When someone is interested in starting a real estate investing portfolio, it means that you are actually starting an investment business. It is always a good time to start planning and taking the time to understand each step along the process. Let’s dive into this discussion and give specific details for building wealth in Real Estate.
The planning process is critical to understand that there are many moving parts in the Real estate investing niche. There are several exit strategies to consider. Wait? What do I mean by exit strategies? Well, exit strategies are the multiple ways you plan to exit or transfer into another mode of investing. This could be a complete SALE of your investment property, it could mean that you will lease your property and sell it Later. It could also mean that you plan to keep your property LONG TERM for passive income/steady cashflow. In addition, you never plan to sell the investment, only instead, you continue to capture money from it thru refinancing.
THE Wealth Process Begins At The Purchase
How to build wealth in Real Estate begins with buying investment properties at a discounted price. Then and only then can you capture the savings needed for later on during the process. Lets say for example, your are going to complete a Fix and Flip strategy. This generally means that you are planning to purchase a “distressed” property at a steep discount. Once you have completed the closing process, you will estimate repairs to rehab this property at a HIGH Level. The plan involves fixing all repairs needed and going above and beyond so that the home is practically BRAND NEW. You are going above and beyond on your repair budget because you ULTIMATELY want to sell or FLIP this investment property to a RETAIL Buyer, or potential HOMEOWNER at RETAIL Price. The difference or SPREAD between the RETAIL price and your buying price including ALL expenses needed to get the property to be SELL-READY will be your Profit. Typical profits for a good Fix and Flip could average around $25k and higher depending on your location in the country you reside in and comparable sales in the city/state you live in.
Another strategy that a potential investor could plan for is called the BRRRR Strategy. BRRRR stands for (Buy, Rehab, Rent, Refinance, Repeat). This strategy is similar to the Fix and Flip except that the once the investor completes the rehab work, he rents it out to Qualified tenants in a great location and charges premium Rent price for staying in the investment property. The purchase would be the same as if it were a Fix and Flip except that the strategy is Buy and Hold for cashflow. After a year, maybe longer, the investor would then refinance to pull the equity out of the property and use those funds as down payment for the NEXT rental property. Therefore, repeating this process as long as the investor has done his due diligence on the property, the location, and has looked at COMPS or Comparable sales in that area, then this can be repeated.
Ways To Reduce Your Risk
First thing that comes to mind is Insurance. Make sure that you have insurance covering the investment property. It is not the same as homeowner’s insurance, but the policy coverage is similar. Next, is the entity type that owns the investment property. Check with your Real estate attorney to determine the best type of entity is best for your investing situation. Whether its an LLC or S-Corp or LLP, the entity type should match what your plan is going to be including your exit strategy. Another way to reduce your risk is by controlling your spending specifically when it comes to Rehab costs. This means choosing reputable contractors and sub-contractors that are licensed, bonded and insured. Lastly, and most importantly when choosing to set your investment property for a rental, a good property Management team must be worth their weight in gold. They must be able to screen tenants, collect rents TIMELY AND if necessary serve eviction notices promptly should the tenants become unable to honor their lease.
Completing The Process Is Rewarding
Whatever strategy has been used and there are lots more that was not mentioned, however, the point is to surround yourself with experts in the field of real estate investing. If you are a beginner, take notes and document your experiences at each phase, whether its written down or recorded on video or audio. Repeat the process and show your progress to others who can partner with you. Each time, you gain more experience and also you utilize Leverage. There are several forms of leverage commonly known as OPT (Other People’s Time) and definitely OPM (Other People’s Money). This is how to build wealth in Real Estate!