The majority of Americans will only conduct 1-3 real estate transactions in their lifetime, all of them for personal homes they intend to live in. Yet we all know of people that have made a wonderful living investing in real estate. We have also heard about the nightmares of being a landlord. What most don’t know is that there are other ways to invest in real estate to begin to build your wealth. Let’s discuss five of those options.
Let’s start with the real estate investing most people are familiar with, rentals. You buy a home that you intend to rent out over the next decade or longer and you earn through cash flow, appreciation of the house value, tax benefits, and startup equity if you chose a fixer upper. Duplexes and smaller apartment buildings are often a good choice for those just starting out because you can live in one section and rent out the rest of the space in order to pay down your mortgage and essentially live rent and mortgage free. Many investors start this way and then save enough to do it again, renting out the space they were living in and moving into the next project.
Now a popular past time on HGTV, flipping homes is simply buying a home in poor shape, fixing it up and selling it. Being able to source the homes, convincing the seller to sell at a price that you can pay for the repairs, holding costs, and selling costs while still making a profit is an art. Having construction experience and being able to do most of the work or oversee the work of hired contractors is generally needed in order to garner a profit that pays for your time and gives you capitol for the next project.
The two major problems with rentals and flips is that you need the money to buy real estate and you need to be able to fix your properties. Wholesaling can cut out those two issues while still making you money. Wholesaling is essentially finding a property that can be bought cheap enough that you can then sell it to another investor immediately at a higher cost, with you keeping the difference. This can be done in a number of ways, a couple of which can be completed without you actually spending your own money to buy the property.
You can purchase the property with cash like any standard real estate contract, and then sell it. If you are short on cash you would put a small option payment down to hold an option contract. This contract gives you the option to buy the property at a specific price before a specific date. You can then sell this option to another investor who intends to flip the property or make it a rental.
This is exactly how I first got into real estate, I bought a 4 unit apartment building that had been in foreclosure, and sold it to another investor less than 30 days later for twice what I paid. I didn’t do anything to the property except take photos. Wholesaling can also lead to other creative investing techniques such as lease options and subject to’s where you essentially take over payments for the original owner and control the property for a period of time before you either buy it or sell it to an end buyer.
Joint ventures are the perfect way to invest in real estate when you have some knowledge and cash, but neither the time nor skills to be the main real estate investor. A joint venture can be used in any of the above investing scenarios. You make a contract to invest a specific amount of money at a specific rate for a specific period of time in a project whether it’s a flip, rental, or a wholesaler that needs a minimum amount of cash to put some piece of real estate under contract. Since this is higher risk, investors are able to demand higher interest rates. Once the project is completed or your contract ends you receive your initial investment plus interest. This type of contract could also be written to give you monthly or quarterly payments, or any other scenario you can dream up.
Self Directed IRA
Most of us are familiar with IRA’s and use them to invest in stocks, bonds, mutual funds and CD’s. A self directed IRA allows you to invest in other things like tax lien certificates, notes, and real estate. Self directed IRA’s can be started at any time or rolled over from 401k’s and other IRA’s. You then direct your self directed IRA to make purchases for you of specific real estate, and all business transactions for that real estate are completed through the IRA. Profits are kept in the IRA either tax deferred or tax free and available to reuse on other investments as you direct. There are some rules for self directed IRA’s, for instance you cannot buy your own home or vacation home with these funds.
Learning different real estate investment techniques, including those that aren’t mentioned here such as buying real estate notes and tax lien certificates will give you more options when looking at properties. By having a number of avenues to explore with each property you are more likely to be able to make a deal that will benefit the seller and your investment portfolio, thereby increasing your wealth.