There’s no doubt about it – real estate has been one of the most consistent wealth-producing asset classes for decades. And while real estate can be a full-time job, there are “lazy” ways to invest in it. And, sure there are real estate market corrections just like in any market. But, the essential and tangible nature of housing has caused real estate values to always trend upward.
However, many real estate investing strategies require a significant amount of work. Flipping houses and managing tenants keep many investors so busy they can hardly keep their noses above the water.
Fortunately, there are many “lazy” ways to invest in real estate. By lazy, we mean creative strategies that get around the obstacles that many investors face, such as time limitations, minimal savings, or poor credit.
But don’t misunderstand; every investing strategy requires work. There is no such thing as truly passive income. Even investors that enjoy passive income today had to spend time and effort in the past to establish those income streams.
Nevertheless, these strategies follow the “work smarter, not harder” philosophy. They are designed to help real estate investors maximize their time and resources and grow their wealth as quickly as possible.
Utilizing Primary Residence Loan Programs
Many investors get into real estate and are disappointed when they learn most lenders require at least 20% down on every new purchase. Not only that, but interest rates are typically higher for investment properties because banks see them as a higher risk.
To get around this, many investors purchase a home as their primary residence and turn it into an investment property. This allows them to take advantage of loan programs only offered to owner-occupants. For example, an FHA loan will only require a 3.5% down payment.
While this strategy isn’t necessarily scaleable since homeowners can only have one of these loans active at a time, it can certainly help investors start growing their portfolio and compound it over time.
House flipping is one of the most well-known real estate investing strategies – but, I’d forgive you for thinking it wasn’t exactly lazy. However, the fast pace and funding resources this strategy requires can make it quite grueling for new investors. On top of that, profit from flipping a house is taxed as ordinary income, which can destroy the bottom line.
An alternative approach to the traditional house flipping model is the live-in flip. This strategy involves purchasing a house to live in, fixing it up while living there, and selling it for a profit.
One of the primary benefits for investors that use this approach is that they can access a favorable loan such as an FHA or VA loan. However, one thing to consider is that the house must be in decent shape at the time of purchase. A traditional lender may not approve the purchase if the home is in major disrepair.
Another benefit of the live-in flip is its significant tax advantages over a traditional flip. While a flipped house is taxed at the investor’s tax bracket rate, the profit from a live-in flip is usually exempt from any taxes. The only stipulation is that the homeowner must have lived in the property for two of the last five years. That two-year mark is the sweet spot for investors who repeatedly use this investing strategy.
Live In Then Rent
Like the live-in flip approach, many investors will buy a property as their primary residence. And then, they will take advantage of lower interest rates and down payment requirements. Finally, they’ll move in shortly thereafter and begin renting it out. This is very common among investors that frequently move for their jobs.
As with any real estate investment, the numbers must make sense to use this approach on a house. Investors must compare the fair market rent of the house to their mortgage payment to see what their cash flow will be. They must also consider other expenses such as property management fees and maintenance. If there is significant cash flow left over when using a conservative rent price and subtracting out these expenses and the mortgage payment, the property will likely be a great wealth-producing asset.
Fortunately for investors that use this investing model, their debt-to-income ratio is barely affected by the first house when they purchase a new one. Most lenders will credit 75% of the rental income toward their debt-to-income ratio. However, acquiring an FHA or VA loan again will likely be more challenging.
House hacking has become increasingly popular recently, especially for young investors looking to acquire their first investment property. Like the other “live-in” investment models, this approach allows investors to capitalize on lower interest rates and down payments by purchasing a property as their primary residence.
House hacking typically involves buying a multifamily property such as a four-plex, living in one of the units, and renting out the others. The rental income from the tenants will often pay the mortgage and provide monthly cash flow. That cash flow can be saved up to purchase another investment property.
Although this model is most commonly used on multifamily properties, it can also be applied to single-family homes. Instead of renting out separate units, the investor would rent the extra bedrooms to roommates.
One of the side benefits of house hacking is the ability to keep an eye on the condition of the property since it is the investor’s home. However, this could turn into a nuisance if the tenants are high-maintenance.
Creative Financing Strategies
The goal of every investor is to maximize their cash-on-cash return. One way to do this is by maximizing the income from their investments. The other way is to minimize the amount of their own money they have invested in their deals by leveraging other people’s money. The latter is easily achieved by implementing creative financing strategies.
Many people believe they must have hundreds of thousands of dollars in the bank to be able to buy houses. But, that’s a fallacy. With a bit of creativity, many investors can purchase as many properties as they get their hands on. And, all that while using none to very little of their own capital.
The BRRRR Method is one of the most popular ways investors stack rental properties. It uses the same principle that wealthy entrepreneurs use to force the appreciation of an asset via improvements. Then, investors leverage bank money against it based on its new value. Wealthy investors rarely sell an appreciated property because they would have to pay taxes on the gains. Instead, they pull the equity out tax-free by refinancing it and use that money to buy more assets.
The “BRRRR” stands for Buy, Rehab, Rent, Refinance, Repeat.
Here is how the “BRRRR” method works:
- Locate a house that needs repairs but would make a good rental when fixed up
- Buy the home at a price to account for the cost of repairs
- Renovate the property to get it rent-ready
- Rent out the home for market rent
- Refinance the house based on the new value and replenish the capital used for purchase and repairs
- Use the newly restored capital to repeat the process on another property
In many cases, investors can pull all of their invested money out of the deal with the refinance loan. Even better, some are able to make some profit when the new loan amount exceeds their original investment. And the best part about this profit is that it is tax-free.
Even if an investor leaves some of their own money in the deal, most of their capital will be replenished by using this strategy. And, they will be postured to quickly find another property to buy.
Buying Subject To Existing Financing
Another lazy way to invest in real estate is by taking over the owner’s loan payment and balance instead of getting a new loan. This strategy is called buying a house subject to the existing financing. Moreover, it has allowed investors to generate insane amounts of cash flow without adding any loans to their credit.
On top of not having to use their own credit, investors using this strategy benefit from avoiding down payment requirements. The only down payment required is what is negotiated between the buyer and seller.
Another benefit of this strategy that may become very prevalent in the near future is investors’ ability to take advantage of homeowners’ interest rates. For example, say the current market interest rates are at 8%. But, the seller’s loan is at a rate of 3%. The current monthly payment would be much lower than it would be on a new loan.
Investors often use this strategy when purchasing homes that are in pre-foreclosure, meaning the owner is behind on payments. Instead of coming up with the cash to buy the house or getting a new loan, the investor simply makes up the back payments on the loan. Then,they begin making regular monthly payments.
What if the seller doesn’t have a loan on their house? No issues! Creative financing still works! In fact, this gives the seller the benefit of receiving interest payments just like a bank.
Instead of going to the bank to get a loan to purchase a house, lazy investors can create a new loan with the seller. This is called a seller carry-back. This loan has all of the terms of a regular loan. For example, it includes the principal amount, down payment, interest rate, and length.
It may sound strange that the seller is financing the purchase for the buyer. However, it is not like the seller has to produce the money to give to the buyer just for them to give it right back. Instead, a promissory note is created that documents the repayment of the purchase price in return for the property.
Seller carry-backs typically take place when a home is free and clear. However, investors use wraparound mortgages when there is still a loan on the property. This process is very similar to the seller carry-back in that it has the same terms that must be defined. It is called a wraparound mortgage because it essentially “wraps around” the existing loan.
The typical wraparound mortgage should have terms that cause it to meet or exceed the balance and monthly payment of the original loan.
Making Money From Real Estate Without Owning It
With regards to business, John D. Rockefeller once stated, “Own nothing, but control everything.” That is the thought process behind many of the ways lazy investors execute real estate investing strategies.
Just by having a signed purchase agreement or even an option to purchase a house, an investor has equitable interest that gives them many different options. One of these options is selling that equitable interest for a fee.
It’s counterintuitive, but some of the wealthiest investors in the world have made money from assets without even owning them. These strategies exist in nearly every industry, including airplanes, stocks, and of course, real estate.
The idea of using a master lease in real estate is fairly straightforward. It involves signing a lease with the owner of a property and then subletting it to tenants. In this scenario, the investor essentially acts as the middleman between the owner and renter. And then, the investor keeps the difference.
The key to this lazy real estate investing strategy is to find a property listed at below market rent. This way, the real estate investor can rent out the property at a higher price. Doing so achieves a positive monthly cash flow that makes the deal worth the effort. As a concession for lower monthly rent, many investors agree to cover maintenance expenses. Therefore, these costs must be budgeted for when analyzing a deal.
Many investors use this type of setup to acquire short-term rental properties. Instead of buying a bunch of houses, they lease them from homeowners. Then, they rent them out on Airbnb or similar platforms. The benefit to this lazy real estate investing strategy is that people can rent houses from homeowners at or near market rent because they can charge a premium when renting them to short-term guests.
Sandwich Lease Option
A sandwich lease combines a lease agreement with an option to purchase agreement. A typical lease option agreement defines the standard terms of the lease and the terms of buying the property in the future. Indeed, the sandwich lease is a very creative and valuable tool for lazy investors looking to earn money in real estate.
Investors can use the lease option to acquire properties. But, the same investors can also use the option as an exit strategy. Many investors use them on both sides of the transaction and stay in the middle, giving the term “sandwich lease option.”
With a sandwich lease option, lazy real estate investors have three ways to profit. The first is on the option fee that is collected upfront. With most lease option agreements, an option fee is required to buy the option to purchase the house at a later date. Then, it is credited toward the purchase price. Most investors try to collect a higher fee from the tenant-buyers than they are paying the seller.
The next way to profit is from the difference in rent price. As a result, most investors try to negotiate a rent price with the seller that is slightly below market rent. The last profit center with sandwich lease options is the difference in the purchase price. Because the tenant-buyers are buying the house with terms, it is sometimes possible to slightly raise their purchase price, especially in an appreciating market.
Wholesaling is another lazy way to invest in real estate. In fact, it’s a strategy that many investors use to start. The process first involves locating distressed properties. Then, it’s essential to get them under contract to buy at discounted prices. And finally, assign the contracts to other investors for a fee.
A key benefit of wholesaling real estate is that it does not require any money or credit to start. Indeed, the wholesaler plays the middleman between the seller and the end buyer. As a result, they don’t have to use their own money to fund the deal. They simply assign their rights to buy the property prior to closing.
The most crucial skill to succeed in wholesaling is the ability to consistently locate distressed properties. And those properties must have owners who are motivated to sell. For this lazy real estate investing strategy, negotiation skills are an absolute must. Indeed, the deals must be good enough for a landlord or flipper to want to buy them and pay the assignment fee to the wholesaler.
While many wholesalers are new investors, it helps to have experience with real estate deals and home renovations. This is because a wholesaler must determine how much a house is worth. And then, come up with an estimated rehab budget to set an appropriate purchase price.
With this lazy way to invest in real estate, investors can score an assignment fee between $5,000 and $10,000. Not bad for never owning the property and not making a single repair!
Creative Selling Strategies
There are definitely more ways to sell real estate than listing it on the MLS with an agent. Not that that’s a bad idea for a flip house, but sometimes other strategies can be more profitable.
Lazy investors can use some of the creative financing strategies above as an exit strategy. For example, many lazy real estate investors prefer to sell homes using owner financing or a lease option.
Investors that have multiple options for exit strategies tend to profit the most on each deal.
Although we mentioned lease options earlier when suggesting the sandwich lease option, that is not the only way to structure these deals. Many investors prefer to use lease options as an exit strategy on houses they already own.
One of the primary benefits of using a lease option versus a standard rental is that tenant-buyers typically take much better care of the house than renters. This is because they plan to buy the home and already see it as their own.
Also, most lease option agreements require the tenant-buyers to be responsible for minor maintenance issues. This way, the landlord doesn’t have to worry about a leaky toilet or dripping faucet. Because of this, it is usually not necessary to hire a property manager. This saves an average of 10% of the monthly rent.
The average option fee on a lease option is 3-5% of the purchase price. This fee is non-refundable and gets credited toward the purchase price when the tenant-buyer chooses to buy the property. Because the tenant-buyer has made this investment up front, they are much more likely to respect the terms of the lease. Also, this option fee gives the investor much more margin than a standard security deposit if they have to file an eviction and make repairs.
Instead of requiring a buyer to go to the bank to get a loan, some chose the lazy way to invest in real estate by “being the bank.” This method involves offering owner financing when selling a house. This way, the investor makes money off interest payments instead of a lender.
Owner financing allows an investor to make much more money over time than what they would receive from an outright sale of the property. After all, a borrower on a 30-year mortgage typically spends two to three times the price of the house while paying back the loan because of interest.
Many investors use this strategy on houses that need repairs. Instead of purchasing the home, fixing it up, and selling it on the MLS, they will offer owner financing to someone willing to buy it and renovate it themselves. This allows many people that can’t qualify for a traditional loan to own a property.
Passive Real Estate Investing Strategies
Some investors prefer a more passive approach to investing. While active investing strategies such as flipping and wholesaling can provide much better returns, passive strategies are generally much more stable.
No investing strategy is 100% passive. Even these “passive” strategies require due diligence and research. However, they are more of a “set it and forget it” approach to investing than constantly marketing for deals and physically renovating houses.
Real Estate Crowdfunding
Real estate crowdfunding is a hot and relatively new investing strategy made possible by online platforms such as Fundrise and RealtyMogul. These platforms allow investors to fund projects they could never accomplish independently due to skill or financial limitations. This gets done by pooling investors’ capital to fund commercial and residential real estate projects.
Because the money is pooled together and used to fund real estate projects, crowdfunding investors don’t need any experience renovating properties or managing rentals. However, it is important to have experience with deal analysis since prospective lending opportunities must be evaluated for risks and rewards.
Each crowdfunding platform offers different features and requirements. For example, many require lenders to be accredited investors. Accredited investors have an annual income of over $200,000 or a net worth of at least $1 million. However, some platforms allow nonaccredited investors to contribute.
Some crowdfunding platforms allow investors to start with as little as a few thousand dollars. And that’s significantly less than the amount they would have to put down to buy a property themselves!
REITs, or Real Estate Investment Trusts, are large organizations that purchase real estate assets such as retail and office buildings with the intent to rent them out. Since most REITs are publicly traded, investors can buy stocks in them just like any other business.
Most REIT investors choose this option to diversify their investment portfolio since the real estate market is not directly tied to other markets and often “zigs” when they “zag.”
Unlike many other stocks, REITs usually pay dividends to shareholders because they must distribute 90% of their annual income to avoid corporate income taxes. Therefore, REIT investors enjoy regular income and capital appreciation of the company they invest in.
REITs are likely the most passive form of real estate investing available. While crowdfunding is more of a private investment vehicle, most REITs are public companies managed by professional real estate developers.
As with any other stocks, REITs are generally very liquid. On the contrary, crowdfunding investments are usually longer-term.
While crowdfunding and REITs involve investing with a large company, many investors choose to lend to smaller private companies such as a local house flipper. Instead of using a third-party platform to put them together with a borrower, they develop relationships with investors themselves and fund their deals.
Because the loans that private lenders make are on more of a personal level, the terms can be adjusted based on the agreement between them and the borrower. This flexibility can provide better returns, meet individual needs, and ultimately allow more deals to be accomplished.
The best way for investors to find private lending opportunities is to network with local house flippers and landlords. After spending some time in that arena, the key players will stand out. These are the best people to lend to because they generally have their processes down and are less likely to make big mistakes than newer investors.
Hiring a Property Manager
Owning rental property should never be considered a lazy way to invest in real estate. In fact, many landlords are some of the busiest people in the world. In reality, it all depends on the house and the tenants. Some rentals go several months without any issues, but some have maintenance problems every month.
While personally managing rental properties will require more work than nearly any other investment method, hiring a property manager will make it significantly easier. Property managers will advertise the property, screen tenants, collect payments, and respond to maintenance requests.
Long-Term Rentals with a Property Manager
Owning rental property is a tried-and-true way to build significant wealth in real estate. Not only do rental properties produce monthly cash flow, but they gain equity over time from loan principal pay-down and appreciation.
However, no investor looking for a lazy way to invest in real estate should try to self-manage a portfolio of rentals. Many have tried and become overwhelmed with the stress it involves.
Any investor looking to build a portfolio of rental properties should find a good property manager to work with. Ask any experienced landlord, and they will say that it is worth it to pay one to manage everything.
Most property managers charge 10% of the monthly rent for their services. It may be enticing to shave that expense off to make a deal work or to make a little extra cash flow each month, but just know that the added stress likely won’t justify the savings.
Short-Term Rentals with a Property Manager
Short-term rentals have recently become extremely popular among real estate investors because they give an alternative to the traditional year-long lease and produce significantly higher monthly income. In many cases, a house will rent as a short-term rental for two to three times more per month than it would as a standard rental.
The most popular platform for advertising and managing short-term rentals is Airbnb. However, some investors specialize in corporate housing and rent to work travelers.
While it is possible to stumble through self-managing a year-long lease, it is nearly impossible to do that on a short-term rental. There are so many moving parts that it can sometimes feel like a full-time job. Managing bookings, scheduling cleanings, and communicating with guests are just a few of the routine tasks required of short-term rental hosts.
Not just any property manager can manage a short-term rental, but there are some in most markets that will handle the day-to-day tasks. Because this job requires much more effort than a traditional rental, some property managers charge up to 20% of the rental income. While this sounds like a lot of money, the premium short-term guests are willing to pay often justifies paying this higher fee for management.
It’s Good To Be Lazy in Real Estate!
While truly lazy people never succeed in real estate investing, there are certainly ways to work smarter instead of harder. Everyone has different strengths and weaknesses, and there are various strategies to complement nearly every skill and resource set. The key is to choose one or two and start taking action. So get out there and start investing in real estate the lazy way!