrid real estate investing when it comes to buy and holding in better neighborhoods with cheaper repairs. it’s definitely a good way to get in. One question though, when riding the real estate wave, what are usually best times that you yourself sell your property or feel the need to sell?

    • Brandon Turner

      Hey Junior – honestly, I don’t know yet, I haven’t hit it yet. My market is still climbing. In my mind, when prices go crazy through the roof, I’ll sell probably. Or, maybe I’ll just keep rocking my cash flowing properties and find other ways up trade up 🙂

  8. Great post, thanks. One thing I don’t understand though, when “selling high” how are you not in a hurry to buy – aren’t there tax implications to contend with? What if it’s 2, 3…4 years before the wave comes back down? I simply assumed that a 1031 exchange is almost always in your best interest when selling.

  9. I never got excited about Rent to Own, which seemed boring to me and low profit; never been interested in flipping because it seemed to risky, but now I had an idea about joining Fliping with Rent to Own: Buy low, renovate, and find a tenant for RTO. There might be one Investor doing it in my area, but I never heard of it, no one discusses this strategy, which makes sense, RTO is supposed to be very simple and no hands on work.

    I am now excited and ready to start this new strategy, let’s see if it works 🙂

    Filipe

  10. Lance Borden

    I think this may be my niche. I love the pride in ownership of buy & hold. But I recognize the potential profits in flipping if I want to replace my income and build long-term wealth. I also like the idea that i don’t have to find rock-bottom deals to pull the trigger. To date I’ve done buy & hold exclusively, but in 2015 my goal is to fix and flip – or fix and hold! Maybe that’s another term to describe the hybrid method – fix & hold.

  11. Casey Murray

    Great article Brandon. Another attractive feature I believe hybrid investing provides is after a year or two of the mortgage pay down in addition to the forced appreciation with the rehab, you can refinance and pull cash out to invest in another property. So instead of selling just one property at the top of a bullish market, you can dispose of several properties utilizing this strategy!

  12. Adam Spencer

    that looks like a cool way to invest sort or a long term fix and flip (didn’t you guys do a podcast on that?) Hey so do you pay cap gains on the money you make this way? can you do a 1031? Could you refi and get cash out tax free and keep the property (if it will still cashflow of course)?

  13. Erin S.

    @Brandon Turner – Just joined and saw this post. I am curious about when you sell the property – what about owing taxes on the profit? Don’t you have a time limit to reinvest in another property or something?

    Sorry if it seems like a stupid question but I’m brand new on here and need to learn A LOT!
    ~E

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