Using debt to build wealth in the real estate world sounds like irony but is very possible. Many of the successful real estate dealers you know are into this trick to build their wealth. And don’t go thinking I am saying this to make it sound like music to your ears. Soon, you will see for yourself how you can start carving out your space from the vast real estate world through debts.
You must have heard people talk about leverage in real estate, yeah? That is just a fancy name for debt. Yes, borrowing money to buy properties that would earn them more money. It is a smart move really, but you have to do it smartly.
There are many ways you can exploit to build wealth by borrowing, most of which I will discuss in this article. It is not fiction. Others have been doing it so why should you be an exception? Let us move on.
Different Ways to Use Debt to Build Wealth in Real Estate
In this article, we will discuss 6 different options you can use to build wealth and make your mark in real estate.
1. Rental Properties
This is a sure way to build wealth with a mortgage. Many people take out a mortgage and keep paying till they can complete the payment. You will be doing the same thing. Only this time, the mortgage is business oriented. The cash may not make you millions of dollars, but it sure will produce a positive cash flow.
Notice that this will be a long-term debt right? This does not mean that the rentals have to be long-term too. You can get creative. You could decide to do short-term rentals, medium-term leases, or even list it on Airbnb. Anything to bring in more cash.
2. Commercial Properties
Another smart way to make use of your debt wisely in the real estate world. Commercial properties are usually more expensive than residential properties but it is way more flexible than residential properties. Its flexibility makes it easier to handle.
You can formulate lease contracts, get interested clients, collect rents, terminate former clients’ contracts, and not worry about legal issues. One drawback of this is that loan terms for commercial properties are usually shorter (about 5-20 years), which is why you should make the most out of it while you can.
3. Buy, Renovate, Rent, Refinance, and Repeat (BRRRR Strategy)
This strategy is self-revealing. An important point to note here is to ensure you buy the properties at their market prices or less, and then invest less than 70% of their after-repair value. The reason is to have enough shares in the properties when selling or financing.
The next thing is to analyze the renovation costs. Renovation should increase the value of the property because a proper renovation will attract the right kind of clients.
Renting out your renovated masterpiece is the next step. This is where the cash is coming from. Furthermore, having a monthly cash flow is like a lifeline for investors. It is also a smart way to pay off your debt.
Another good thing here is that lenders are more likely to refinance a rental property than they are to a residential one. While refinancing, you must do your research and do it well. Banks/lenders who offer cash out should be your priority. Also, know how long the property should be in your name before you can refinance.
Before you Repeat the process, take your time to go through your last BRRR and make adjustments in your next. If you do this well, you are on your way to becoming a top real estate investor in no time.
4. House Flipping
You do not have to be a real estate guru to know that house flipping is short-term, quick, and one of the easiest ways to build wealth in real estate. All you will be doing here is identifying and purchasing houses that need some refurbishing, renovating the house, and selling it to someone who needs a modern move-in-ready home for a good price.
Although flipping can be a fast way to earn investment returns, the costs and taxes are a bit on the high side, so you may want to be careful with house flipping.
5. Land Investments
This is a niche with fewer competitors. It usually comes with less worry because no maintenance is needed, no refinancing, no tenants-landlord problems, and other headaches that may accompany house investments.
This method is similar to house flipping but what you are flipping here is land. Investors would purchase a division of land, otherwise known as a parcel, and then look for interested buyers.
They can also look for interested buyers who will pay in installments. In this case, the legal ownership will be transferred only after the buyer has completely paid for the property.
6. Mobile Homes
Just like any other type of property, you can take out a loan to purchase mobile homes and use them for rentals. Mobile homes often come with fewer expenses because maintenance is not on you, rather the people renting are the ones doing the upkeep. This is also a niche real estate investors are not really into yet, which means more returns for the few who are into it.
Final Thought
Much of the renowned success in real estate comes from debts. It is a sure and perhaps the only way to build wealth in real estate fast. Unless maybe you are some already-made billionaire.
However, you will have to tread with caution because as they say, “leverage is great until something goes wrong with your investments and you still have to pay your debts”.
When starting, it is best to begin with small amounts of debt. As you increase your knowledge and are more confident in your expertise, you can also increase your debt. Or in real estate jargon, your leverage.
