Based on your results from our Real Estate Investor Quiz, we believe the following strategies may be the right investment options for you:
- Lease Option (Owner Carry)
- STR Sandwich Condo
- Wholesaling, if you can’t find another way to raise capital
Lease Option (Owner Carry)
In this strategy, investors lease a property from an owner, and the owner still carries all of the mortgage. The investor finds a tenant for the property and rents it out to them. This practice is commonly known as subleasing or subletting. This is a potential starting point for those who want to invest in real estate but don’t have the capital or credit score to buy their own property.
Subleasing may be prohibited by the property owner or local regulations. Check the terms of your lease to make sure this is allowed. If renting in an apartment or condo building, make sure the building’s HOA approves of these arrangement, in addition to getting approval from the property owner.
Always check your local laws and regulations. Some jurisdictions allow tenants to sublease under certain circumstances regardless of lease prohibitions.
Learn more about subleasing in this Investopedia article.
Pros and Cons of Lease Options
Pros of Lease Options:
- Option to get started in real estate investing with potentially $0, though $5,000 is typical.
- Your credit score is not impacted by this type of investment, so anyone can try it regardless of credit history.
- The ongoing time commitment is relatively low, at 0-3 hours per week. It’s possible it could be even less, since lease-option tenants often do their own minor repairs.
Cons of Lease Options:
- This tends to be a very competitive sector of real estate investing since the entry barriers are so low.
- The time commitment to get the investment started can be extensive (60+ hours). It takes time to find the right property and an owner who will agree to your terms. Once you have located the right property, you need to find a tenant to match to the property. Depending on the market, this can also take time. There will be some paperwork to fill out on a one-time basis (the leases, the option, etc.)
- Because you signed the lease with the landlord, you are legally and financially responsible for the lease. This means that if your subtenant does not pay rent, you are still required to pay the landlord the rent and any late fees.
- Some leases contain clauses that forbid subleasing, and the landlord must be notified and agree to sublease before you can sign an agreement with a subtenant.
Short Term Rental Sandwich Condo
A short term rental (STR) is a property or part of a property leased out on a short term platform, like Airbnb or VRBO. Short term rental stays are 30 days or fewer. It is much more management intensive than a long term rental but can earn considerably more income. Property managers and management companies specialize in this area, which can make it less labor-intensive.
In an STR Sandwich Condo, you sign a long term lease on a condo (ideally for 24+ months), and then lease out the property on an STR basis. You only need to pay for the furniture and furnishings. The amount of equity you’ll need is around $10,000 and up. Your typical time commitment to get started is at least 40 hours to find the right property.
Check out our interview with AirDNA founder Scott Shatford to learn how he got started using this method and subscribe to our YouTube channel for more content.
Pros and Cons of an STR Sandwich Condo
Pros of STR Sandwich Condo
- The only upfront capital needed is first month’s rent, security deposit, and your furniture and furnishings.
- Property management can be hired to lessen the time commitment.
- The relative risk is lower than a traditional STR, though there is some operational risk.
Cons of STR Sandwich Condo
- Condo buildings may have rules against short term rentals, and it may be difficult to find an owner who will agree to these terms. Read this Investopedia article to learn more about potential restrictions.
- If you choose to self-manage, you will need to commit 10-20 hours per week.
Wholesaling
An investor who is interested in wholesaling, sometimes referred to as assignments, gets a property under contract for an attractive price, and then assigns the contract to another buyer, usually another investor. The first investor will be paid a fee for the work. The purchaser of the contract gets all the rights and accepts all the responsibilities of the contract.
If you don’t have much equity (e.g., cash to use as a down payment), and/or if your credit power is limited, assignments can be a way to get started in real estate investing. You will need to have a strong “sales” personality to succeed at it, though.
Be advised: Selling real estate without a license is a crime in Colorado and most other states. Before attempting to wholesale, consult with a lawyer about the legalities involved. Learn more about Colorado requirements at the Division of Real estate site.
Pros and Cons of Wholesaling
Pros of Wholesaling:
- Option to get started in real estate with potentially $0, though $5,000 is typical.
- You aren’t using your credit score for this type of investment, so anyone can try it regardless of credit history.
- It’s a one time transaction and therefore there’s no recurring time commitment.
Cons of Wholesaling:
- This sector is extremely competitive because the barriers to entry are so low.
- The time commitment to get started is extensive (80+ hours). Usually, you will start by finding a motivated seller, then negotiating the terms. Depending on the conditions in your market this can take some time. Once you have located the property you need to find an investor to match to the property. Again, depending on the market, this can also take time.
- Because you are not bringing cash or a high credit score into the deal, you will have to commit a lot of time and energy. Many people find it is more hassle than it’s worth.
- Wholesalers can run into legal trouble if they are not careful. We do not recommend this as a viable way to get started investing in real estate.
Learn More
To learn more about how to effectively manage your short term rental and get all of the tools you need to get started, take our Step by Step Short Term Rentals Course. This course is currently on sale for a limited time.