Real estate investing can be an effective way to generate passive income if the property is cash flow positive, meaning monthly rental income exceeds monthly expenses.
Business Insider spoke to several real estate investors who own profitable properties and asked them what they look for in the acquisition stage.
Here are three of their main strategies. Business Insider verified each investor's real estate ownership claims.
1. Choose an apartment complex
An apartment complex is a single building that is divided to accommodate multiple families living separately, and can range from two- to three- to four-family homes. Buildings with four or more units are generally considered commercial real estate.
Financially Independent Investor Dana Bull says this type of real estate has some big benefits.
There's what she calls an “acquisition discount.” If you buy an apartment complex, you may pay less than you would if you bought two to four separate condos or apartments.
“Let’s say you buy a three-family home for $900,000,” she said. “If she bought each of them as a condo, she would probably end up paying more than $1 million in total. If she buys them all together, she gets that discount.”
If you own a multifamily property, you also enjoy economies of scale, or the cost savings that come with operating on a large scale. Think about the maintenance required for multi-family homes versus single-family homes, Bull said. Owns multiple families in New England: “If you buy a three-family house and the roof breaks, you only have to replace one roof. You only have one driveway and you have to shovel it. You have to maintain the common hallways. ” Doing so will reduce maintenance costs and ultimately give you more money for your money.
Owning a duplex or triplex also allows you to “house hack”. Used by new investors to get started in the real estate industry. House hacking a duplex means living in one unit and renting the second unit. The idea is that the tenant's rent can cover some (or all) of their housing costs.
This is a low-risk way to dip your toe into real estate investing and see if you like it. If you enjoy buying, renting, and managing tenants and want to grow your portfolio from there, you'll repeat the process, but at a different level of cost and effort.
Keep in mind that not all markets have an abundance of multifamily housing.
If this type of property is not popular in your area, look for a property with an unfinished basement that can be converted into another unit to rent, or a house with multiple rooms available for rent. please.
2. Choose an area with high rent demand
It's important to take a step back and consider the market as a whole. Is anyone renting in the area you are considering investing in?
“We need tenants,” Bull stressed. “They're the lifeblood of your business. They're paying for everything.”
To understand rental demand, investors Nyasia Casey looks back at her days on the market When looking at rental properties. This allows her to know if she can get a tenant in the property right away. If there are a lot of vacancies in an area, or if rental properties have been on the market for weeks or months, there may not be strong enough rental demand in the area.
Don't assume renters are looking for the more expensive parts of town, says Casey. “For a lot of first-time investors, their knee-jerk reaction is, 'I'm going to buy in the nicest city I can.'” They can afford it. 'Well, the town may not be set up as a rental community. There may be more single-family homes and owner-occupied homes. ”
Mr Bull also wants people to look at the employment opportunities in the area, saying: “People want to stay in the area. They are very reluctant to invest in an area where there is only one major employer. .If that company goes bankrupt, that's a problem.'' ”
3. Find an ugly house
“Rental properties don't have to be 100% clean,” Casey says. His strategy is to buy undervalued properties, renovate them, and fill them with long-term tenants. His first rental property in Baltimore gave him $1,000 in cash flow per month. “When you’re looking for an investment property, you’re looking for something that’s really on the market that you can renovate.”
She advises looking at listings on sites like Zillow and Redfin to find “really ugly homes.” Next, contact the agent associated with that property.
While that particular property may not be a good fit for you, “that agent understands and works with distressed properties,” Casey said, and they could be a good agent to work with. he said.
You may want to ask questions like, “Are there any other properties like this? Do you also deal with off-market properties?” she said. She says, “Agents are always in contact with sellers, so let them show you properties and develop leads outside of the market.”
