May 09, 2023
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Short-term money-making tactics like house flipping won't work anymore
In the current U.S. housing market, your chances of finding the ‘get-rich-quick’ card as a real estate investor are slim, according to Zillow Chief Economist Skylar Olsen.
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Olsen told Business Insider she believes the party’s over for short-term real estate investors who rely on tactics like house-flipping (when you buy a property, fix it up and then sell it for a profit) to make a quick buck.
She blamed her bearish outlook on mortgage rates — which she expects to hover around 5.5% to 6% in the “long run” — and the fact that elevated house prices have kept homebuyers out of the market.
If you’re a real estate investor looking to keep some skin in the game, here’s three ways you can generate positive cash flow.
Buy, hold and build equity
The simple fact is that people can’t afford to buy houses. As mortgage rates hover above 6% and house prices remain high, affordability and demand have suppressed.
Olsen thinks real estate investors should adopt a buy-and-hold strategy to ride out the tumultuous market — and build cash flow along the way.
By holding onto your home and putting more money toward paying off your mortgage, you can build home equity — the difference between how much your home is worth and how much you owe on your mortgage.
This is an attractive prospect for the roughly 40% of current U.S. mortgage holders who secured low fixed-mortgage rates of 3% to 4% in 2020 and 2021, when the COVID-19 pandemic drove borrowing costs to historic lows.
Desperate to hold onto their low mortgage rates, they’re choosing not to sell their properties, instead building their home equity. This comes with benefits.
First off, you’ll likely come away with more cash when you do eventually sell your property — and you can use those profits to increase your down payment and get better mortgage terms for your next real estate venture.
Also, when mortgage rates eventually fall, you can refinance into a lower rate, improving your positive cash flow.
Finally, as you build home equity, you become eligible for a home equity line of credit (HELOC) which generally gives you access to cash at a low rate.
Become a landlord
If cash flow is an immediate issue, you might want to consider becoming a landlord to bring in monthly rent payments that you can put towards your mortgage and other financial goals.
The rental market is hot right now. High mortgage rates have prevented many Americans from making the leap from renter to homeowner, which in turn has meant a rental unit shortage, moving landlords to raise prices.
Rental prices aren’t expected to cool in the near future. In fact, U.S. households are now currently “rent-burdened” for the first time ever, spending 30% of their income on rent, according to Moody’s Analytics.
As a landlord, you can build up your cash flow over time as rents rise.
The rental income you generate can be set aside for a future down payment for additional real estate investments or be added to your retirement nest egg.
However, keep in mind that becoming a landlord takes work and doesn’t always result in positive cash flow. You need to find reliable tenants, collect rent and handle maintenance and repair requests (out of your own pocket).
Generate passive cash flow
If the hassles associated with becoming a landlord and managing a property don’t appeal to you, but you are still interested in real estate investments, there are other options.
You can consider buying into real estate investment trusts (REITs) or you can make passive income by investing in properties through a number of new online platforms without needing to take on the mantle of landlord.
REITs make it possible for you to profit from the real estate market without having to buy a house or worry about screening tenants, fixing damages or chasing down late payments.
They’re publicly traded companies that own income-producing real estate like apartment buildings, shopping centers and office towers. They collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.
Essentially, REITs are giant landlords. Some have seriously blue chip tenants, including the U.S. government, while others house e-commerce giants like Amazon and Walmart.
If you’re unsure about where to start, there are new online platforms — supported by a team of experts — that will give you access to institutional-quality commercial real estate investments without the leg work of finding deals yourself.
You can browse curated deals or join funds invested in diversified real estate portfolios that will maximize your returns while keeping your fees low.
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