Written by: Angelia "Angie" Michalak, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
This Strategy will Knock Your Socks Off! Make More Money with Less Headaches! I call it Build-to-Rent then Flip. Build-to-Rent then Flip is a hybrid of both concepts. Learn how you can make more money in real estate in less time and with less headaches. You can do it without the risk of the unknown you find in a real estate flip. For instance, buying a property that looks great on the outside and you think it just needs some cosmetic work. You even get an inspector. Then after the purchase, your contractor finds that under the siding all of the wood needs to be replaced because there was a hidden dry root and termite infestation that had eaten away at all of your exterior walls.
Now you have a huge project in front of you and you are hoping to just break even or to not lose too much money on the project. Or you are holding a property and the tenant is calling what seems to be every other day to have something fixed. It seems like you are going to lose the entire year or 2 years of profit fixing up the place. Maybe you have to dip into your pocket to take care of some of these repairs like replacing a roof or the HVAC. Let me show you a better way. A way that you can invest in real estate. Most likely you will find that with the right Realtor and Builder, you can make more money in real estate in less time with less headaches and most likely with less of your own money than you are investing now! This is not a “use other people’s money” get rich quick advertisement! I am talking about a legit loan based on the debt-to-income ratio of the investment property. Your credit may not be a factor if you buy a home that is already built and you get a lease on the home before the closing of the property. These are advantages of the Build-to-Rent and Flip plan.
Why do People Invest in Real Estate?
That’s simple. Real estate investing has a great return. There are very few investments that can produce the income that real estate can produce. Some investors prefer to flip dilapidated homes for an immediate payoff while other investors buy and hold for a rental income. Within the rental investment niche, there are some that prefer long-term rentals for family living housing while some investors prefer short-term vacation rentals. Both long- and short-term rentals have their advantages and disadvantages. Since my background is finance in addition to real estate, I tend to avoid risk when possible. I will be referring to long-term rentals in my article.
The Best Way to Diversify Your Portfolio!
As a Financial Planner, we talk about diversifying your portfolio. If you walk into your planner’s office, I assure you they are advising you to put your money into IRA and mutual funds for retirement. Maybe they are really good and offer you an IUL (indexed universal life policy). However, I guarantee they are not speaking to you about diversifying your immediate income in case you lose your job. Maybe you decide to start a family and want to stay home for a few years to raise your children. Or heaven forbid the career you racked up your student loans for is just not paying off and you have to start all over again. When you have rental properties, you have essentially diversified your income. Shouldn’t this be part one of your portfolio diversification? You never know when you will need an extra income to “get your back”. Not everyone can go home and ask mom and dad. Nor should we as adults. What we should do is plan better for life’s changes.
The Rental Business can be a Game You Win or Lose
I have watched many of my fellow realtors and investors win in rentals and I have seen many of them lose too! They have about the same response as a previous boat owner. Their happiest days was when they bought their first rental property and the day they sold their last rental property Why? They can make a lot of money no doubt. They also give the owners great write-off abilities. So why do they want to sell them? It is undoubtedly the risk and headaches involved with being a landlord. With any business, and yes you are a business owner, you incur risk. You can buy liability insurances. You should definitely talk to a property and casualty agent about insurance on the home and consider an umbrella policy for extra coverage (https://www.allstate.com/ can get you a great rate and you can bundle your insurance coverages). You will want to find a real estate attorney about forming a Limited Liability Company for each rental home you buy.
What I really want to talk about is the risk of the day-to-day bottom line. There is no doubt that an older home on a bad side of town will calculate the highest % monthly return. But does that really make you the investor the most money? You are definitely risking every year ending in the red instead of in the black. What you don’t think about during the initial purchase is all of the updates needed for the older properties? What about the mental anguish of the tenants constantly calling about the repairs? This can eat up a good portion or all of your profit for the year. I have also dealt with many investors that managed their properties with the intention of the rent maintaining them through their retirement. However, I have found many times by retirement the properties have become run down to the point they are inhabitable. They investor does not have the money for the rehab nor can they afford the taxes on the property. So instead, they lose them one property at a time. It’s very sad.
Here is a new concept: Build-to-Rent then Flip.
This is how I do it and make tons of money for my clients. I combine 2 concepts just with a little twist. We buy and hold new construction for a very short time 18 months to 2 years. (The holding time may vary based on the market.) Then we flip it. There is a bonus that we are in the best school district in the state of Florida. You will definitely want to be in a growing area with a great school district. (To find a school rating https://www.niche.com/ or https://www.greatschools.org/). The key is to find the right team of professionals. You will need a great Realtor (for recommendations on a great Realtor which may not be your buddy! https://www.nar.realtor/) and a quality local builder (recommendations on a reputable builder: https://www.nahb.org/) to contract to build smaller affordable homes in a high-income area. I have connections to realtors and builders all over the nation. You may also contact me to help you find the right team. (https://angiemichalak.com/schedule-an-appointment/ola/services/copy-of-copy-of-complimentary-consultation). The small homes you build you will want to have the upgrades of the high-cost homes. You are just building them much smaller. So, features like granite throughout, LVP floors, tile bathrooms on the floor and in bath/shower area, and stainless-steel appliances. this can draw young professionals and contractors that can afford a higher monthly rental rate but have not yet established enough credit to buy.
Since the home is a new home, you have some additional benefits. The home will be under warranty. Each builder will have their own warranties. Be sure to ask before you make an offer with the builder. If the builder only offers a 1-year warranty, you can request a Builder’s Warranty from a variety of home warranty companies that will cover the builders craftmanship, electrical, plumbing, mechanical systems, and structure for many, many years. In addition, the brand-new appliances, HVAC, hot water tank, and roof will all be under warranty. You also have the option to buy your own home warranty for around $500-$600 a year for greater peace of mind. We use 2-10 Builders. https://www.2-10.com/builders-warranty/.
To help protect your investment, I recommend you hire a property manager (for a referral in your area https://www.narpm.org/ I use https://allcountycpm.com/ in my area. ) that ensures that tenants are making their [timely] monthly payments. One that has no emotional attachments to tenants. One that will do occasional interior inspections (state laws permitting). You should also have the HVAC filter changed monthly by your management company well as HVAC maintenance agreement. This is one of the biggest expenses to replace. the new lawn needs protection and consistent maintenance, hiring a service will pay dividends in the future in preserving that curbside appeal. ..The same company will likely handle spraying for pests and termite bonds. Preventive maintenance in these areas can save you thousands in replacement costs. Warranties only cover item defects. They will not cover items for poor maintenance.
I know that real estate investors have stuck in their minds income, income, income. They do not care about the “backside” aka the home’s appreciation. However, I find that appreciation is a significant component of real estate investment. Consider a car lease. Have you ever leased a car? You drive the car for the first 3 years. You get to drive it for the best 3 years of its life. You give the keys to the sales agent and move on providing you took care of the vehicle. Then you’re likely turning it back in with around 30K miles, right before it needs the major maintenance. You give it back to the dealer before it needs new tires and brakes. Before the car shortages caused by COVID, rental car companies also sold their cars at 30K miles, so when things get back on track and you need a deal on a car… Looking at rental properties the same way could make you big dollars. If you found a great location to build and are smaller homes that are perfect for first time home buyers, keep them for a few years, then sell them. But, sell them before your warranties run out! That way you don’t have to put big money in replacement costs into the home [for HVAC’s, hot water tanks, appliances, etc.]. Having maintained your properties properly on the front side, you should collect a nice appreciation on the backside. Let’s look at one of my actual build-to-rent then flip scenarios:
We bought 4 properties from the builder at 165K and 4 properties at 175K (in different areas of the city). We rent the homes that are 165K for 1200/m and the homes for 175K for 1450/m for 18 months. Then we sell them off. At an avg, we sell homes that were 165K for 230K and homes that were 175K for 250K. These were smaller 2 bed 2 bath homes, but we still made a killing!
4 homes @ 165K = 4*1200/m = 4800/m*18 months = 86,400
(230K-165K*4) = 260,000
260,000 + 86,400 = 346,400
4 homes @ 175K = 4*1450/m = 5800/m*18 months = 104,400
(250K-175K*4) = 300,000
300,000 + 104,400 = 404,400
For a total of $750,800 in 18 months! Here is the best part. The owners only had to put down 25% down for the mortgage of the homes. So, they made $750,800 on a $415,000 investment in 18 months!!!
Now you can do the same thing all over again! Your small homes in the high-cost area will appeal to first time home buyers, local heroes like the community teachers, firefighters, and veterans. Since the national builders really do not find it profitable to build homes of this size or caliber, you as the investor become a silent hero helping a local builder’s get more homes built for those that really need them!
For more specific details about my process or for information on my available properties to start the Build-to-Rent then Flip process with me, go to my real estate website or here.
For more information about me and my services relating to Financial Planning, Real Estate, and Financial Education click here.
Military & Veteran’s resources click here.
Angelia "Angie" Michalak, Executive Contributor Brainz Magazine
Angie Michalak, is a leader in the Financial and Real Estate Industry. While Planners are still just learning of the concept of the new branch of financial planning called Integrated Asset Management (IAM). Angie has been licensed in both Financial Planning and Real Estate for 9 years. Her innovative ways to invest in real estate decrease risk and the headaches that investors normally experience while increasing their overall profit and customer satisfaction. Angie received many awards during her time in the USAF, as a Fortune 100 small business owner, and the various companies she has worked for. She was on the cover of Top Agent Magazine 2022 and recognized as the Best of 2022 by the American Inst of RE.
