If you are on My Money Chronicles, you are like most of us – looking to increase our income, pay down our debt, or get a profitable side hustle going. Many of us have worked on multiple side hustles until we find the one we enjoy that creates the income we strive for.
A perfect side hustle for many people is real estate investing. It can be one of the most lucrative, challenging, and enjoyable side hustles around. My goal is for real estate investing to be a profitable side hustle and eventually replace my 6-figure full-time career. In this article, I will walk you through how to get started so that you can do the same thing.
Real estate investing is unique because there are at least five ways to earn money on a single deal. First, you may earn rental income or positive cash flow after paying your expenses. Next, properties appreciate in value over the long term. Sure, there are always ups and downs in the short term, but real estate gains value over the years. There are tax benefits because you can leverage depreciation, which allows you to reduce your taxable income for maintenance costs and the fact that buildings will require upkeep over the time you own them. As a rental unit, your tenants will pay down your mortgage and add equity to your net worth. Finally, leverage allows you to own an asset for a small percentage of its total cost. You cannot buy a share of a company’s stock by putting 20% down and financing the rest, but that is precisely what you can do with real estate. You can take advantage of its full value but not tie up 100% of your cash in that property.
What is Real Estate Investing?
First off, let’s define exactly what we are talking about. Real estate investing is simply leveraging residential or commercial properties to earn you money, either in a single transaction or more passively month over month.
There are several ways to leverage property to make money – the two most well-known are probably fix and flip projects, as you see on A&E or HGTV, or holding rental homes in your portfolio. In one of the following sections, I dive into these two strategies and many others to show how you can start investing, regardless of your experience or current financial position.
“Why” Is an Important Question To Start With
A crucial question to start any new venture is, why are you doing it? Take some time on this one. We all say, “I want to make more money” or “I want to replace the income from my job someday,” but that isn’t clear enough. A couple of things to determine are how much you want to make (either per month or per year) and, in a perfect world, how you want to make it. For example, three goals will each make someone $100,000 per year, but they will require vastly different work, skills, financial backing, and experience.
1. I want to work full-time, completing four monthly projects that will each earn me at least $2,000. That would make me over $8,000 per month and around $100,000 per year, and with that, I can replace my full-time job.
2. I want to work part-time, focusing on managing my rental portfolio of short-term rental homes that will earn me just over $8,000 per month. That will make me around $100,000 yearly, and then I can spend the rest of my time with family.
3. I want to do one huge deal each year that will make me $100,000, and then I’ll spend the rest of my year volunteering at my church.
You see, these are vastly different goals that end up with the same result but will require different types of investing, skills, daily activities, etc. Knowing what you are shooting for will give you clarity so that you focus your time on the right move.
Real Estate Investing Strategies
There are many ways to participate in the real estate investing industry, and I will list a sample of activities and investments in a logical order to give you an idea of how many people get started. Once you have the basics down, you can focus on growing and scaling your new business to continue increasing your income. Starting out, you may have a limited amount of money to invest, which is many people’s most common challenge. As you spend time researching real estate investing, you’ll see plenty of ways to become an investor without having a huge bankroll to start. As you become more successful, you may leverage the money you start making into more (or bigger) projects. Set that money aside and continue investing without using your own money, just as you did when you started.
Bird Dogging means finding a good potential investment and giving that potential lead to another investor to act on. For example, as you drive to and from work, you may see a house that has become neglected and showing severe signs of distress. That distress may be physical issues like roof damage, overgrown lawn, weeds, or a dilapidated garage or pool. The homeowner may be having personal problems preventing them from keeping up with maintenance, and they may be interested in selling but have yet to act on it. Also, serious issues like roof damage may preclude them from selling to a retail buyer because banks will not finance a home purchase with such serious repairs needed. You could bring this potential house project to a fix and flipper or our next investor, the wholesaler, and get a finder’s fee from them. The Bird Dog has yet to spend any money, didn’t need to talk to the homeowner, or know how to negotiate. However, they may still earn several hundred to several thousand dollars to highlight this house to another investor.
Wholesaling is a term in real estate investing that means finding a potential house that could be a good fix and flip or rental house, talking to the homeowner about selling, and then bringing that negotiated deal to a cash home buyer, you know who will then buy and renovate the home. The Wholesaler is the one who talks to the homeowner to determine if they may be interested in selling the home. If they are interested in selling, the wholesaler will negotiate favorable terms for the seller and the potential buyer and write up a purchase and sale agreement to buy the home. The wholesaler then finds the perfect buyer and “assigns” the contract to that buyer. Assigning the contract means selling the right to purchase the house at the terms negotiated to another investor and earning an assignment fee for putting together the transaction. It’s a Win-Win-Win – the seller can sell their home without doing any repairs, the buyer gets another project they can renovate to resell or hold as a rental, and the wholesaler earns an assignment fee. This fee is usually several thousand dollars, and the wholesaler hasn’t risked any money or time to do the renovations. They are quickly in and out of the transaction, and a good wholesaler can assign several houses each month. Some states require a real estate license to wholesale property, so check with your state to be sure.
Fix and Flip is what you see the home renovators do on TV shows on A&E or HGTV. The “Flippers” buy homes that need a lot of repairs or renovations so that they can be resold to a retail buyer or another investor, or they may hold them as rentals in their own portfolio. The first step to a successful flip is to buy the home at the right price so that you have the margin to spend money on renovations and still sell for a profit. Flippers must get very good at predicting the After Repair Value (ARV), or the price at which the house can be sold on the open market once it is fully renovated. Once they have an ARV they are confident in, they know what they can buy for, what they can spend on renovations, and what to expect in profit when they sell that ARV. Flippers must also have good project management skills, a good contractor (or the ability to make repairs themselves), and access to the capital to buy the home and complete the renovations. Flippers can make big profits, but they also risk more by using their money or a lender’s financing, and they need to spend several months on each project.
Rentals can be either long term or short-term, and they can be single-family homes, duplexes, or larger multi-family homes. Typically, a “long-term rental” means an annual lease where the tenant agrees to monthly rent and the landlord agrees to provide a safe and comfortable home for the extent of that lease. “Short-term” can be a nightly vacation rental using a platform like Airbnb or VRBO, or it can be a rental for a month or two at a time, which is perfect for traveling nurses or people on extended vacations or business travel. Rentals typically require more money upfront to purchase and can require monthly maintenance, but once rented out, they can be more passive, so you spend less time on the day-to-day operation of this investment.
Private money lending is a strategy where you provide capital to a flipper or rental investor in exchange for either a portion of the flip proceeds or a percentage interest rate on that money. At the same time, it is invested in this project. This is where knowing your goals is crucial. Do you want to gamble a little and get a more considerable potential upside six months later? Do you want a safer investment that will earn you 6, 8, or 10 percent while the property is collateral for your money? There are many ways to structure deals like this, and they can be very passive, but you obviously need that capital upfront to lend it out.
There are many more ways to invest in real estate, but these represent the majority of methods people use to get started. Start with these ideas and grow your investing arsenal as you become more successful.
Actionable Advice To Get Started Today
Ok, you’re getting some ideas of how real estate can become a great side hustle or full-time career. Now how do you get started? Here are a few practical tips to get you started today.
Learn by reading and listening to/watching podcasts, webinars, and videos on YouTube. Plenty of valuable (usually free) resources are out there, so start researching. Some content creators have courses, mentorships, or communities you can pay to join. These may accelerate your learning, but ask around and ensure the program will be worth your investment.
Attend your local Real Estate Investor Association (REIA) meeting or real estate-focused meetup in town. There are groups of investors in virtually every area or city, so get out there and start meeting people, asking questions, and determining the best route for you.
You may even meet some investors you want to partner with at these events or on forums like BiggerPockets.com. That is how I got started – I met some investors who have become business partners and friends by attending local events. I talked to people, learned how they invest and determined if they needed a potential partner and where I might fit into their operation. I grew several profitable partnerships just from doing that.
House Hacking is the best way to get started in real estate investing. If you are looking for a home to live in, what if you bought a duplex, triplex, or quadplex and lived in one unit while renting out the other(s)? You could eliminate or significantly reduce your living expense while taking advantage of all the benefits of real estate investing. This is the best way to get started because, as a primary home (and under five units), you can buy for little to no down payment and likely get a better interest rate too! Then after two years, move on to the next tip.
The Live In Flip / Live In Then Rent model combines the benefits of the house hack with the potential of adding value while you own and live there and then reselling for a big profit after two years. The 2-year mark is significant because you can sell after that time, and all your financial gain from the sale may be tax-free. Check with your CPA, but as I write this, the tax-free cap is on profits of up to $250k per individual and $500k per couple if you lived there two out of the last five years. Or, if you’d like to, you can keep the property and rent out all the units now that you have a cash-flowing property that you know well and got into very affordably. Now, you can do it again and again!
Get Started Investing in Real Estate Today!
As you can see, real estate investing is a fantastic way to earn income in the near term while also building wealth over the long term. There are a lot of strategies and pitfalls to avoid, but as I said, there is no shortage of help out there, and this is one of the most-giving communities around. Best of luck on your journey, and drop a comment or reach out to let us know how your investing is going!
Jeff Cody is the Managing Partner of NextBridge Home Solutions, a real estate investing firm buying homes in Florida, Ohio, and New York. Jeff has seen it all as an active wholesaler, flipper, and rental home operator. Feel free to contact Jeff and his team to partner on deals, ask questions, or share the wins from your real estate investing journey.
Jason Butler is the owner of My Money Chronicles, a website where he discusses personal finance, side hustles, travel, and more. Jason is from Atlanta, Georgia. He graduated from Savannah State University with his BA in Marketing. Jason has been featured in Forbes, Discover, and Investopedia.