There are a million ways to make a million dollars in real estate. That is reason #687 why I love investing in real estate as a wealth-building strategy. And people from every background you can imagine have found financial freedom investing in it. That’s in part to how replicable it is. It is a plentiful asset class with models of success that work – all you have to do is follow what others before you have done. Let’s discuss how you can get started with NO prior experience and buy your first investment property.
This, in my opinion, is THE best way to buy your first investment property. House-hacking is where you buy a property to live in and rent a portion of it out. It is so powerful because you can get in the game for low-down with homeowner’s loans (which have the lowest rates and the best terms) and then have your tenants pay for your house. People have been using this strategy to eliminate their housing expense for generations, but it has only recently become a popular strategy for beginning to build one’s wealth in real estate.
That’s because instead of paying rent and instead of you simply paying a mortgage every month, you have someone else pay your mortgage for you! It’s a very dynamic strategy as there are several paths you can take to be successful with house-hacking. The goal is to ideally reduce and hopefully eliminate your housing expense. And with the right property, you can even achieve positive cash flow.
The most likely case for a house-hack is where you buy a duplex and live on one side while you rent the other side. This is a really easy, non-threatening way to get your feet wet with real estate. It allows you to go through the process of buying your first property and managing your first tenant. The beauty is that the duplex will likely be in the same price range as a single-family house (in most locations) and at the very worst you can still cover your mortgage. The benefit is that you only have to go through ONE transaction and manage ONE tenant, lowering your chances to fail while at the same time building momentum as a real estate investor.
You can also maximize the benefits of house-hacking in a couple of ways. One way is to buy a triplex or quadplex, thereby decreasing your living expenses even further or getting into cash flow territory where you actually make money to live for free. That’s a cool thought, huh? Another popular strategy is to buy a larger single-family house and rent out each additional bedroom. Or rent the extra units with Airbnb, increasing the revenue you bring in per unit.
My wife and I used the ladder strategy on our first house-hack (and are still using it now). We bought a house with a separate mother-in-law suite, or guest suite, and rented it on Airbnb. We bought all the furniture on Facebook Marketplace and got decorations at cheap outlets like Goodwill, Homegoods, and Ross. For about the price it would take others to pay for their first month’s rent, last month’s rent, and a security deposit, we were able to not only purchase the house but get it furnished and rent ready. That house allowed us to come out net positive on all living expenses (including utilities and even the WiFi) with a cash flow of $100/month.
The reason I think this is THE best way to buy your first property is that it is easy. When buying residential real estate you can find an agent who will complete most of the purchase requirements for you. They can connect you with a lender, schedule the inspection, handle appraisal discrepancies, and ensure the whole process ends with you holding the keys to your new home. This takes a lot off your plate in the beginning, especially because the whole process can seem daunting. But you don’t need to do it all! A good agent will do it for you.
I mentioned this before and I’ll expand on it now – because you will make the property your primary residence, you will qualify for the best loans available with the lowest, fixed interest rates, and the lowest amounts down. You can use an FHA loan for 3.5% down or a VA loan if you are in the military for 0% down (how I got started). This is an incredible chance to experience homeownership for very little out of pocket. And with President Biden’s proposed first-time home buyer initiative, you might even get $15,000 towards the purchase of your first home. When you combine that with house-hacking you will be like 50 Cent… laughing straight to the bank.
Now, this is my favorite overall real estate strategy. I’m not a flipper, though I have flipped properties. And I’m not just a buy-and-hold investor, though I do generally hold onto my properties long term. But I do consider myself a BRRRR investor and it combines both of those above strategies. BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat.
This strategy gives you the velocity of money, meaning that you can recycle your money from one deal into the next deal thanks to the refinance step. When you rehab a property, also called adding forced appreciation, you increase the value of the property. You can then go to a bank and get a new loan at the new, higher value. When done correctly, you can refinance out most or all of your initial capital and recycle it into the next deal.
This is a scalable strategy that allows you to speed up your results because you don’t have to save up a new down payment for each additional property. The down payment and repair costs come from the refinance of the previous property once you get started. So you only have to save up the money for the first deal – or find a partner to provide that upfront cash. The BRRRR strategy has allowed me to add to my portfolio while also adding to my cash because I have been able to do several perfect BRRRRs where I have been able to refinance out all of my initial capital. When done correctly, this strategy can make a significant impact on both your cash flow and your net worth as you add equity in each BRRRR deal.
Become an Apprentice
The apprentice model in society has dwindled since the industrial revolution. To learn a profession, people used to become an apprentice for a short time to learn the craft before going out on their own to practice that craft. Think of how blacksmiths, and carpenters, and early entrepreneurs like merchants built their skills and businesses – they learned from a mentor.
You can do the same thing today in real estate! You do this by finding someone in a position you want to be in one day and bring value to them and their operation. The key is to bring VALUE. Don’t show up and put the ball in their court and make it a lift for them to figure out how to use you.
There is a craft to the process to do it most efficiently
- Identify the person/position you want to be in
- Find what that person needs, that by having it will make their life easier
- Provide that thing – whatever it is (as long as it’s legal, moral, ethical)
The above process is not guaranteed, but will drastically increase your chances of finding a mentor that you can learn from and create a mutually beneficial relationship with. If you want to flip houses, find a successful house flipper in your town and follow that 3 step process. The same goes for someone syndicating deals or anything else. Provide value and be effective at what you do, and all that knowledge and experience of the mentor will rub off on you through the process and they will be more likely to share what they know.
One of my recent podcast guests, Sterling White, shared how he got started in real estate by using this exact method. You can check his episode out here.
It’s not a coincidence that I have used all of these strategies so far to get started and do deals, and this one is no different. I actually made the money I needed to do my first BRRRR by wholesaling. It is a great, low-down way to get started, build experience, and connect with other active investors in your market.
Wholesaling is simply getting a deal under contract and selling the rights to that contract to an end buyer. Just like a traditional wholesale company, you are the middle man between the manufacturer (seller) and the end buyer (investor).
The process itself, though simple, is not necessarily easy. The key to this strategy is finding good deals. Yes, I said good deals, not just any deal you can find. Wholesalers market to get off-market deals and sell those deals directly to the end buyer. Since the deal isn’t on the market (on the MLS) you can usually find better deals.
But you have to know where to find good deals so you need to learn what motivates sellers to sell and purchase lists of properties with criteria that would make someone want to sell. For example, you can purchase a divorce list, or a probate list, or any number of potentially motivating factors that cause people to sell.
You then contact those people directly and ask them if they want to sell. To find them in the first place, once you purchase the list with your desired criteria, you will need to get it skip traced to retrieve the owner’s contact information. A skip trace is where you look up their information which pulls from massive databases of public information. Once you get their contact information, you contact them by cold calling them, sending them direct mail, texting, or even by knocking on their door – to name a few.
Once you find the right lead, the right seller, and get it under contract, you then find an investor and sell the contract to the property at a discount from the market rate. The seller gets helped out of a bad situation, the end buyer gets a good deal, and you get compensated for your effort in finding the deal.
It is also a great low-risk strategy because you never take ownership of the deal, and you do not have to do the rehab. The end buyer who buys the deal from you is who does that. This is a big reason why so many wholesalers have popped up in markets all around the country. The low risk and low barriers to entry make it really competitive and also tough from a reputation standpoint because there are a lot of dirtbags who get into wholesaling for those same reasons, expecting it to be their get rich quick scheme.
There are definitely pros and cons but if you act with integrity and focus on bringing value to the marketplace by finding good deals and selling them at reasonable discounts, you can do really well.
Passive investing is where you find a trusted investor and invest in their deals. There are a few different ways you can passively invest:
This is where you acquire the debt on a property and become the bank. You get paid every month based on the predetermined interest rate on that note. You can make the most out of this strategy by buying underperforming or undervalued notes at a discount. Then you can get equity should the loan default.
Private Money Lending
Private money partners are those that lend their funds on fix and flips, BRRRR projects, or in a deal as an equity partner. These deals can be structured a million different ways. Most commonly on fix and flip or BRRRR projects, the lender holds a promissory note and, depending on the state, a mortgage or deed of trust. In Florida we have mortgages and I have structured several deals where the terms between me and my private money investors are outlined in a promissory note and reflected on the mortgage that they hold on the property until the deal is done. If the private money partner becomes an equity partner in the deal, then you create a true partnership and share in all profits for as long as you both own it. I have used both strategies, and both are great to get into deals.
Syndications are where you invest passively in a large deal along with other investors and your investment earns you a slice of ownership of a deal. It’s almost like buying into a stock where you own a portion of the company, but backed by a physical asset and gives you all the benefits of owning real estate.
This is my favorite passive investing strategy because you get equity in the deals and all the benefits of real estate such as cash flow, tax benefits, appreciation, and equity pay down. Investing in a multifamily syndication, like the deals I put together, grants you access to arguably the best asset class there is. Commercial multifamily on a risk vs. return ratio is unmatched. It has consistently outpaced the stock market and is yet safer than investing in bonds.
It is also an amazingly powerful tool for high-income earners or wealthy individuals. That is because depreciation is the 8th Wonder of the World. The IRS allows you to deduct the depreciation expense from other earned income, meaning you keep more of what you make.
Of course, you need to vet the syndicator that puts the deal together and who you invest with and review the deal to ensure it makes sense. It is a fantastic strategy for the working professional who does not have time to put together their own deals or doesn’t otherwise have the access to get into big deals like this. It allows the common person to invest in an asset class not widely accessible to the public. You can’t just log in to Robinhood and ask for “3 shares of a syndication please”. Maybe it’s cause it’s so good Wall Street doesn’t want you to know about it? Sensing a conspiracy?
Wrapping It Up
Investing in real estate has massive potential to impact your wealth. And these are the best ways I know of that you can get started. Which strategy you choose is completely dependent on your personal situation. If you are currently renting, and want an easy way to get in with the help of an agent then house-hacking may be the way to go. If you have time on your hands and the drive then BRRRR or wholesaling may be a good starting point. And if you already have the capital but lack the time then passive investing may be the best route for you. I wanted to outline all of the strategies so that you had a holistic understanding of the opportunities available for you. If you want to learn more on specific topics you can check out the Multifamily Journey Podcast where I interview successful investors and entrepreneurs on how they found success in real estate through various strategies.
Now that you have the information you need on each strategy, dig in, pick which one is right for you, and give it a try. Your 5-year-from-now self will thank you!
Blake Dailey is a multifamily real estate investor and host of the Multifamily Journey Podcast. He has reached financial independence (Passive Income > Expenses) through investing in real estate and aims to help others do the same. He helps passive investors impact their lifestyle and wealth by investing in multifamily real estate. He helps investors achieve the ultimate asset – Time – by making their money work so they don’t have to.