This article was co-written with Good Nelly. Good Nelly analyzes financial happenings and writes articles to help her readers plan for their financial future. She has been associated with Debt Consolidation Care for a long time. However, she has contributed her articles to other websites, too.
You may have tried various ways of achieving financial independence, but in my opinion, real estate is a vehicle to help you get to financial independence faster.
You’ve probably heard your co-workers talking about FI around the water cooler, but do you actually know what they’re talking about?
You may have come across the term “financial independence” (FI) at some point. But what is the actual meaning of it?
Do they know what they’re talking about?
Simply put, financial independence can be explained as the ability to payoff all of your living expenses without actually having to need to go to work for a paycheck.
Real Estate As a Vehicle
By no means is real estate investing the only way to achieve FI. The FI forums on Reddit are riddled with heated debates between individuals who vehemently believe that one way is better than another.
Some people feel that choosing Vanguard Index Funds are the way to go, while others suggest investing in REITs or real estate investing.
The truth of the matter is this: Everyone’s path to FI is different and everyone’s financial portfolio and situation is different.
My advice? Do what works best for you!
That being said, let’s look at some of the different real estate vehicles you might choose from when jumping into the real estate investing world.
We’ve all seen different types of house flipping on HGTV. From hit TV shows like “Love it or List It” to “Flip or Flop” to the beloved “Fixer Upper.” There’s a level of American pride and nostalgia when it comes to finding an old house, tearing it down (“It’s DEMO DAY!!”) and restoring it to its former glory.
And for many would-be investors, house flipping can prove to be a good introduction to the level of real estate investing.
What is house flipping? At its core, house flipping consists of purchasing a dilapidated property well below market, rehabbing it in order to add value, and selling it for a profit.
A report by the U.S Census Bureau data reveals that the sales prices of new homes had been facing constant appreciation from 1940 to 2006 (before the housing market crisis). But, when the economy rebounded, post-2009, it has been gaining momentum again to date.
Suppose you have purchased a property worth $200,000 and you are investing $50,000 for renovating the same. Then you are selling it for $310,000 and earning a gross profit of $60,000. (NOTE: Your net profit would likely be a lot less secondary to real estate agent commissions, interest payments, etc…).
According to a report by Fortune published in 2016, flippers had made gross profits, as high as 80% more of the cost price of the homes, in the following regions:
- East Stroudsburg, Pennsylvania (212.1 %)
- Reading, Pennsylvania (136.4 %)
- Pittsburgh, Pennsylvania (126.8 %)
- Flint, Michigan (105.8 %)
- New Haven, Connecticut (104.8 %)
- Philadelphia, Pennsylvania (103.7 %)
- New Orleans, Louisiana (97.6 %)
- Cincinnati, Ohio (88.5 %)
- Buffalo, New York (85.1 %)
- Cleveland, Ohio (83.8 %)
- Jacksonville, Florida (81.8 %)
- Baltimore, Maryland (80.8 %)
It’s no doubt that getting into flipping houses can be worthwhile.
Opting for Real Estate Investment Trust (REIT)
Basically, “REIT” is any company which owns and operates income-producing real estate and its assets. But these companies should meet some requirements to qualify as a REIT.
It is based on the idea of mutual funds and as a result, it provides dividend-based income along with total returns.
A report says that approximately more than 80 million Americans invest in REIT stocks through their 401(k) and other investment funds.
You can invest in various types of REITs which are explained below:
- Equity REITs buy, own, or manage high revenue generating properties like shopping malls, hotels, apartments, etc. They generate revenue through the rents of the tenants, who take the lease on the space.
- Mortgage REITs generate revenue by the interest incurred from buying mortgages or mortgage-backed securities. Opting this helps you to invest in real estate without buying it actually.
Getting started in real estate can sometimes require a large chunk of money at the beginning. For example, house flipping typically requires using all cash or raising capital from private investors or hard money lenders because traditional lenders typically require a “seasoning period.” However, as I’ve written before, House Hacking can be a terrific way to get started in real estate investing.
House hacking typically consists of purchasing a multi-family property, (such as a duplex, triplex, or fourplex), living in one unit and renting out the other units. However, in some parts of California, purchasing a multifamily property can be cost prohibitive and quite expensive. Instead, you can participate in what I like to call the “California House Hack.” This is where you purchase a 3-4 bedroom house and live in one room and rent out all the other rooms. Many times, this can greatly reduce your mortgage bill and oftentimes, you’ll end up saving much more had you been paying rent to live somewhere else.