The content from this article comes from episode 62 of The WealthBuilders Podcast with Karen Conrad.
There are many ways to build wealth through real estate. In fact, you can mitigate most risk and thrive in any economy if you know how to position your real estate investments for different revenue streams. In addition to a financial return, real estate can have an impact return as well. Creating intentional, affordable spaces for families and individuals to live and vacation is an extremely rewarding form of creativity. In this blog, you will learn about four common real estate revenue streams: single family homes, small multifamily homes, turnkey properties, and fix and flips.
A single-family home is a free-standing residential building that usually contains one dwelling unit. It’s the bread and butter of real estate investing, and a common starting point for investors. Buy and hold real estate, vacation properties, and fix and flips are all great options for maximizing your single-family home’s potential.
With buy and hold real estate, you purchase a property and lease it to a tenant for 12 months or longer. The tenant’s rent covers your mortgage and provides additional cash flow (if you do your real estate financing correctly.) Before you purchase a single-family home, analyze the rental rates in that area for similar properties. Ensure that amount would cover your mortgage (with principle, interest, taxes, insurance, and any HOA fees) and provide you with $300+ in cash flow. This form of investing is probably the most hands off, especially if you have a property manager!
Vacation properties have gained traction as more people have begun to work remotely. When you can work from anywhere, why not work at the beach or mountains? In addition, studies show that 60% of travelers prefer home rental to hotels. Of course, not every market is great for a vacation property, so do your due diligence ahead of time to ensure your destination is a hot spot for travelers. Note that vacation properties require more upkeep than buy and hold real estate because there is a quicker turnaround of renters. Plus, you need to provide more functional supplies such as minimal cookware and linens, and you’ll need to have a plan to keep the property clean.
We’ll dive deeper into fix and flips at the end of this blog post. Here’s a quick overview: the first step to purchasing a fix and flip is to buy a property that needs some work. The second step is to put work into it that enhances the value. Then, you sell it and make a profit off the newly appraised value.
The key is to purchase a single-family home that can function as two or even three of these strategies. This gives you an exit strategy that can immensely reduce your risk. This saved us a lot of money on our house in Minnesota when we moved to Colorado.
During that time, interest rates were climbing, so it was a strong buy and hold market. Not as many people could afford to buy a home, and there was a high demand for rental properties. Even though the economy was going down, my cash flow of rental income on that property went up! However, as the market began to improve and more people could afford houses, the buy and hold market tanked.
I had to transfer my strategy if I was to have any hope of cash flowing. Luckily, I was in a location where vacation properties were a possibility. I was able to retain the value of my investment and continue to be profitable on that property I was eventually able to sell.
Small Multifamily Homes
A multifamily home contains more than one housing unit. I recommend duplexes, triplexes, or quadplexes. These are smart investments because you can either
- collect rent from multiple tenants
- live in one of the units and collect rent from the other unit(s).
You can work the numbers on the second option so that your tenant’s rent pays your mortgage, and you can live there for free! There are also a lot of real estate financing benefits to multifamily homes. The big one is that you can claim it as your primarily dwelling and finance it under conventional guidelines. Proximity to your investment also has its advantages. You don’t have to pay for a property manager if you don’t want to! These are a good option in a tight market because not as many people qualify for or are as interested in multifamily homes.
Turnkey properties are units that an investor can purchase and immediately rent out. So, here’s how you create revenue streams from turnkey properties: first, update everything in the property. Then, find a tenant. Put it out on the market as an already rented property. If you do the work on the front-end, the investor will purchase it from you on the backend. Investors love to buy turnkey properties when they’re already cash flowing because lenders count that income as a part of their DTI ratio. It’s a win-win—they get an investment, and you can turnaround a profit.
Fix and Flips
Fix and flips are a great investment to work into your real estate rhythm because they provide quick cash. Billy recommends doing 2-3 buy and holds, a fix and flip, and then repeating the process. This is because fix and flips provide you with cash for a down payment(s).
If you do a fix and flip and sell it within the same year, it is taxed as earned income. If you hold it for at least a year, you can claim capital gains. These are typically much smaller taxes. Finding short-term renters can help you make the most on your fix and flip.
Note that fix and flips have more strategy and risk involved than other real estate strategies. You must be sure not to overspend or to under improve the property. Keep the ARV (as repaired value) at the forefront of your decisions so you can claim the biggest profit possible. If there are market fluctuations in the process of doing the flip, the property value could go down. So, have a couple exit strategies, such as converting the property into a buy and hold.
I hope these tips on real estate revenue streams have inspired you to take the next step in your wealth building journey. If you want step-by-step guidance on how to buy properties like these, I recommend coming to The WealthBuilders Real Estate Workshop April 22-24, 2022. We will have 1-1 coaching and live Q&As in an intimate group setting. (And the money you will make from this information will be well worth the price of the ticket.) Click here to learn more about this real estate conference.