What is creative real estate investing
Creative real estate investing is a newer, value-added investing strategy that is different from conventional investment methods as they have historically been practiced (such as, for instance, “buy an investment property and rent as is”). As the real estate market is becoming more and more competitive, with prices skyrocketing and profit margins growing slimmer, new approaches are needed to achieve better ROI. To keep up with the market, savvy investors have to think outside the box and come up with innovative investment strategies since a lot is at stake! Here is our list of top-five creative strategies you may want to try to bring your real estate investing game to the next level:
1. Fix-and-flip properties
Flipping houses is one of the most popular and straightforward creative investing strategies: purchasing a property, renovating it, and then selling it at a profit.
One common practice is to find “hairy deals.” Typically, this type of project involves some structural problems like cracks in the foundation, mold, or the need for some other major repairs. But the good thing about them is that even in today’s hot market you enjoy less competition on those deals.
The other advantage is that even without engaging in problematic properties you can be as creative as you want (within reason, preferably!) – you may wish to redo the kitchen if you feel like it, move the walls, reconfigure the house layout to open it up and create a more modern flow – in other words, add value and make it more marketable in the current conditions.
One thing to make sure when getting involved in house flipping is to always hire professionals who are experienced in addressing specific issues, so they can help you fully and thoroughly assess the property and its potential. Some novice investors make the mistake of thinking that they are personally qualified to handle every aspect of the project, and many end up paying for this painful lesson with their own money and energy. Find good experts for every stage of your project – from the initial inspection, through the actual rehab and on to the final staging of the property to prepare it for sale. And once you find them, keep them! In the long run, they will be instrumental to your success.
2. Adding square footage (SF)
This is another approach to rehabbing the property in order to sell it at a higher price. While fix-n-flip involves renovating the existing structure and fixing any issues it may have (foundation, leaks... whatever), home addition, as the name implies, is a means of building onto an existing house, a “value add,” by adding an extra bedroom, or bedroom and bath or even doubling/tripling the living space. Adding square footage increases the footprint of the dwelling. Typically, the SF addition would also include a rehab consistent with, and complementing the existing structure.There’s also a construction component to a square foot addition, so it certainly requires much more knowledge, experience, and time. Building major additions may require that you go through various permitting processes. Depending on the state or even county, requirements may vary, and you should be aware that California is one of the trickiest ones in terms of getting building permits. The process is also time-consuming and often involves a lot of red tape.
If you do not yet have sufficient experience in this type of rehab, to make this investment strategy successful you may want to consider partnering with someone who has plenty of experience with this sort of projects. It is also a good idea to hire a design-build firm or an architect that could help you “translate” what you envision onto graph paper.
Yes, the process takes quite a bit more effort, time, and money from your side, and this market is very competitive, but in the long run, it is a very good strategy.
Investing into an AirBnb property is a creative investing strategy in which real estate investors purchase rental properties and list the entire house or individual rooms on Airbnb. Usually, investors themselves do not live in these properties. This creative investment strategy is an excellent way for investors to generate income from multiple properties they own.
The good thing about the AirBnb strategy is that it is much more lucrative than traditional renting. However, you will need to commit more resources in order to get this gig going: from the very start, it requires more work, and you may need to hire a management company to manage your AirBnb properties.
Another factor to keep in mind is that there may be rental restrictions and regulations in your chosen market, and they may vary from state to state and even from town to town. You will need to make sure that your property is in the approved zone and won’t get banned. Owning an AirBnb rental can be a great way to generate a stream of income, but before diving into the project, it may be a good idea to make sure you have Plan B, where your property can also function as a traditional long-term rental, just in case the situation doesn’t play out according to your carefully laid plans.
4. BRRRR method
The BRRRR method means “buy, rehab, rent, refinance, repeat” and describes a creative investing strategy used by investors who wish to build a source of passive income over time. It’s a long-term investment strategy with the main focus on investing in distressed properties, rehabbing them and renting them out, and on refinancing rehabbed properties in order to buy new ones. In the final step of the BRRRR strategy, you will go back and repeat all the previous steps in the same order as before.
This method is good but it requires loads of patience and time: to rehab the home, find tenants, and allow for seasoning (i.e. a certain amount of time the property must be occupied before it can be refinanced) before you can get a cash-out refinance.
This tool is perfect for investors who are interested in building a passive income portfolio from start to finish. The process might be more demanding than buying a ready rental unit, but it can also be very rewarding. This strategy is a great fit for real estate investors who are comfortable taking a certain degree of risk and are ready to work hard to do their own in-depth market research.
5. ADU – Accessory dwelling unit
The accessory dwelling unit is an additional residential building that is built on the same lot as the primary residence. It can be attached to a house or garage, or it can be built as a stand-alone unit. In either case, it will utilize the water and energy connections from the primary dwelling.
Some people build ADUs for their family members to live in (“in-law apartments”), but many others use them for extra rental income, hoping to gain success.
This can be a wise and profitable investment, but it hugely depends on many factors like upfront costs, possible tax consequences, zoning ordinances, etc.
It’s vital to first investigate if it’s legal to build ADU on their property. If the new structure goes against the law, you may incur fines or have issues refinancing the property in the future. On the other hand, some localities with high occupancy rates may encourage and incentivize this type of construction projects in order to alleviate their rental housing shortage.
Building an ADU could also mean a sizable tax bill, which will cut into your desired profit. Once you determine the likely overall annual income from ADU, you can consult with a tax professional to determine if it makes sense to invest in an ADU.
California is a very competitive market. If you can find ways to get creative in your investment strategies, you will have a competitive edge and a good chance to earn better money.
But in order to do that, you have to think outside the box. Start by analyzing your options and choose the one that best fits your business goals, income requirements, and personal style. Do a project or five. If you are so inclined, try another investment strategy, and then another one – the more tools you have in your toolbox, the more opportunities you can create for yourself. Just about anyone can do a simple fix-and-flip, and with all the available loan options out there most can find success investing in real estate. As you practice and gain more experience, you will realize the nearly limitless potential of this industry. And the more complex and creative investing strategies you use, the more doors will open to you, and the more deals you will close.