Real Estate Investing 101: 3 Strategies and their Pros and Cons

I've always enjoyed my long term flips. They've allowed me to hone my design skills and express my creativity through construction (you've see the product of those as blog posts). Something that has constantly bothered me about flipping is that on my tiny scale, there doesn't seem to be any long term wealth building as you just cash out of one and put into another. A website and podcast called Bigger Pockets ** opened my eyes to the world of rental properties and house hacking. This post is dedicated to 3 types of real estate investing that you'll see me talk about from time to time on the blog, what I like about them and what I don't. 

1. Flipping

As mentioned above this was my introduction to real estate investing. I've never done a quick flip, but I've now completed 2 long term live-in flips. It's super addicting if you like home construction and design because nothing is ever permanent (also good for the commitment phobe!). I've loved it too because I've been fortunate enough to start doing this in a growing market that has helped make me "invest" and grow my money in a way that doesn't feel like investing. 

Something that has frustrated me about this form of real estate investing is long term wealth. How can you make your dollar go further if you're constantly selling and re-investing. How do you live off of this? Plus, what happens when things aren't increasing and there is a recession, because there will always be another recession. Flipping, on a small scale, doesn't have a great answer to this. The best conditions for flipping seem to have happened over the past 10 years (although no one can tell the future) where the real estate market is expanding and growing, but what does this form of investing look like when things take a turn? 

Pros: Fun, doesn't feel like investing, beat the market when things go right, can be a huge payout 

Cons: Long term wealth growth, results vary drastically with the market, hard to do on smaller scale with consistent results, very hands on investing

2. Rental Properties

Through Bigger Pockets I found the world of rental properties. My parents have always had rental properties, but all I ever heard from them is griping about their "lousy tenants". I never thought about rentals until I started to hear about the benefits from bigger pockets. Rentals answered my question about long term wealth growth. Think about this, you buy a house today at 25. You own this house for 30 years and rent it out to someone else during that time. If you run the numbers right, you're making enough from the rent to pay the mortgage, put aside money for repairs/cap ex/planned vacancies, while still having money left over to pay yourself (we call this cash flow). How awesome is that? You have an income stream for 30 years (or less if you choose to pay down the mortgage faster), someone else is paying your mortgage for you, and at the end of the 30 years you own a home outright that is worth way more than when you bought it 30 years ago you can choose to re-finance, sell, or continue to rent out with much higher cash flow. Not a bad option for a 55 year old planning to retire soon, eh? 

So what's the catch? Rewind to my parents griping, not everyone is built to be a landlord. There are ways to mitigate the tenant issues, but there will always be a bad apple. If you can't handle this or don't like dealing with people landlording may not be the investment strategy for you. 

It also takes a lot of money. Buying a house is expensive as a homeowner, buying a rental property is even more. Most lenders require at least 15% down when you're purchasing an investment. On a $100,000 property that's $15,000. Not to mention any immediate repairs you need to attract the right tenant. Also holding multiple rental properties can pose some risk if you're not financially stable enough to pay multiple mortgages at once if each one was vacant or your tenants stopped paying rent. Money can be a barrier of entry for some. 

Pros: Long term wealth growth, built in retirement plan, SOMEWHAT recession proof because rental demand is higher in a recession, own real property

Cons: Expensive $$, takes a while to see the benefits, tenant relations

3. House-Hacking

This is my favorite. I didn't realize there was a term for this before bigger pockets, but it's genius especially when you're younger and looking for ways to save more money. Basically instead of bringing more money in as income, you lower your living expense. This can be a multitude of different scenerios: renting a room in your house to a friend, buying a small multi-family and living in one unit (we're about to do this!), AirBNB part of your house, etc. Anything you can do to cut down the expenses of your primary residence. 

It's an easy tool to utilize when you're young, right out of college and looking for ways to save more money. Buy a house and plan to rent 1 or more rooms to other fresh-out-of-college friends looking to save on rent. It's a win-win. They save on rent and you have someone else contributing to your mortgage. You charge $600/month for a room and your mortgage goes from $1800 to $1200! What a great way to pocket more money.  

You do have to be willing to live with other people or near other people. My fiance and I just bought a duplex and plan to rent out the other unit. To me this was a good compromise. We don't have to live with a stranger (we're a little older), but we're still reeping the benefits of someone helping us with our mortgage. 

Pros: Lower your mortgage, save more, little risk because you just pay your mortgage if the person moves or doesn't pay rent for a month, good way to tip-toe into real estate investing and make sure the landlord life is for you

Cons: You have to live with or near someone else

**For anyone at all interested in real estate investing I highly recommend the Bigger Pockets podcast and website for information.