You’ve heard that residential real estate is the best investment you can make. But how do you make money as a real estate investor?
Five Ways to Make Money with Residential Real Estate
By making a side-hustle (or full-time career) out of residential real estate, you can create a reliable source of income. Although real estate investments are less liquid and can be more time-consuming than throwing your savings into the stock market, the potential for stable passive income and a diverse investment portfolio can lead to a desirable outcome for any investor.
Here are five different strategies for making money with your residential real estate property.
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1. Buy and Hold
What is buying and holding?
Buying and holding is a type of long-term investment that’s considered a standard rental property. You purchase a single-family home or a multi-family unit, then turn it into a yearly rental that generates steady passive income while you pay down your mortgage. After holding the “buy and hold” property for a set number of years, you finally sell it for a profit.
Who is it for?
Buying and holding a long-term rental property is great for the investor who wants reliable monthly cash flow. Holding real estate provides you with a more diversified portfolio of assets, and there’s also the benefit of long-term appreciation on the property.
Pros of Buying and Holding:
You can get a steady and recurring passive income from rent each month.
Your property acts as a long-term asset that appreciates in value over time.
You can get tax benefits such as being able to deduct expenses.
You can turn a profit when the market appreciates before you sell.
Cons of Buying and Holding:
You have to pay a property manager or handle your own landlord duties.
You may rely on rent to cover your mortgage payment, which can become a serious issue if your tenant doesn’t pay on time!
You are responsible for typical homeownership costs, which can lead to unexpected expenses that eat into your annual income.
Your money may be less accessible because real estate is a fixed asset.
You may struggle to sell for a profit if the market depreciates.
Before you buy your next investment property, make sure to download our free Rental Property Cash Flow Calculator to accurately estimate how much money you can make.
2. Buy, Rehab, Rent, Refinance, Repeat (BRRRR)
What is BRRRR?
BRRRR stands for “Buy, Rehab, Rent, Refinance, Repeat.” First, you’ll look for a home under fair market value to buy, usually a distressed property. Next, you flip (or rehab) the property, focusing on renovations and updates that will give you a good ROI. Once your renovations are complete, you rent it out to start generating income through the property. Your next goal is to refinance the property to increase its appraised value by more than the amount of money you used to flip it. With extra cash flowing in each month from your tenants and equity built from refinancing, you can repeat the process so that you are buying and holding multiple properties and making money off each piece of real estate.
Who is it for?
Fans of Bigger Pockets and Rich Dad, Poor Dad are often drawn to this method. If you’re willing to put the time into it, following the BRRRR method is a creative way to make a passive income with less start-up cash. This type of real estate investment appeals to many first-time investors who want to generate multiple deals, starting with their first big investment.
Pros of BRRRR:
You can multiply your income significantly as you add properties.
You may not need as much up-front capital.
You can make back your initial investment by refinancing and invest more into future property investments.
You can get regular monthly income from renting the property.
You can leverage your initial investment to scale and grow your portfolio.
Cons of BRRRR:
You may need to put in extensive work, which can take longer than expected.
You run the risk of uncovering major repair needs (such as foundation leaks).
You may run into unexpected costs that break your budget.
You won’t get that stable passive income right away from each property.
Your budget and strategy may be affected by drawn-out refinancing or low appraisals.
3. Flipping
What is flipping a house?
Those fixer-upper shows on HGTV? They are typically flipping a distressed property. The flipping cycle goes like this: buy a house that needs a lot of work at a low price; renovate and fix it up; list it, and sell it for a profit.
Who is it for?
Flipping homes is generally a way to make money from real estate that is most successful for seasoned property investors. There are many factors that go into making a profit from flipping a house. Investors who want to try this method should have a team of reliable contractors and experience with renovation and project management.
Pros of Flipping Homes:
You can make a quick and large profit from each flipped home.
You can use hard money loans and creative financing to invest without much of your own cash.
You can get equity in the property immediately when you buy distressed homes at a discount.
You get the satisfaction of seeing a complete property transformation.
Cons of Flipping Homes:
You may need a large amount of up-front cash or operating capital to cover the purchase of the property and holding the property while you flip it.
You need knowledge and know-how to flip the house quickly before it becomes a money pit.
You can’t guarantee the result will be as profitable as you planned.
You need a team of expert contractors you trust to get the job done and at the price you need it done.
Your profit on a short-term investment, such as a fix-and-flip, may be subject to capital gains taxes.
4. Wholesaling Real Estate
What is wholesaling in real estate?
Wholesaling is when an investor enters into a contract to purchase a property from a seller, then sells that same contract (with the same terms) to a third party for a set fee. As a wholesaling investor, you don’t spend your own money on the home purchase, and you receive an assignment fee from the third-party buyer.
Who is it for?
Wholesaling is a very different way to make money in residential real estate. If you’re looking for a short-term investment strategy in which you can turn a profit without making a large initial investment, this could be the way to do it. If successful, you can wholesale real estate without spending a dime on actual property.
Wholesaling revolves around relationships. To be successful in this type of real estate investing, you’ll need to be able to persuade sellers that going under contract with you is for their benefit. You’ll need to anticipate what type of offer you can make that will both entice not only the seller but also the buyer (who will be purchasing that contract for an additional fee).
Those who purchase contracts from wholesalers are typically investors who want to either buy and hold a property or flip it. You’ll need some emotional intelligence to discern what buyers are looking for and how to market to them when acting as the wholesaler.
Don’t start wholesaling without downloading our free Home Sale Proceeds Calculator.
Pros of Wholesaling:
You don’t need a real estate license (in most states).
You can spend less time on each deal than if you buy or flip.
You don’t have to renovate or repair the property.
You take on less financial risk initially, as long as you can find a buyer.
You don’t need to purchase a house if you’re able to sell the contract.
You can work from anywhere, in any market.
Cons of Wholesaling:
You need to understand local markets and know how to identify properties desirable to other investors.
Your income is unpredictable.
You will likely have a high level of competition with other investors and buyers.
5. Residential Real Estate Sales
What is real estate sales?
In a nutshell, working in residential real estate sales means getting your real estate license and becoming an agent or broker. A real estate agent is a licensed professional who represents buyers or sellers in real estate transactions for a commission.
Who is it for?
Those seeking a career in real estate sales should also be ready for an unfixed salary and varied working hours. While it’s true that for the most part you have the power to control your schedule, as a real estate agent, you’ll likely find yourself working odd hours, weekends, and holidays to accommodate your clients and find success.
Pros of Real Estate Sales:
Your income is only limited by what you decide to put into it.
You can have a more flexible schedule than many jobs offer.
You don’t need to purchase property to make money.
You get to help other people make wise financial decisions and secure an essential need—housing.
Cons of Real Estate Sales:
Your local market is likely saturated with agents.
You have to compete not just with other agents, but with off-market investors, builders, and wholesalers.
Your income is based on commission.
Your work schedule may be inconsistent.
The Bottom Line
There are plenty of ways to generate an active or passive income through residential real estate, and knowing which strategy best fits you is key. Working with a real estate consultant like those at CGP can help you assess the best way for you to make money from residential real estate. Reach out today!