Zillow's chief economist says short-term tactics like home flipping no longer work as home prices continue to rise. Instead, here are three easy ways to build wealth in real estate.
According to Skylar Olsen, chief economist at Zillow, the current US housing market makes it unlikely that you'll find a “get rich quick” opportunity as a real estate investor.
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Olsen told Business Insider that he believes the days of short-term real estate investors looking to make a quick buck by relying on tactics like house flipping are over.
She blamed her bearish outlook on the fact that she expects mortgage rates to hover around 5.5% to 6% “for the long term” and that high home prices are keeping homebuyers out of the market.
And home prices are still on the rise, with the average price of a new U.S. home hitting a new record in June, according to the latest home price data from real estate brokerage Redfin.
As a real estate investor, if you want to ensure profits, there are three ways to generate positive cash flow.
Buy, hold, and build assets
The simple fact is that many people cannot afford to buy a home. Mortgage rates above 6% and persistently high home prices are suppressing affordability and demand.
The latest news on home prices will be especially hard on first-time homebuyers and investors: Redfin reported that a typical entry-level home sold for a record $243,000 in June, up 2.1% from a year ago and up more than 45% from pre-pandemic levels.
Olsen believes real estate investors should adopt a buy-and-hold strategy to weather a turbulent market, building cash flow in the process.
By owning your home and spending more on your mortgage payments, you can increase your home equity, which is the difference between the value of your home and the remaining balance on your mortgage.
That's an attractive prospect for the roughly 40% of current U.S. mortgage holders who secured low, fixed-rate mortgages of 3% to 4% in 2020 and 2021, when the COVID-19 pandemic pushed borrowing costs to historic lows.
Desperate to keep mortgage rates low, they are choosing not to sell properties and instead build home equity, which has benefits.
First, you'll likely have more cash in hand when you eventually sell your property, and you can use the profits to make a larger down payment and get better mortgage terms for your next real estate investment.
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Plus, if mortgage rates eventually fall, you'll be able to refinance at a lower interest rate, improving your cash flow.
Finally, as you build up equity in your home, you may be able to qualify for a Home Equity Line of Credit (HELOC), which generally provides access to cash at a low interest rate.
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Becoming a homeowner
If cash flow is an immediate issue, you might consider becoming a landlord and earning monthly rental income to help pay for your mortgage or other financial goals.
The rental market is booming right now because high mortgage rates are preventing many Americans from switching from renting to buying a home, resulting in a shortage of rental properties and forcing landlords to raise prices.
Rents aren't expected to come down anytime soon. In fact, according to Moody's Analytics, American households are now “rent burdened” for the first time in history, spending 30% of their income on rent.
As a landlord, you can increase your cash flow over time as rent increases.
The rental income you earn can be set aside as a down payment for additional property investments in the future or added to your retirement savings.
But remember that being a landlord takes work, and it's not necessarily cash-flow positive: You have to find reliable tenants, collect rent, and handle maintenance and repair requests (with your own money).
Generate passive cash flow
If you don’t want to go through the hassle that comes with being a landlord and managing a property, but are still interested in real estate investing, there are other options.
You could also consider investing in real estate investment trusts (REITs) or earn passive income by investing in real estate through some of the new online platforms without taking on the role of landlord.
REITs allow you to profit from the real estate market without having to buy a home or worry about screening tenants, repairing damages, collecting overdue payments, and so on.
A corporation is a publicly traded company that owns income-generating real estate such as apartment buildings, shopping centers, office buildings, etc. It collects rent from tenants and passes that rent on to shareholders as regular dividends.
Essentially, REITs are giant landlords. Some have A-list tenants, including the U.S. government, while others are home to e-commerce giants like Amazon and Walmart.
If you're not sure where to start, our new online platform, supported by a team of experts, can give you access to institutional-grade commercial real estate investing without the hassle of hunting down the deals yourself.
Browse handpicked deals or join funds invested in a diversified real estate portfolio to maximize your returns while keeping fees low.
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This article is for informational purposes only, should not be construed as advice, and is provided without warranty of any kind.