toby mcCosker - Real Estate Goals vs Strategies vs Tactics The peak of the mountain is like your financial and life goals. And there are numerous milestones (or sub-goals) along the way. Strategies are like plans for how to climb up the mountain in the first place. They are the routes that will take you towards the peak in the fastest AND safest manner. And tactics are like the climbing tools (ropes, ladders, binoculars, etc) that help you actually climb up those routes. To make them easier to understand, I’ve divided each of these strategies into groups based on how they’re used. These groups include: Business strategies Starter strategies Wealth building strategies Debt strategies Passive strategies Business Strategies More businesses than investments, these strategies can generate income and replace your job. But you must be prepared to invest the upfront time and effort of a business start-up in order to make them work. 1. Fix-and-Flip The Fix-and-Flip strategy is the business of finding properties that need work, doing the repairs, and reselling them at top price for a profit. If you’ve ever watched the flipping shows on HGTV, this is what they do! I used this model for much of my early years in real estate in order to pay the bills and generate cash savings for future investments. It was not always easy, but the beautifully finished houses and the sometimes large chunks of cash were rewarding. 2. Wholesaling Wholesaling is the business of finding good deals on investment properties and then reselling them quickly for a small mark up. The crux of this business is being good at marketing and negotiating to find those good deals. If you’re good at sales, you’ll like wholesaling. But if the idea of sales makes you cringe, I’d look for a different strategy.
I also began my real estate career doing a variation of this strategy called “bird-dogging.� I essentially hunted down deals for other more experienced investors. I then got paid whenever they bought a deal that I found. Starter Strategies These are my favorite, safest ways to get started in real estate investing. And in some cases with a little hard work, you can even get started with a small amount of cash. 3. House Hacking House Hacking means living in a home that also produces income, like in a duplex, triplex, fourplex, or house with extra rentable space like a basement, guest house, or spare bedrooms. By renting out part of your residence, you can reduce your total housing costs. House hacking is also an amazing strategy because you learn the landlord business while living at your rental. And once you are done living there, you can move out and transition the property to a long-term rental.
4. Live-In-Then-Rent Live-In-Then-Rent is simply living in a house that will eventually become a rental. This means the house must work as your home AND as an investment later on. But unlike house hacking, you don’t rent the property while you live there.
Doing this strategy a few times is a great way to build a small portfolio. And you don’t have to live next to your tenants like house hacking. 5. Live-In-Flip The Live-In Flip is a strategy where you buy and move into a home, fix it up, and wait two years or more to resell it for a profit. If you follow the IRS rules, you pay NO tax on the profit up to $250,000 for an individual or $500,000 for a couple filing jointly. 6. BRRRR Investing BRRRR stands for Buy-Remodel-Rent-Refinance-Repeat. When done carefully, it’s an excellent way to build a rental portfolio without running out of cash early in your investing career. Essentially you look for fixer-upper properties that you can buy below their full value. You use short-term cash or financing to buy the property, and then after it’s fixed and stabilized, you refinance with a long-term mortgage. If done well, you can pull most or all of your original capital back out for the next deal. Wealth Building Strategies The focus of these core wealth building strategies is turning a small nest egg into a large amount of wealth. Real estate investing has long been an ideal vehicle for this purpose. 7. Short-Term Buy and Hold Rentals This strategy involves buying and holding rental properties for relatively short periods of time – perhaps 1 to 5 years. Often the purpose of this strategy is to force property appreciation (aka add value) by remodeling, raising the rent, decreasing expenses, or all of those. The short-term buy and hold strategy works very well for multi-unit apartment turn-around projects. It also works well for rentals in high priced, appreciating markets that don’t cash flow as well. 8. Long-Term Buy and Hold Rentals This is the strategy of owning real estate with the intention of keeping it for the long haul. The benefits of this slow and steady (and very successful) strategy include rental income, tax shelter from depreciation expenses, amortization of loans, and price appreciation. I continue to use this strategy, especially on my properties in the best locations. I like to keep these properties because they attract the best tenants, are the least hassle to manage, and tend to appreciate the most over time.
9. The Rental Debt Snowball Plan The Rental Debt Snowball Plan is one of my favorite strategies to predictably build wealth, reduce risk, and eventually create an ongoing income stream from rental properties. It basically involves gathering all of the cash flow from your current rentals and any other sources, and then concentrating that cash flow to pay off one mortgage debt at a time.
10. The All-Cash Rental Plan The All-Cash Rental Plan is similar to the Rental Debt Snowball Plan because it snowballs rental income for growth. But instead of using mortgages, you just save up cash and buy a rental property without any debt. Some financial teachers like Dave Ramsey advocate this type of investing. It would be tough to get started with all cash investing in a high priced market, but in many areas, it’s still a great plan. 11. The Trade-Up Plan The Rental Trade-Up Plan is perfect for entrepreneurial investors willing to juggle a lot of moving parts. This strategy is a way to quickly build real estate wealth and income by moving from smaller to larger properties, typically using a technique called a 1031 tax-free exchange.
Debt Strategies These debt strategies put you into the profitable (and often passive) role of lender instead of an owner of real estate. 12. Hard Money Lending Hard money lending is the strategy of making short-term loans to real estate investors who buy rentals or fix-and-flip properties. Usually, the loans involve high-interest rates, points (i.e. upfront fees), and lower loan to value ratios. While the strategy can be very profitable, it also has large risks. If you have to take the properties back at foreclosure, you need to make sure you’re protected. 13. Discounted Note Investing Discounted note investing means creating or buying notes (i.e. real estate debt) at a discount to the note’s full value. Because of this margin of safety, you can create large returns and reduce your risk. One form of Discounted Note Investing involves buying notes (typically those that are delinquent) from other owner financing sellers or from banks. This is a much more advanced strategy, so I recommend studying it carefully before jumping in. Passive Strategies Although some of the passive strategies below still involve important upfront investment decisions, they require less day-to-day hassles than some of the prior strategies. 14. Syndications & Crowdfunding Syndication is essentially pooling your money with other investors to buy real estate or make loans. It’s a way to invest in any of the other strategies mentioned above without having to put the deals together yourself. You invest your money with syndicators or general partners who find and manage deals for you (and they receive a fee). Crowdfunding is a relatively new form of syndication investing where deal opportunities are marketed through online platforms like Peer Street (this is an affiliate link). Most require you to be an accredited investor, but you can sometimes begin investing with as little as $1,000 to $5,000 per investment. 15. Real Estate Investing Trusts (REITs) Real estate investment trusts (i.e. REITs) are very similar to a mutual fund. But instead of allowing you to own a piece of many stocks or bonds, these REITs allow you to own a piece of many commercial, income-producing properties.