How to Use Debt to Make Money in Real Estate
While many people perceive debt negatively, you can use debt to make money in real estate. Investing in real estate is a great deal since the value of the real estate is always appreciating. Real estate assets like rental houses can also be a good source of passive income. You can leverage other people’s money to build your own portfolio of real estate properties. In this article, you are going to learn ways of using debt to buy real estate and make money.
How to Use Debt to Build Wealth in Real Estate
The following are some of the ways on how can you use debt to buy real estate and make money from it.
1. Flipping Houses
Flipping houses is one of the ways to use debt to make money in real estate. All you need to do is to borrow money, then use it to buy and renovate real estate properties. After renovating them, you can sell the property at a higher price.
House flippers borrow money to buy and renovate a house. The lender normally provides between 70% and 80% of the purchase price and 100% of the total cost of renovation. The flipper puts down between 20% and 30%. The flippers can then sell the property after the renovation at a profit and pay off debt and repeat the process with other properties.
2. BRRR Strategy
You can use debt to make money using the BRRR strategy. BRRR is an acronym for Buy, Renovate, Rent, Refinance. This strategy works almost the same way as flipping houses. Once you have bought a house and renovated it, you then rent it out. You can get money to buy and renovate a house through borrowing.
Once you have renovated the house, you can refinance the property with a long-term mortgage. This way, you are able to pay off your high-interest loan. The refinance loan is valued based on renovation value and not the original purchase price. This means that you can withdraw your original down payment after refinancing. You can keep on buying real estate properties with no cash tied up on any of these real estate properties.
3. Buy Rental Properties
The other way of how to use debt to buy real estate is to borrow a mortgage to buy rental properties. You can easily get a mortgage of between 15 to 30 years and then repay it from the rental income you will be getting from the rental properties.
To get a mortgage, the lender provides between 70% and 80% of the property price while the investor has to pay a down payment of between 20% and 30% of the property price. Once you have bought the house, you can rent it out to tenants or start an Airbnb business.
Land is another real estate property you can buy with a loan and make money out of it. Buying raw land has lots of advantages in that it does not require any maintenance costs or renovation costs. Besides, you don’t have to worry about investors damaging your property.
You can buy land using a loan and then leave the land for a few months for its value to appreciate, and then sell it at a profit. It is easier to find raw land buyers compared to house property buyers. As such, this is an excellent way to leverage debt to make money in real estate.
Also read: How to buy assets with debt.
5. Commercial Properties
Commercial properties tend to cost more than residential properties. You can acquire them through a loan. The only downside is that loans for commercial properties come with shorter loan terms of between 5 and 20 years while personal loan terms range between 15 to 30 years.
Commercial properties can generate more revenue compared to residential properties. Once you buy commercial properties using a loan, you can then start renting them out and collect rents that you can use to pay off your debt.
Summary of How to Use Debt to Make Money in Real Estate
The above are some of the ways to use debt to make money in real estate. While debt is perceived negatively, when used well, it can have positive results. Many wealthy people have known how to leverage debt to create wealth. You can invest using debt and avoid draining your savings. But even so, you need to have a clear plan of how you to repay that loan. So, don’t get into debt just for the sake of it if you don’t have a clear investment plan.