Best Real Estate Investing Strategies When Rates Are High

Now that we’re all starting to accept that rates aren’t going down any time soon, we need to start thinking about what real estate investing strategies work in our new high interest rate environment.

If you’re reading this you’re already ahead of the pack. 

Most folks are doing one of two things:

1. Hoarding cash, waiting for rates to come back down.
   
2. Mindlessly clicking around the MLS in different markets, trying to force yesterday’s square strategy into our current environment’s round hole.

For the rest of us that want to actually be productive in moving our real estate investing goals forward, neither of these options sound attractive.

So in an environment that seems impossible to locate cash flowing real estate deals, how do we go about finding them?

We don’t.

We have to start creating opportunities with more creative real estate investing strategies.

Here are a handful of things I am doing right now to continue building my real estate portfolio.

My Favorite Real Estate Investing Strategy: The Live In Flip

I’ve never been a fan of buying turnkey real estate. That includes my primary residence.

While many will argue that your primary residence is NOT an investment or asset, it’s a bit more nuanced than that.

You have the power to make your home whatever you want it to be. 

Buying a newly renovated dream home is more of a liability than an asset.

However, buying something that needs some work, renovating it, and forcing appreciation has a ton of benefits.

Our First Live In Flip

When my wife and I relocated from the San Francisco Bay Area to Troy, a Detroit suburb, in 2017, we intentionally sought out a home that needed updating.

We put about $50,000 into our new house, doing much of the work ourselves over the course of 18-months. 

Here is our primary bathroom remodel my wife did for the grand total of $3,500:

Once we were done, we had the house appraised for a HELOC. With the new forced equity from our remodel we were able to tap into a $130,000 line of credit. 

We used this HELOC to pay cash for homes in Detroit, do some rehab, refinance, and then put the cash back into the HELOC so we could do it over again.

The sweat equity we put into our primary gave us the firepower to aggressively build a 12-door rental portfolio over the next 2.5 years.

But it didn’t stop there!

When we decided to move back to California we listed our gorgeously renovated house for sale for $675,000. This represented a nearly $215,000 increase since we purchased the home 5 years previous.

Our neighbors thought we were dreaming!

To our delight, we sold our home in the matter of days for an eye-popping $755,000.

And yes, there were some macro tailwinds that helped appreciation during those years. But the fact remains our home’s sale still stands apart from any others.

The next highest sale in our subdivision has only managed to hit $611,000:

When you buy a fully renovated house you remove your optionality. If the economy shifts and you need to sell, it’s highly likely that you’re underwater with a newly renovated home.

You’re also at the mercy of the market, waiting for appreciation and mortgage pay down, if you want to build equity.

It may be many years before that equity is substantial enough for you to leverage it for other investments.

Our Current Live In Flip

Now that we’re back in California we’re doing it all over again.

Our new primary residence is extremely dated and we’re planning to do a full remodel once more.

Even though we plan to make this our forever home, well… you just never know. And when the real estate market feels bubbly, there’s no better way to hedge things than buying a fixer!

We haven’t made all that much progress on our house even though we’ve been here over a year. But that’s because we’re busying working on another real estate investing strategy that still makes sense today.

Value Add New Construction

When we moved to Arroyo Grande we knew we wanted to eventually add an Additional Dwelling Unit (ADU) to our home.

We figured we’d remodel the interior of our main house, have it appraised once done, and then use the HELOC to fund the ADU construction.

This is exactly what we did in Troy.

The problem?

As we started work on the interior of our home we quickly realized a lot of remodeling decisions were dependent on the ADU specifics.

For example, we planned to move our laundry to the garage and expand our second bathroom. But it didn’t make sense to that yet because we’d have to tear down our garage and rebuild it for the ADU.

We also knew we’d likely need to trench new electrical and plumbing. It didn’t make sense to redo our landscaping and add hardscape if we were going to have to cut or dig through it!

And this backyard desperately needs some help!

So the interior reno plans went on the back burner and the ADU became our primary focus.

But just like we don’t believe in buying turnkey real estate we didn’t think it made sense to do turnkey construction either.

Why We Chose White Box Construction

To put it plainly: value add!

While it took some extra legwork finding a contractor that would work with our requirements, we are going to have our ADU built only to the “white box” phase.

This means having everything done except finishes. Imagine walking into a space that is a completely blank canvas with just drywall.

That’s what we’re planning to do with our ADU. We’ll handle the finishes ourselves. In the end, this will save us a ton of money and it really makes sense when you start running the numbers.

Our new ADU will be two levels with a 1,030 sq ft footprint.

The lower level will be our new garage, storage room, mudroom, and a 1 bed/1 bath guest room.

The second level will be a 1,030 sq ft 2 bed/2 bath unit.

We’re hoping to build the structure for about $160,000. Then we’ll have to spend some money on the finishes and potential furnishings if we decide to go the short-term renal route.

Here is what those numbers might look like when done for both short-term rental and long term rental scenarios:

These are obviously exceptional returns, especially in California!

But these numbers wouldn’t be possible without doing a good bit of the work ourselves. For a fully done ADU we received quotes anywhere from $215/sq ft to $325/sq ft or $443,000 to $670,000!

That’s like buying a negative cash flowing property on the MLS.

The drawback to our approach is that we’re not able to easily finance the build.

Banks want to make sure you’re having a contractor build from start to finish. And since we’ve only been in our home for about a year we don’t have the equity to pull a HELOC and fund it that way.

Getting Creative With Your Primary

It has become increasingly difficult to find properties that make sense for house hacking.

Instead of complaining or hoping things change, it’s time to get creative!

I’ve heard of people converting their garage to income producing rentals for a fraction of what we’ll spend on our ADU.

You also don’t have to do such a large project like we’re doing. Many cities have off-the-shelf ADU designs that are much smaller and more cost effective to add to your primary residence.

This is why I believe a primary home can absolutely be an asset. This just isn’t something you can do while renting.

But if you don’t want to do either of these real estate investing strategies there’s always the off-market BRRRR.

Off-Market BRRRR

This is the strategy I relied on to build my portfolio in Detroit in a short amount of time.

Quite simply, I sourced off-market deals in an effort to have instant equity by purchasing below market rates.

Remember, the MLS is designed to fetch the highest possible sales price. By definition, you are NOT getting a deal when you buy on the MLS because everyone sees deals that are publicly listed.

Market inefficiencies exist with off-market deals because sellers are prioritizing speed over maximizing their sale price.

This strategy is as old as time.

But it seems the typical real estate investor today has become complacent during the ten-year period where it was easy to buy instant cash flow off the MLS.

Now that those days are gone we need to get back to the basics and putting in the hard work to execute successful real estate investing strategies.

Invest With Me In Detroit

I’m in the final stages of finishing up a big rehab on a Detroit duplex. The neighbor has already approached us about selling his property, so that may very well be my next project!

I have a great team on the ground in Detroit. We source off-market deals, connect investors with our contractors, help manage the rehab process, and even offer property management when it’s done.

It’s a great way to still apply a hands off real estate investing strategy. If you want to know more about how you can invest with us for a turnkey experience while still forcing appreciation check it out here.

The catch is all of our deals are cash only.

That’s a theme you’ve probably recognized with all of these real estate investing strategies… they all require a fair bit of capital or putting in some sweat equity.

Real Estate Investing Is No Longer Easy

It’s not that real estate investing strategies have gotten harder. It’s really that it’s not longer super easy.

We’re in a time where it’s back to basics. You have to roll up your sleeves and do some hard work to be successful.

If you don’t want to do that you’re going to need the cash to partner with someone who already has systems and a team in place.

Honestly, that’s probably a good thing. Real estate investing isn’t supposed to be easy.

We’ve been spoiled by a lengthy period of low rates and easy money. Those times may never be back.

Instead of waiting and hoping they return we need to adapt to our current environment.