"Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise wage earner of today invests their money in real estate." -Andrew Carnegie
It turns out, millennials aren’t the renter generation after all. The 2022 Consumer Insights Report from Mynd says there’s a portion of millennial and Gen Z buyers who are pursuing homeownership as a way to build their wealth, but it may not be exactly the way previous generations have done it. The study explains how they’re breaking into the market:
“. . . younger generations of Americans are not buying into that dream in the same way that older generations have. A growing number of Americans are choosing to make their first real estate purchase as an investment property.”
Instead of buying a home and moving into it themselves, some young buyers are purchasing a home so they can use it as a rental. This tactic may be gaining popularity, at least in part, because of the affordability challenges brought about by today’s higher mortgage rates. The report above mentions how many people in this group are considering this approach. It says:
“Almost half of Millennials and Gen Z (43%) are considering buying an investment property compared to only 9% of Baby Boomers and 27% of Gen X.”
If you’re thinking about buying a home as an investment strategy to build your wealth, let’s connect to explore your options and nearby areas that may have homes that fit what you’re looking for.
The conventional long-term buy-and-hold investment strategy is a little simpler than most but can be just as effective. It's perhaps the most common way to invest in real estate, outside of your primary residence. It works by purchasing a property you intend to keep for a considerable amount of time—anywhere between five and thirty years or more. Most commonly, these are single and multi-family or apartment complexes.
Historically, the value of real estate has consistently risen over time. So, investors know over time, the value of the property will continue to increase, and all they need to worry about is continuing to make their monthly payments. In addition, depending on interest rates, investors typically lock in a fixed loan with long-term rentals, meaning their principal and interest (P&I) payments will never increase. Knowing that, it's important to look for properties in areas with good price-to-rent ratios and potential for growth.
To take on the least amount of risk and maximize your investment, you need to purchase a property where the rental income exceeds P&I payments, property taxes, home insurance, management fees (if applicable), and all other expenses. This means you'll be collecting consistent cash flow each month, which can range from a couple of hundred dollars to a couple of thousand dollars depending on the rental income of the property you purchased. In addition, the rental income your tenants pay will also increase the equity you own in the property as your loan is paid off more and more each month. Then, once the loan is fully paid off, investors might sell their property for a profit, as it'll historically always be worth more than what they bought it for if enough time has passed. On average, nationwide, home prices appreciated 290% over the last 30 years. In Washington State, home prices have appreciated around 481% since 1991. Even with the dramatic increase in value over time, once the loan is paid off, renting the property is still a popular choice among investors. All the rental income will now be passive cash flow, as you won't have monthly P&I payments anymore.
After purchasing the property, you can hire a property manager/management company that charges a percentage of your rental income, typically between 8-11%. They can deal with the tenants, marketing, accounting, maintenance, and most other responsibilities of being a "landlord." That way, you won't have to worry about getting woken up by a tenant's call in the middle of the night. Of course, you can also take on landlord responsibilities moving forward and manage it yourself; if this is the case, it's important to research property management, so you know what to expect and how to handle certain situations.
The catch, or difficulty, with typical long-term buy-and-hold investment rental properties is that the required downpayment is typically between 20-25%. Although the return on your investment can be excellent, the problem can be saving enough money for a downpayment to get started and buy your first property. However, there are plenty of ways to purchase investment properties without paying a 20% downpayment. The most similar investing strategy that allows a downpayment of around 3.5% is called "House Hacking," which you can read more about on my website under "Investing Strategies".
For generations, investing in real estate has been one of the most tried and true ways to achieve financial freedom in America. Although many understand this to be true, it can often feel overwhelming taking the leap and buying your first investment property.
Saving tens of thousands of dollars for a downpayment, having the burden of dealing with tenants forever, crunching the numbers, paying bills, and the risk of a crash in the market, are all examples of myths that scare most people away from ever investing in property. However, house hacking solves/debunks all these beliefs. House hacking is one of the best investment methods to get your foot in the door and on your way to financial freedom without having to be an expert investor, have a profound knowledge of real estate, or have loads of cash in savings. As long as you have a good credit score, typically 620 or above, you can purchase a home with as little as 3.5% down, or even 0% down in certain cases.
What is House Hacking? House hacking is a real estate investing strategy where you purchase a duplex, triplex, fourplex, or even single-family home and live in one unit as your primary residence for at least a year while renting out the other units/rooms. The method to the madness is that your tenant's rent will be enough to cover your mortgage payments and all other property expenses. With the right property, the rental income can even generate monthly cash flow for you. This means you can live for free and generate thousands of dollars in passive income, all while building equity in a home you own. Once you've lived there for a year, if you wish, you can move and rent out all units, maximizing your rental income.
Managing the Property: Now, you can choose to hire a property manager/management company for a % of your rental income, typically between 8-11%. They can deal with the tenants, marketing, accounting, maintenance, and most other responsibilities of being a “landlord". That way, you won't have to worry about getting woken up by a tenant's call in the middle of the night. You can also take on landlord responsibilities moving forward and manage it yourself, if this is the case it’s important to do your research on property management so you know what to expect and how to handle certain situations.
Bottom line: With the right deal and system in place, you'll be generating thousands, even tens of thousands of dollars in passive income a year while building more and more equity in your home as others pay your mortgage. The beauty of House Hacking is that it makes investing in real estate more affordable, with a low down payment of around 3.5% compared to a conventional 20% down payment investment property.
What is it? The BRRR method is another great real estate investing strategy. The general idea is similar to house flipping, with a couple more steps involved. To utilize this strategy most effectively, investors should look for properties that need work. Then, after buying the property, investors rehab it before renting it out to tenants. The rent covers their mortgage and collects passive income, so they can do a cash-out refinance and use the profit to do it all over again in another property, building their portfolio.
Buy: For the BRRRR method to work best, investors should focus on finding a property that needs some work yet is still undervalued with the amount of work necessary. If an investor can find a deal that's listed under market value, they're starting with a significant advantage.
Rehab: The reason it's crucial to find a distressed property with this method is so you can add value through rehabbing. The most important part of the rehab step is to focus on making improvements that increase the property's value the most. Specific improvements add value to the home more than others, and it's essential to identify these and then make a budget for what all repairs will cost. After determining cost estimates and relaying these to your REALTOR, you'll arrive at what's called After Repair Value (APV). In other words, what the new market value of the property will be.
Rent: While looking for a distressed and undervalued property, you should also be conscious of what market rents in the area are. This way, you'll have a good idea of your rental income after making repairs. Like most investing strategies, it's ideal if your rental income exceeds the sum of your mortgage payments, property taxes, home insurance, and other expenses. This means you'll be collecting cash flow passively each month and gaining equity in the home, as your tenant's rent will be covering your mortgage. Once the rehab step is complete, you'll want to start the process of finding tenants. You can hire a property management company to take over landlord responsibilities, typically for around 8-11% of your rental income. If you want to manage the property yourself, you'll want to start marketing and screening potential tenants. Once you've found suitable renters, it's crucial to have a good lease agreement contract in place, ideally reviewed by an attorney.
Refinance: After having renters in place, it's time you do a cash-out refinance. A cash-out refinance allows you to leverage equity (the value that you've paid/own in your home) for cash, in exchange for taking out another mortgage on the property you're refinancing. This way, you can repeat the BRRRR method for your next investment property using the cash from your previous property as funding. Knowing the entire BRRRR process before buying your investment property with this method is important since not all lenders offer a cash-out refinance. So, meet and discuss this with a few lenders offering cash-out refinancing options and get pre-qualified before the refinance step.
Repeat: The only thing left to do is repeat these steps with your next investment property. Of course, you can stop at one, but the beauty of the BRRRR method is that you can follow the steps and continue to build your real estate portfolio by taking advantage of cash-out refinancing and using the money from your previous deal for your next deal.
The live-in-flip strategy is a great way to capitalize on the market and get started in flipping houses in an affordable way. The live-in-flip approach combines both House Hacking and the BRRRR method, without renting the property out after owner occupying it and making improvements.
A live-in flip involves living in your investment property for around two years while making improvements to sell for a profit subsequently. When used correctly, this strategy allows you the advantage to save on taxes, gives you a place to live while rehabbing, allows for a lower down payment than a conventional investment property, and can be very lucrative if the right property is purchased with the right plan put in place. To maximize profits and execute this strategy as intended, investors must look for distressed properties that are undervalued even with the amount of work required. In addition, it's a slower approach than traditional house flipping and the BRRRR method, as you won't be rushed to time the market or get renters in. Therefore, depending on what you're comfortable with, live-in-flips allow more flexibility when looking for a property to buy.
The reason it's crucial to find a distressed property with this method is so you can add value through rehabbing. The most important part of the live-in-flip process is making improvements that increase the property's potential value. Specific improvements add value to the home more than others, and it's essential to identify these areas of improvement and then make a budget for what all repairs will cost. With this strategy, it's crucial to consider all costs, including the selling costs of your home, property taxes, and not underestimating repair costs. After determining cost estimates and relaying these to your REALTOR, you'll arrive at what's called After Repair Value (APV). In other words, what the new market value of the property will be. A popular rule among house flippers is called the 70% rule. The 70% rule states that an investor should not spend more than 70% of the home's APV minus the costs of rehabbing the property. Keep in mind this rule isn't cut and dry, as you'll likely be saving more money with the live-in-flip strategy with DIY projects that will cut down on rehab costs.
One of investors' favorite aspects of the live-in-flip strategy is the tax advantages. When you sell a house after a standard flip, you must pay capital gains taxes on your profits. However, according to IRS Section 121 exclusion, you are exempt from paying capital gains taxes if you live in the property for at least two of the five years before selling it. With the live-in-flip strategy, you don't have to live in the house for two years, but just know that you'll likely have to pay capital gains tax on your profits if not. In addition, to be eligible for financing options that allow a lower down payment, you will likely need to live in the property as your primary residence for at least one year.
The rise in popularity of companies such as AirBnB and VRBO has directly correlated to the increase in buying of vacation rental properties. Because of these apps, finding and advertising vacation homes is now easier than ever. The number of people interested in investing in vacation rentals has therefore increased. Although investing in vacation rentals is one of the more unique strategies, if the right property is found, the cash flow can be dramatically greater compared to long-term rentals. In addition, there are multiple tax advantages, and you can have a vacation house for yourself while making money on it.
The first, and most important step (in my opinion) in finding the right vacation rental, is to find a property that would be in high demand. Vacation rentals can produce unbelievable rental income with short-term leases if the property is consistently booked at the right price; however, you want to ensure you don't buy a property in an area with low demand for vacation rentals. Before purchasing the home, you must do market research with your REALTOR. If you find the right deal, your rental could profit hundreds of dollars a night and be booked consistently throughout the year.
A big draw that vacation rentals offer is the tax benefits. If you rent out your vacation rental for at least two weeks each year, your home is regarded as a real estate business for tax purposes. As a result, while the rental's income will be subject to taxation, many of its expenses can be deducted. Numerous expenses, such as property management fees, occupancy taxes, mortgage interest, utilities, etc., are tax-deductible.
Want to buy a vacation home but are worried it won't be worth the money for the amount you'll use it? Vacation rentals may be the perfect answer. This investing strategy allows buyers to generate income passively while having a vacation home they can use whenever. Block off the desired days on the sites you advertise the house on, and take a vacation there. The flexibility makes it the perfect strategy for those looking to receive monthly passive income (at times not as consistent as long-term rentals), build their real estate portfolio, and have a vacation home of their own.
Let us put our knowledge and expertise, as well as the power of Windermere, to work for you. Don’t hesitate to give us a call or send us an email for a free, no-obligation market analysis and consultation. You won’t be disappointed.