As you all know, we are a little obsessed with real estate. In our opinion, it is one of the ‘easiest’ ways to reach financial independence in the shortest amount of time. Since we are still fairly young, we obviously don’t want to spend what are potentially the best years of our lives working on or for something we aren’t 100% passionate about. We are using our able bodies and minds to save and invest in real estate now so we can use that as our means of living in the future while our minds and bodies can work on other enjoyable tasks.
If you would have asked me 4 or 5 years ago if I could imagine where I would be today with the amount of properties and work that goes into them, I would have said absolutely not. I would have been been clueless as to where to start. I mean we did make one of the biggest financial mistakes with our first home purchase almost 4 years ago. I would been afraid to take the leap of faith to invest that much money into something, and I would have been reluctant to give up my hard earned and well saved money on something that I didn’t really know if I wanted.
The more properties we buy and the longer we own rental properties, the more I realize that just about anyone with a money earning job can invest in real estate and use that to supplement or replace their income, but very few people actually do. Think about it like this, everyone needs a place live, whether that be you or some Joe Schmo down the road. So, today, I am going to list some easy and not quite so easy ways to dip your toes into the real estate game.
1. Buy a house
We’re going to start off with probably the easiest one. Frankly, whenever I think of investing in real estate, I think of buying a house. A house is ideal for most people. You have your own space, including your own yard, no shared walls with a neighbor, and maybe even a garage. Before you make an offer on a house make sure you read up on the rules of thumb for investment properties. Unlike what old people always seem to tell you, real estate is not always a good investment.
If you’re not ready to jump head first into homeownership by yourself, maybe look into buying a house and then getting a roommate. Roommates are not the ideal situation in some cases, but it would definitely be an easy way to help make those mortgage payments. OR take roommates to a whole ‘nother level and go AirBnB that bitch. If your house is too big, or you’re house hacking, try renting out a room or a portion of your house. It could be another easy way to earn a little extra dough. Although the legislature toward AirBnB’s has recently cut down on the appeal, there is still plenty of areas that you can make a decent buck off of a short term rental.
If you aren’t interested in roommates, or even managing the property yourself, be sure to calculate the cost of a property manager in with your other expected expenses. We always calculate the cost of a property manager with our rentals even though we know that we will manage them ourselves. It can help the ownership become more passive, although it shouldn’t ever be completely passive. You want to know how someone is managing your asset, so while they are managing the property, you should be managing them.
2. Buy a multi-family property
Smaller multi-family properties seem to be our specialty because 8 of our 10 units could be considered multi-family. While we have not occupied any of the duplexes we own, we are house hacking by living in the detached apartment and renting out the house. Most people don’t understand why we don’t occupy the house, but it’s honestly too big for us and our cozy little apartment meets all of our needs and I couldn’t be happier about our living situation. The duplexes, on the other hand, we bought have been purely invest properties, and because they are multi-family, we had to put down a minimum of 25%. But, if we were so inclined, we could’ve just taken our time and owner-occupied a duplex later on and put less % down. The biggest factor in this process is to owner-occupy a property, you are typically signing something stating that you’ll live in that property for at least one year.
Once again though, a multi-family property can be house hacked. If you owner occupy it, you can get away with putting less money down, the exact percentage would depend on your lender. You can also rent out the units on your property and essentially live mortgage free. Another added perk is the diversification of rent. You can lose a tenant and still have income from another tenant keeping you from losing as much money. The same benefit is the drawback, with two units, you have two kitchens with two ovens and two fridges. Double the potential issues when it comes to appliances and other ‘consumables’ that need to be replaced.
3. Private Lending
We don’t think hard money lending gets enough love in the FI community. Big upsides of higher returns, the opportunity to diversify into real estate without having to deal with the drawbacks of actually owning and managing a property, as passive as index investing, and being able to contribute smaller amounts than would typically be accepted through different methods of crowdfunding. There is some risk that the person or project you’re funding is shit, but what investments are without risk?
Another method of this is seller financing. We know a guy who has sold the same property three times. He owns a rental that he would like to off-load and finds a buyer, they put down a down payment (typically $5,000) and then he starts collecting their payments toward the balance. He gets the benefit of 100% occupancy and not having to pay for any repairs, while the buyers are actively gaining equity in a property. The buyer eventually grows restless and wants to move to another house, another neighborhood, another city, or even another state. After all, how many people acquire a mortgage thinking that they will still be in that house in twenty years? So, they can either sell the property and pay off the rest of the money they owe, which can take time, or they can just sign the house back over to him, and he won’t try to collect the unpaid portion. Rinse and repeat.
Real Estate Investment Trusts are the true passive investors opportunity to get involved in real estate. You own no individual properties, you deal with no tenants, yet you are diversified over not only multiple properties, and even multiple states, but also with real estate which typically ebbs and flows at different rates than the stock market. REITs also give the opportunity to get involved in commercial real estate, which is a whole other article in itself. REITs themselves can hold properties, and pay out based on the rental income, they can hold notes (mortgages) and pay out based on interest rates, or they can do a combination of the two.
REITs are also very liquid. Let’s say that Joe down the street has a rental that’s not doing too hot, so he decides to sell. He refuses to get rid of the tenant, so he passes that issue along to the next owner. Now, he’s only getting investors as potential buyers, because retail buyers aren’t interested in dealing with evicting a tenant, or non-renewing leases. But, the other investors aren’t idiots (*sometimes they are) and they know a bad deal when they see one. It takes Joe 6 months to sell his rental, and he has to pay the realtor fees, part of closing costs, and any other shit the buyer can tack on.
Now, Joe’s neighbor, Moe, has the same amount of money in a mortgage REIT. He thinks he can see the tides turning on mortgage notes (he can’t), and thinks he smells another recession coming on (he doesn’t) so he decides to time the market and pull all his money out of the REIT. He sells off his shares and decides to go with an index fund. All it takes is logging onto the investment platform and he’s done in less time than it takes an Amazon package to hit the doorstep.
We like to say that anyone can own investment properties, but not everyone can manage them. If you’re like me, then getting as passive as possible will be the best thing you can do to get involved in real estate. REITS, property managers, or crowdfunding will be your best friends. However, if you are more like James, then managing the properties is half the fun, and you can dive right into the ownership and management of house-hacking, and multi-family methods. This is why he largely manages the properties, and I provide much needed insight and advice when finding the properties and picking out different things like upgrades or renovations. We both have varying opinions and bring our own individual vision to the table. Self-awareness and the acknowledgement of your strengths and shortcomings are vital to picking out the best real estate investment method for your goals and personality.
Don’t let the worry of a tenant calling with a clogged toilet at 2:00 AM keep you from investing in real estate. Your future self will thank you.