Even as things change, two reliable ways of making money in residential real estate remain. Flipping houses and renting houses. You need to know how to do both and which one is best for today's marketplace. But there is a flipping strategy that very few investors consider that works best.
While foreclosures are greatly reduced, they are still happening to bring bargain houses to the market. Large hedge funds and other big institutions are still heavily in the single-family house market although they aren't buying as heavily as they were a year or two ago. That's easing the upward pressure on prices. Lending is getting easier but it's not going back to the undocumented mortgages of the past. And no one knows where the Fed is going to take interest rates.
This combination will keep rental rates high for years to come. However, appreciation rates have most likely run their course for the near term. Buy and hold probably isn't the best strategy going forward.
But it does make it tempting for investors to jump into the landlording business. Do you really want toilet problems, tenant problems, and 2 a.m. phone call hassles that come along with the landlording business? There is another option that creates long-term positive cash flow without the landlord hassles...
There is a way of quickly flipping houses without finding a buyer needing to qualify for a standard loan. And often without having to rehab the house. A good formula is finding a distressed house to invest in at least 30% below the after repaired value. As soon as you have it under contract, you begin marketing it as a seller financed home.
These work best in lower income, working class neighborhoods but not the gang war zones of cities. You want to target neighborhoods were people can afford to pay rent but would like to be homeowners. Seller financing works great in neighborhoods where you set monthly payments close to what two and three bedroom apartments are renting for. That's often a 20-year amortization.
According to National Rental Price Monitor, the average national apartment rent for a 2 bedroom is $1,080. Compare that with seller financing a $100,000 house with a 10% down payment and a 12% interest rate with a monthly payment of $1095.92. That includes the loan payment, property tax, and homeowners insurance. For that extra $15.92 a month, the buyer has the pride of ownership, a private yard, a garage, and the many other amenities that come with homeownership. Qualified people that can't obtain a standard loan grab at these opportunities.
First, you buy the house for $70,000 and sell at $100,000 to create a quick $30,000 profit. But you need to get all of your money out of the house so you can reinvest.
There is a strong secondary market for loans secured by real estate. With a 12% loan on the house, you can turn around and sell the loan at 10% to create a long-term passive income of 2% for yourself. The beauty of doing this is it returns your capital so that you can reinvest. Over time, you can easily create 10, 15, 20, or more passive income streams from the interest payments, while at the same time collecting a nice profit from each sale. It's the best investment strategy for today's marketplace.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.