3 Real Estate Investment Strategies to Start Your Property Empire

Over the last 200 years, 90% of millionaires have built their wealth through real estate, one of the most stable assets in the world.

Whether it be through appreciation, rental income or other business activities that come from the ownership of property, there are many ways to make money in real estate.

And many benefits associated with them, including:

  • Tax advantages
  • Passive income
  • Stable and reliable cash flow
  • Diversification
  • Leverage

In this article we discuss our 3 best real estate investment strategies to make your money work more efficiently for you.

The BRRRR Strategy

The BRRRR Strategy is both a short-term and long term-strategy.

The BRRRR (buy, rehab, rent, refinance, repeat) acronym is the summation of these steps:

  • Buy a property, preferably an undervalued or distressed property, or one in an up and coming neighborhood
  • Renovate it and ****improve it’s value through renovation
  • Rent it out, find stable long term tenants and generate passive income
  • Refinance it and then;
  • Repeat the process all over again

To fund this strategy real estate investors will put down 20 or 30 percent of their own money and fund the other 70 or 80 percent of the purchase price through a private lender or investor.

After the house is rehabbed, they refinance it to a lower cost traditional mortgage.

Since they have increased the value of the property, the investor is able to tap into this additional created equity.

This equity combined with a new hard money loan allows the investor to purchase another run down house, repeating the process.

The BRRRR Strategy is really about leveraging the value of an asset to increase the amount of financing to buy another asset.

Pros:

  • Little money is needed to implement this strategy, just a down payment on the home and a private money lender willing to back you
  • Slowly grow a portfolio of assets over time
  • Passive cash flow in the short-term from rental income
  • Can withstand market fluctuations if held for the long term
  • More tax benefits such as depreciation and 1031 Exchange potential

Cons:

  • Managing the property, means maintenance and becoming a landlord
  • Can take time to find rental tenants
  • If the property does not appraise well it would limit your ability to repeat the process
  • Falling short of rental amount desire
  • At more risk of long-term market fluctuations

The Fix and Flip

Fix and Flipping has been popularized in mainstream culture the last few years through shows like Fix or Flop, Flipping 101 and My First Home.

The fix and flip is a short term strategy where a real estate investor (also called a Flipper), buys a property that is undervalued or distressed and after fixing it up, is able to sell it for a higher price.

The first few steps are exactly the same as The BRRRR Strategy we discussed above.

The only difference is the exit strategy.

In the BRRRR Strategy you rent the property out, with a Fix and Flip, you sell it on the open market in a very short time frame.

Investors good at this strategy can make a staggering 20 to 30 percent profit on their money in as little as 6 months.

Successful fix and flippers can make a lot of money, but it also takes a bit of experience to be great at this game.

There are many factors that go into executing a profitable fix and flip:

  • One must find an undervalued home
  • Know which upgrades and floor plans are more valued in their market
  • Have great contractors that can execute the renovations in a short time span

Pros:

  • Short term profits
  • Allows you to keep your cash moving
  • Can be a nice side business to add some supplemental income
  • No property maintenance
  • No managing tenants
  • Usually a safer investment because money is only at risk for a short amount of time

Cons:

  • If your fix and flip stays on the market too long it could negatively impact your profits due to carrying costs
  • At risk of any short-term market swings
  • You cannot perform a 1031 exchange with a fix and flip
  • Short term capital gains if sold in less than a year
  • Unanticipated expenses can eat into profits
  • Most private money lenders require borrowers to have experience in real estate investment or fix and flipping before backing a borrower

1031 Exchange

A 1031 exchange is a popular real estate investment strategy which allows an investor to sell an investment property and reinvest the proceeds into a property that is like-kind and of equal or greater value, all while deferring the taxes until the gains are realized.

This essentially means you can build wealth tax free because you are not taxed every time you sell one and trade it for another.

The truth is, the rules and regulations of a 1031 in the IRS Tax Code are super complicated for a normal human to understand.

But this complicated tax benefit is very powerful for building wealth in real estate.

If you want to get up to speed on them quickly then checkout our other article 1031 Exchanges Explained, in Plain English.

Pros:

  • You can defer tax into the future
  • The 1031 tax code allows you move into higher value properties
  • No limitation to the number of times you can execute a 1031 exchange
  • Increased leverage and purchasing power
  • Great way to both diversify or consolidate a group of properties

Cons:

  • There are strict timelines to adhere to, such as 45 days to identify properties and 180 days to close on properties
  • Failure to meet these timelines will result in disqualification from executing the exchange
  • You cannot exchange your primary residence, (you are only allowed to exchange investment properties)
  • Cannot be used in conjunction with a fix and flip
  • The rules and regulations are pretty complicated to understand
Author's Bio: 

Russell Barneson runs Sales & Marketing at Crescent Lenders and is real estate investor and operator of his own vacation rental business.

He is passionate about the topic of real estate investing.

Having the experience of operating a real estate business himself, as well as helping other investors get capital for their projects, gives him unique insights into real estate investment trends and strategies.

Russell is a sports fanatic and in his spare time he loves to travel, surf, play sports, and have the occasional beer.