Real Estate Investing Strategies
We are firm believers in the central role real estate can play in both financing travel and helping you build wealth while on the road. Without real estate, we would have far less financial flexibility during our own travels. As such, we want to use this article to provide an overview of common real estate investing strategies to help fellow travelers find similar flexibility.
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In addition to writing about his and Jenna’s travel and work adventures, Chipp is a CPA and founder of Walutes Capital, a real estate development and accounting firm. Wearing this “other hat,” Chipp offers real estate investment and development consulting services to clients. If you’d like help with your own real estate investing journey, contact Chipp here to set up an appointment!
How Real Estate Investing Builds Wealth
Before diving into specific investing strategies, we want to highlight the three primary ways real estate can build wealth. When we left to travel and work full-time, we weren’t ready to completely put our savings on hold - or tap into those savings. Real estate allowed us to keep saving while overseas. Whether you own a single condo or a portfolio of rental properties, real estate investing builds wealth the following three ways:
Property Appreciation: It may happen in fits and starts, but over time, real estate generally grows in value. The longer you hold a property, the more wealth you gain. The House Price Index shows average year-over-year growth of 4.59% from 1992 through 2022. On average, if you bought a home in the United States in 1992 for $200,000, it would be worth $768,661 in 2022. Even with an average inflation rate of 3.8% from 1960 to 2021, this property appreciation makes you wealthier.
Loan Amortization: When you pay your mortgage every month, a portion of that payment reduces the balance of your loan. If you owe less, that means you own more (i.e. you’ve increased the equity, or ownership interest, in your home). As you make more and more mortgage payments (as opposed to monthly rent payments), you gradually reduce your mortgage liability, building your wealth in the process.
Cash Flow: Cash! More than anything else, new investors associate cash coming in as a primary wealth-building benefit to rental real estate. If you own real estate, you can rent that real estate when traveling overseas. Any rental cash coming in that exceeds cash going out in housing costs goes right into your pocket. These extra funds can go a long way towards offsetting travel costs!
In the rest of the article, we’ll outline some real estate investing strategies that can help travelers build wealth and generate cash while on the road. Of note, these are certainly not the only strategies - far from it. But, we know that they work.
Investing Strategy 1: Buy a Primary Home
This should almost be called Investing Strategy 0. Owning your own home doesn’t generate cash flow, per se, as you don’t initially rent out your home. But, it allows you to get your foot in the real estate investing door and start building wealth, primarily via loan amortization and property appreciation.
Plus, once you own a primary residence, you gain experience navigating the home-buying and mortgage-application processes, which can certainly overwhelm first-time buyers. Additionally, owning your own home provides the flexibility for you to expand into the next two strategies.
Investing Strategy 2: House Hack Your Home
“House hacking” refers to renting out a spare bedroom in your home. For instance, say you own a home with three bedrooms. You sleep in one bedroom and use the second as an office / guest bedroom, so what do you do with the third? If you’re willing to take on a roommate, you rent it out. This brings in extra cash every month to 1) offset your mortgage and other home-related costs, and 2) provide you extra financial flexibility while traveling.
Overseas travel isn’t an all-or-nothing undertaking. That is, you don’t have to commit to doing it full-time. Plenty of people start with a more hybrid approach, maybe spending a few months in the summer overseas, coming home, then spending a few more months in the winter somewhere else. If you try to do this while paying 100% of your mortgage, money may be tight. But, if you have someone renting out your spare bedroom, you can put that cash towards your mortgage payment, meaning you have more money to spend traveling.
These real estate strategies helped us travel and work full-time
Investing Strategy 3: Convert Your Primary Home Into a Rental Property
Now, assume that after a couple years of house hacking, you decide you do want to travel full-time. You no longer need the two bedrooms you’d been using in your home - or any of your home for that matter. Instead, you convert the entire home into a rental property, allowing you to collect a full rent payment (as opposed to a partial one for only renting a single bedroom).
You’re cooking with gas now! If you properly analyze your property’s cash flow (i.e. confirm that market rents will exceed monthly costs), renting out your home when you travel lets you fully reap the above real estate investing benefits. Holding the property will allow you to benefit from appreciation, and your tenant’s rent payments will go towards paying down your mortgage. Any extra cash helps offset the cost of living during your travels!
Investing Strategy 4: Buy a Rental Property
Buying a pure rental property (as opposed to a primary home that you convert to a rental) is the next logical step in the real estate investing continuum. But, this goes back to the idea of planning your full-time travels well in advance. Unless you’re a gazillionaire (in which case, this article is largely moot), you’ll need a mortgage to buy a rental property. And, securing a mortgage - especially for a rental property with a stricter lender approval process - generally requires you having a full-time, W-2 job. Getting a mortgage to buy a rental property while freelancing overseas is next to impossible.
So, if you set a target, full-time-travel departure date a couple years out, you can plan backwards from there. If you save enough cash for a down payment, once you own your own home (and have started house hacking to bring in extra money), you can buy a rental property. This amplifies the above wealth-building elements of real estate investing, meaning when you do hit the road full-time, you’ll have two properties appreciating, amortizing, and bringing in cash flows - your converted primary residence and your rental property.
Investing Strategy 5: (Potentially) AirBnB Your Apartment
Unfortunately, not everyone’s in a financial position to buy a home. But, that doesn’t mean you can’t use real estate to help fund your overseas travels! These next two strategies are designed specifically for people who A) want to tap into some of the wealth-building aspects of real estate while traveling, but B) don’t yet have the cash or credit to buy their own home.
A close friend of ours lived in Chicago, renting a two-bedroom apartment with a roommate. Our friend’s job kept him on the road about nine months of every year, but he still needed his place back in Chicago for his time there. So, rather than basically burn nine months of rent payments for a bedroom he wasn’t using, he and his roommate came up with a plan. They’d list our friend’s bedroom on AirBnB when he wasn’t there and split the cash they collected.
People looking to collect some rent payments while traveling can potentially replicate this strategy. And, even if you don’t have a roommate, plenty of companies have popped up that will manage an AirBnB on your behalf. But, before going this route, make sure it’s allowed in your lease - last thing you want is to be evicted when you’re half-way around the world due to breaking a lease covenant…
Investing Strategy 6: Invest in a Real Estate Investment Trust (REIT)
Real estate investment trusts, or REITs, provide another option to build wealth from real estate without actually owning any properties. REITs raise money from individual and institutional investors, and then use that money to buy a number of income-producing properties, typically in a particular sector (e.g. one REIT may focus on multifamily properties, while another on industrial buildings).
Many REITs are publicly-traded, meaning you can buy and sell them as you would stocks. Once you buy shares, you collect the distributions (monthly, quarterly, or annual) the REIT pays out. In simple terms, you provide the financing, the REIT does the work, and you collect a portion of the cash the REIT’s income-producing properties generate.
While owning a REIT may limit your exposure to the direct benefits of property appreciation and loan amortization, they can provide a stable source of cash flow without the 1) large capital hurdle of buying your own property, and 2) potential hassles of being a landlord.
Our goal with this article was to provide an overview of different real estate investing strategies to help travelers continue to build wealth while on the road - not to make you experts in anything. But, hopefully you see these options as a path towards financial freedom - and the role real estate can play in building that freedom!
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