Year 2016 was a year full of financial learning for both my husband and I. Early this year, we learned the importance of financial planning (which I talked about in this article). Towards the close of the year, we learned about the importance of having a business plan when investing in real estate. Part of getting started on real estate investing is to first decide on a niche (or two) to get into and which strategy to use to build wealth.

Real Estate Niches

When I started researching on real estate investing, I was only interested in single family homes. I was aware of other investors buying up small and large apartments, commercial real estates and notes (the buying and selling of paper mortgages). However, my husband and I never paid much attention to those kinds of real estate investing. These types are only for investors who have lots of money. Even if we have the cash or leverage (securing loans), my husband and I aren’t interested in venturing into that kind of large scale risks or work. We’re looking for something much smaller in scale and more manageable. As I wrote in the previous article, we aren’t looking to become multimillionaires through real estate investing. We are interested in portfolio diversification and additional stable monthly cash flow.

Small Multifamily Properties and Their Appeal To Us

After having done some research in the past couple weeks, my husband and I became very interested in small multifamily properties (such as duplexes and triplexes). We’re even open to fourplex (quads). There are many things to like about these kinds of properties.

First, there’s often less competition bidding for small multifamily properties than single family homes or large apartments. Those who are bidding on these kinds of properties are typically individual investors, thus, ruling out many who are only interested in owning a home or large companies/institutional investors. Second, the process and guidelines securing a loan (through a bank) for small multifamily properties are generally the same as that for single family homes. In addition, only one loan is needed as opposed to if you would to invest in two, three or four individual single family homes. Third, you can ‘house hack’ the property and might be able to live for free (or at very low cost) if the rents from the other units or rooms are enough to cover the mortgage and other costs of the whole property! Lastly, the units are very close in proximity, minimizing travel distance when maintenance needs to get done if you choose to manage the property yourself.

With their advantages, unfortunately, the supply for small multifamily properties is generally smaller in number than single family homes. My husband and I quickly learned that these properties are very limited in number in one particular city where we are interested in purchasing rental properties. We determined this quickly once we obtained access to the MLS through a real estate agent. However, we are still hopeful. Supply usually goes up in the spring and summer months, but prices usually go up during that time as well since seasonal demand growth outpaces supply growth. At the same time, we are prepared to change plan. We are okay going with single family homes, too.

Real Estate Strategies

At the time I got started on this real estate investing pursuit, I was already familiar with two strategies: buy & hold and flipping. Although I didn’t know they were ‘strategies’ back then.

Buy & Hold

Buy & Hold involves purchasing a property and renting it out for an extended period of time (usually on a 12-month lease). This strategy is one which most people are familiar. Investors who use this strategy to build wealth are usually interested in monthly cash flow and home value appreciation (some investors choose to hold the property for a very long time). This way, the tenant(s) are helping you pay down the mortgage while you build equity in the property. To become successful at this, you need to (1) evaluate and buy good deals (this includes doing market research, building a great team and knowing about costs), (2) find quality tenants (running a credit and background check, asking for bank statements and calling references) and know how to be a landlord (either getting the education you need to become a good landlord or hiring outstanding property management).

Flipping Real Estate

Investors interested in this strategy typically purchase fixer-upper properties (‘buy low, sell high’). The process involves buying the property and rehabbing it and selling it quickly thereafter.  To make a decent profit, time is a key factor here in order to avoid many months of carrying costs. Carrying costs include utilities, property taxes, and possibly mortgage payments and insurance. These costs add up over time and eat into your profit. Unless you are a contractor or have years of experience flipping, you’d need to hire a reliable contractor to walk through the property with you to help you come up with close estimates for fixes prior to making an offer.

Wholesaling Real Estate

Wholesaling involves you (1) finding great deals (you should know your housing market(s) very well), (2) making an offer and going under contract and (3) selling the contract to another buyer within the contract pending period (typically 30 days). The goal in real estate wholesaling is to sell the property under contract before the contract with the original seller closes.

According to this article, wholesaling is somewhat similar to flipping except that you never actually own the property and you aren’t responsible for any fees or taxes of the property. During the sale pending period, the property still belongs to the seller (thus, you can’t make any repairs). You make a profit when another buyer/investor buys the contract from you. The profit is the difference between the contracted price you made with the seller and the amount paid by the buyer (the one you found). Essentially, you are the middleman between the seller of the property and the new owner. To successfully build wealth using this strategy, you need a large network of prospective buyers and investors to sell the contracts to.

This strategy is typically recommended for new investors who have very little money to leverage. It is also much less risky than flipping. As a wholesaler, I read you have the option to add a contingency to the purchase contract that allows you to back out if you’re unable to find a buyer before the expected closing date. Essentially, you put in the work to try to find great deals (and network) and make some money, while minimizing financial risks.

I was actually somewhat aware of this strategy, but couldn’t put a name to it until very recently. My husband and I browse the MLS once a while. When we do that, sometimes we’d noticed that certain properties had gone under contact, then came back on the market again. Back then, we thought something must had gone wrong with financing. However, after having educated ourselves on real estate strategies, these could easily be wholesaling deals that didn’t work out.

As you learn about the various niches and strategies that are available to you, you may be tempted to explore and get into everything. While starting out, narrow down to one or two that you enjoy the most and become an expert in those areas. As you gain expertise, you can either venture out into other areas or continue to build wealth with what you already know and are comfortable with. In the next article, I will share our shopping criteria and the rules-of-thumb we are using to quickly analyze a potential deal.

My husband and I currently favor small multifamily properties and the buy & hold strategy. If you are a real estate investor, what niche(s) are you interested in? Which strategy(ies) do you use? Why do you favor one (or two) over the others? What recommendations do you have for new or prospective investors?