I have come across several residential investors throughout my time in real estate. Below are a few of the people I have met and their methods!
The Owner Occupied String Method
Before purchasing my first property I was simply dropping in on open houses as a lookie loo. Every time I would see a sign I would stop my car and go inside to talk to the realtors there. One day I was chauffeuring my parents to their friends house across town when I saw an Open House sign. Without thinking twice I stopped to take a look inside. The house was basic and clean. I remember a lot of wooden trim. The realtor was busy with other people when I noticed an old guy sitting down in a chair smiling at me. I gave myself a quick tour of the house and came back to be faced with the same smiling old man sitting on a chair. He booms out,” Are you buying or just looking?” I answered,” I am looking but will be buying soon.” He laughs and begins to tell me how he bought his first property years ago for $3000. I was flabbergasted but it made sense when he told me he was 90 years old and owned 9 houses. He told me how he did it.
He told me he would buy a house, live in it for a few years, continue to save money. When he had enough money to make his next purchase he would buy a another house to live in and lease out the one lived in. He did this until he got to 9 houses! Later on, I understood the many benefits for doing it this way.
One benefit is the lower interest rate on the loan for purchasing each property as an owner occupied unit. Banks usually give a lower interest rate for owner occupied properties as opposed to investment properties.
Second benefit is that for most investment properties banks require more of a down payment but as an owner occupant loan the down payment could be less. This allows for less money to be used as leverage and allows more disposable money for repairs or an emergency fund.
Lastly, there is more red tape on an investment property and banks become more lenient when you are going to live on the property. The transactions are much smoother on owner occupied properties.
When you make the homes into a rental you had already reaped the benefits by purchasing as an owner occupied transaction! And it is all legal. Most banks never specifically says how long you should live in the property. It could be one day, two days, a year, or more.
The Move Up Method
I had a broker friend who would move every two years! No kidding! He would purchase a bargain property , fix it up, then live in for two years, use the proceeds to trade up to a more expensive house, then do the same thing again, each time increasing their net worth and value of their property!
The US federal tax system allows you to keep $250,000 if your single and $500,000 if you are married without taxing any of your capital gains if you live in the property for 2 out of 5 years! If you sell sooner there is a possibility your gain could be taxed as ordinary income. Not good. However, if you sell after 2 years, you can continue to move your entire gains until you find your dream home. You may not have many homes with this method but you might end up with your dream home which is just as great for some people who don’t want the hassles of landlording!
If your goal is to increase your property count you can also buy two, three, or four properties depending on how much you have gained on the sale instead of buying one more expensive property. If you do this more than once, you could readily acquire a substantial amount of property.
Renting Rooms Method
I once drove by a house I was interested in buying. I asked the owner to show me the house. It was 3000 square foot house with 4 bed rooms with an office. When we walked inside I noticed that there were many people living there and none of them were related! He rented each room for $500 generating about $2500 in rents, $1000 more than if he leased it out to a single family. Later on in life I met a teacher that did the same thing and due to the area he was generating even more money! Be before warned that there will be more risk because you would be dealing with several people and their conflicts. There is a price to pay for more money and that is more management. But if you manage it right with strict rules you will be alright. That teacher, last time I spoke with him, was generating $3000 free and clear after all expenses from two properties, a little less than his teacher salary. It also a great way to raise capital faster for the next investment!
Pyramiding With 1031 Exchanges
Back when I was a teacher I had met a coworker that only worked half the school year. I asked him what he did when he wasn’t working. He said,”I vacation.” He took out his wallet with pictures of places he has gone to. I asked him how he funded all of that. He proceeded to tell me how he used 1031 exchanges to purchase a couple of very high income producing properties.
When you have an investment property or several and you want to increase your property count you can sell it tax free using a 1031 Exchange. With selling one property you can purchase up to three. If you sell two you would be able to purchase 6. And if you had 3 you would be able to purchase up to 9 properties tax free! You can increase your portfolio quite rapidly using this method and would not be penalized during tax time! (I won’t go into too much detail on 1031 Exchanges here but you can do an independent search about 1031 exchanges on the internet!)
These are just a few ideas. Investors may or may not use them depending on their goals. Some investors will use a combination of the methods above, some one, some none, and that is OK. Because we are all different in our approach to investing. The best method whenever you do any investing is actually none of the above. The best method that beats them all is simply buying more property at a bargain!