Invest In A Bigger Real Estate Deal with a group of people or a company
The first is what I do with my investors at MC Companies. Which is joining with others to invest in a bigger deal. This can be either commercial or residential.
There are two great things about investing in a larger real estate deal.
- Low minimums – Sometimes you can invest as little as $500 and be an owner in a property. (but always remember you will have little to no say in how the property is managed)
- You don’t have to be an accredited investor – in the past, to participate in these types of investments, you had to be an accredited investor, but that rule has gone away for certain investment types. At MC Companies you do have to be accredited.
Buy A Rental Property
Purchasing homes and renting them out is a great way to produce extra monthly cash flow.
To do this, you have to purchase a house that has a combined monthly mortgage payment, home insurance payment, and property tax payment lower than the rent the property commands. There are several ways to do this – from buying in an area with high rents to putting a lot of money down so that your mortgage payment is low. If you buy correctly, rental properties can be very lucrative. And, if you do the upfront work of finding those hidden gems, you can let a property management service do the rest and rental properties can be a form of semi-passive income.
Rent A Portion Of Your Existing Home
If you aren’t don’t have the cash to buy a rental property, you could first test the waters by renting a portion of your house. You have a couple of options to do this. First, you could rent a spare room in your home or you could rent the basement. If you’re yet to purchase your first home and like this idea, you could even buy a duplex and live in one apartment and rent the next.
The advantages of renting a portion of your house are that you get to watch your tenant closely. It’s less likely that a tenant will try to stiff you for the rent payment when you’re in the same household. Renting a portion of your house also gives you the ability to get a feel for what it’s like to be a landlord without making such a huge monetary investment.
What I would never recommend…
House Flipping:
I feel like house flipping is similar to gambling. You may win once or twice, but it’s never a long term success strategy. Below is why….
How Do You Make Money Flipping?
As a flipper, it’s simple Math. Add up how much you paid for the property, plus all the expenses to rehab it (it will always be more than you think), monthly cost to hold it, and any other expenses. Then you subtract that (likely very large) number from the income you get from selling the home, and that is your profit or loss.
It’s not like you see on TV. At all. As with most reality shows, they make it seem so easy: buy a home, work with your contractor, fix a few things up and boom you just made 100k. It’s not like that at all…..below is the reality of house flipping.
It’s Risky
Most flippers usually use leverage to purchase the property, and usually those are hard money loans to secure the property and pay for construction. They then try to fix it up quickly to maximize profits. Unfortunately, with each passing day/week/month, holding costs continue to add up. Some holding cost examples are maintenance, insurance, and interest. Delays will
kill your profit and delays are inevitable when dealing with contractors and the unknowns of reconstructing a house.
Taxes
The main reason I hate house flipping is the tax. The rate at which your profits are taxed can depend on how long you’ve held on to the property. If the property is held for a less than a year, then the profits are taxed at ordinary income tax rates, which can be 30-40% (it can be more if you’re in a higher tax bracket) Real estate is a very tax efficient vehicle, but flipping most definitely isn’t. If you hold onto the property for more than a year, you’ll be taxed at the long-term capital gains rate that typically ranges from 15-20%.
Conclusion
You may get Lucky once or twice flipping a home (or you may lose your ass) but at the end of the day there is no long term tax strategy and you will pay high taxes.It isn’t a strategy I recommend because I like long term cash flowing deals.