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When my husband and I got married, we bought our first place—a brand-new, 1.5-bedroom condo—in Bedford–Stuyvesant, Brooklyn. At the time, the Bed–Stuy neighborhood was rough—for example, a biker gang that loved to throw huge all-night parties was headquartered at the end of our block, and there were abandoned buildings every few feet, often rustling with the sound of homeless inhabitants. Back in the early aughts, this ZIP code was not for the faint of heart.

But at $375,000, a solid C-/D neighborhood was what we could afford in NYC, and our place was new and huge (for Brooklyn) at 1,200 square feet. Plus, I had a hunch. When we first toured the apartment, I went up on the roof and looked out over the neighborhood. From that vantage point, I could see three luxury buildings going up within a few blocks of us. I knew this neighborhood was about to change.

We loved our place and lived happily there for many years. Then, two kids, one black Lab, and an inevitable migration to the Jersey ‘burbs later, our Brooklyn place transitioned into a rental unit. We had good luck as landlords and very low vacancy rates, renting to excellent tenants who always seemed to be at the same life stage as we were when we lived there: just married and about to have babies—since the .5 bedroom in our apartment made the sweetest nursery.

Our Brooklyn rental, however, never drove significant cash flow. With sizeable monthly maintenance (typical for apartments in NYC) on top of our (fixed, 30-year) mortgage, we pretty much broke even every month. But man, did it appreciate.

Over the last few years, we started to realize that based on this equity growth, we could make much more money with our money. With the 2024 resale value of our condo now hovering around $950,000 and a lot of downward pressure on it going much higher anytime soon (due to a hefty New York millionaire tax that kicks in when the sale price tops $1 million), our $800,000 in equity is not working nearly hard enough. 

We realized that, in this case, we were perfect candidates for a 1031 exchange.

What Is a 1031 Exchange?

A 1031 exchange is a tax-advantaged strategy that allows you to trade like for like and essentially kick the hefty capital gains tax can down the road. In our situation, this would save us a whopping $80,000-plus. 

The gist of the exchange is that you hire a third party to manage the transaction proceeds (if you touch the money yourself, you instantly forfeit the tax deferral benefit and have to pay capital gains taxes), and you are bound by very strict timelines. 

Here are the basic rules:

• New property needs to be of equal or greater value than what you’re selling.
• Need to identify the new property within 45 days of closing on the old (you can ID up to three properties).
• Need to close on the new property within 180 days of selling the old.

The timing is tight, and any misstep means you forfeit the tax advantage and are on the hook for capital gains tax. 

Our 1031 timer starts in May—five months from now, when our current tenant’s lease ends. Between now and then, we’ll be learning and networking and putting in place as much as we possibly can, so when it’s crunch time, we’ll be ready to go.

Building Out Our “Sell” Team

Every month, we’ll give ourselves new tasks and things to research to optimize our position and options. Here’s what’s on tap for January:

• Interviewing agents to list our Brooklyn property, agreeing on a fee
• Deciding: Do we need to do anything to the condo before we list it?
• Interviewing and finding a lawyer 
• Interviewing and finding a third party to help us with the eventual money exchange
• Start thinking about where we might want to buy

Next month, we’ll share how we’ll pick our location and narrow down cities for potential investment (all out of state), and we’ll start to think about our buy box. Stay tuned! 

This 1031 diary will be a monthly series throughout 2024, chronicling our journey to a (hopefully) successful and profitable 1031 exchange, which will kick off in May. We’ll share everything—all the numbers, analysis, the good decisions, what we wish we’d done differently, the big mistakes (hopefully not many), and everything in between. 

Got questions? Got advice? What are we missing? Share in the comments below!

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

So, you want to know how to rent your house out. Maybe you’re upsizing or downsizing, moving away for work, or just want to buy another primary residence and take advantage of low-money down loans. Whatever your reason, renting out your primary home can be a phenomenal way to get into the real estate investing game. You’ll make passive income, all while holding on to the equity in your home and appreciation potential. So, how do you start?

David, Henry, and Rob are all on the show today to give you a step-by-step guide to turning your primary residence into a rental property. Hundreds of properties have been owned between these three investing experts, and all of them have turned their primary residences into rental properties multiple times. But before you rent out your home, you’ll need to know if your home is even rentable.

We’ll tell you exactly what you need to know to decide whether or not your home would make a good rental, how to make the most money possible off your home with affordable finishes, added amenities, and upgrades, how to decrease your liability and keep your property safe, insuring your rental, screening tenants, collecting rent, and more. If you’re a beginner landlord or are renting out your home for the first time, you CANNOT miss this.

Click here to listen on Apple Podcasts.

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In This Episode We Cover:

• How to convert your primary residence into a rental property 
• How to know whether or not your home would even make a profitable rental 
• Areas to invest in and what potential renters will look for
• Long-term vs. short-term rental investing and how to know which works best for your home
• Affordable finishes and amenities you can add to rent out your home for more
• What you MUST fix in your home to keep your liability as low as possible
• Landlord insurance and the one added policy you (probably) should get
• How to screen tenants, collect rent, and get substantial tax benefits
• Whether to invest in out-of-state rentals or buy property in your backyard
• And So Much More!

Links from the Show

Book Mentioned in the Show

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Real estate investing can be a one-and-done deal or a strategy with more work but potentially higher profits. If you’re an investor looking for ongoing passive income, the BRRRR method may be a good option.

The BRRRR method means you buy, rehab, rent, refinance, and repeat. It’s a cycle to build a robust real estate portfolio by purchasing undervalued properties using the equity of an existing investment property, renovating the new property, renting it out, and repeating the process.

But does the BRRRR method work? It does, and here are five reasons why.

1. Leverages Your Real Estate Investments

If you own a property with equity, you can leverage that equity to grow your real estate portfolio. Refinancing an existing property to use the equity provides the capital needed to purchase and renovate another property. 

This means you leverage your initial investment, putting the money to good use with the hope of high returns from the newly invested property from both capital appreciation and rental income.

Each time you use a property’s equity and reinvest the funds in another property, you amplify your earnings on the existing property while creating a potential for future passive income by renting the new property after rehabbing it.

2. Rehab Increases a Property’s Value

A big part of the BRRRR process is rehabbing a property. You purchase an undervalued property and rehabilitate it, potentially increasing its value. This could provide immediate increased asset value and allow potentially higher rental rates.

A higher property increases your net worth and potential future profits when you sell the property. It also opens more opportunities to continue the BRRRR method by leveraging the equity in the recently renovated property to purchase another property and further grow your real estate portfolio.

3. Creates Passive Income

A big reason the BRRRR method works is the passive income it creates. Initially, you must put in the hard work. Refinancing an existing property, finding an undervalued property, and rehabbing it requires extensive labor. Once you complete the process, you rent the property to tenants, and your workload decreases. 

If you manage the property yourself, there’s still work involved, but it creates an ongoing income stream that can be somewhat passive and creates an opportunity to further expand your real estate portfolio by tapping into that’ property’s equity and repeating the process.

4. The BRRRR Method is Repeatable

Some real estate investment strategies, like fix-and-flips, are a one-and-done strategy: You buy the house, rehab it, and sell it. You earn profits once, and there’s no ongoing or passive income.

Real estate investors can repeat the BRRRR method as many times as they want. This enables investors to grow their real estate portfolio as large as they want without generating a lot of capital.

5. Low Barrier to Entry

All it takes to start the BRRRR method is owning a single property. Once you earn equity in that property, you can use it to purchase another property, but this time it’s an undervalued property you can renovate.

The BRRRR method makes it easier for beginning investors to start investing, and experienced investors can grow their portfolios even further without waiting to have enough cash in hand.

Final Thoughts

If you’re wondering if the BRRRR method works, know that it does. But like any real estate investment strategy, it requires careful planning and consideration. It’s a great option for beginning and experienced investors looking to grow their portfolios.

The key is finding the best financing, undervalued properties, and having a team of reliable contractors to handle the rehab. 

Purchasing a property in a hot rental market can help you earn passive income while growing your overall real estate portfolio without the need for excessive capital.

Five Steps to Financial Freedom

How do you BRRRR? Buy a property under market value, add value with renovations, rent it out to tenants, complete a cash-out refinance, then use that money to do it all over again. In this book, author and investor David Greene shares the exact systems he used to scale his real estate business from buying two houses per year to buying two houses per month using BRRRR.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

The Federal Reserve‘s effort to bring down inflation has so far been successful, a rare feat in economic history.

The central bank signaled in its latest economic projections that it will cut interest rates in 2024 even with the economy still growing, which would be the sought-after path to a “soft landing,” where inflation returns to the Fed’s 2% target without causing a significant rise in unemployment.

“Rates are headed lower,” said Tim Quinlan, senior economist at Wells Fargo. “For consumers, borrowing costs would fall accordingly.”

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Most Americans can expect to see their financing expenses ease in the year ahead, but not by much, cautioned Greg McBride, chief financial analyst at Bankrate.

“We are in a high interest rate environment, and we’re going to be in a high interest rate environment a year from now,” he said. “Any Fed cuts are going to be modest relative to the significant increase in rates since early 2022.”

Although Fed officials indicated as many as three cuts coming this year, McBride expects only two potential quarter-point decreases toward the second half of 2024. Still, that will make it cheaper to borrow.

From mortgage rates and credit cards to auto loans and savings accounts, here are his predictions for where rates are headed in the year ahead:

Prediction: Credit card rates fall just below 20%

Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

Going forward, annual percentage rates aren’t likely to improve much. Credit card rates won’t come down until the Fed starts cutting and even then, they will only ease off extremely high levels, according to McBride.

“The average rate will remain above the 20% threshold for most of the year,” he said, “and eventually dip to 19.9% by the end of 2024 as the Fed cuts rates.”

Prediction: Mortgage rates decline to 5.75%

Thanks to higher mortgage rates, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

But rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is 6.9%, up from 4.4% when the Fed started raising rates in March of 2022 and 3.27% at the end of 2021, according to Bankrate.

McBride also expects mortgage rates to continue to ease in 2024 but not return to their pandemic-era lows. “Mortgage rates will spend the bulk of the year in the 6% range,” he said, “with movement below 6% confined to the second half of the year.”

Prediction: Auto loan rates edge down to 7%

When it comes to their cars, more consumers are facing monthly payments that they can barely afford, thanks to higher vehicle prices and elevated interest rates on new loans.

The average rate on a five-year new car loan is now 7.71%, up from 4% when the Fed started raising rates, according to Bankrate. However, rate cuts from the Fed will take some of the edge off of the rising cost of financing a car, McBride said, helped in part by competition between lenders.

McBride expects five-year new car loans to drop to 7% by the end of the year.

Prediction: High-yield savings rates stay over 4%

Top-yielding online savings account rates have made significant moves along with changes in the target federal funds rate and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Even though those rates have likely peaked, “yields are expected to remain at the highest levels in over a decade despite two rate cuts from the Fed,” McBride said.

According to his forecast, the highest-yielding offers on the market will still be at 4.45% in the year ahead. “It will still be a banner year for savers when those returns are measured against a lower inflation rate,” McBride said.

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As a real estate investor, you must always remember one thing: every type of investing strategy involves risk.

With that in mind, it’s good practice to learn more about low-risk real estate investing strategies. You may come to find that these provide the perfect balance of risk and profit potential. 

Below, we break down six low-risk real estate investing strategies. 

1. Real Estate Crowdfunding

Crowdfunding opens the door for a wide range of investors to engage in real estate projects through user-friendly online platforms. It lowers the barrier to entry, allowing smaller investors to participate in real estate markets traditionally dominated by larger players. 

Crowdfunding also fosters community involvement in projects, creating opportunities for collaborative investment and shared success.

Why this is low-risk

Crowdfunding in real estate reduces individual risk by distributing the investment across a large number of contributors. This collective approach mitigates the financial impact on any single investor, making it a safer option for those cautious about high-stakes investments.

Who this is best for

Crowdfunding is ideal for new or small-scale investors seeking entry into the real estate market without substantial capital. It’s also well-suited for those who prefer a community-oriented approach to investment, allowing for shared decision-making and risk.

2. Real Estate Syndication

Real estate syndication involves pooling funds from multiple investors to purchase a single property, often larger and more expensive than typical individual investments. 

This method allows investors to access high-value real estate opportunities without bearing the entire financial burden. Syndication also provides the benefit of professional management, reducing the individual investor’s workload and expertise requirement.

Why this is low-risk

Real estate syndication spreads the risk among multiple investors, reducing the financial burden and exposure for any single participant. This collective investment in larger, potentially more stable properties, offers a buffer against market volatility.

Who this is best for

Syndication is best for investors who have more capital to invest but prefer not to handle the day-to-day management of a property. It’s also suitable for those looking to diversify their portfolio with significant real estate assets without the complexities of sole ownership.

3. The BRRRR Method

The BRRRR method, which stands for Buy, Rehab, Rent, Refinance, Repeat, is a comprehensive approach to building a real estate portfolio. It starts with purchasing undervalued properties, followed by renovating them to boost their value. 

Once rehabbed and rented out, these properties are refinanced to recover renovation costs, enabling the investor to repeat the process with new properties.

Why this is low-risk

The BRRRR method is low-risk due to its focus on adding value through renovations and ensuring cash flow through renting. By refinancing, investors can recover most of the invested capital, reducing the amount of money tied up in any single property.

Who this is best for

This approach is ideal for investors who are hands-on and have a good understanding of property renovation and management. It suits those looking for a long-term investment strategy that builds wealth through property accumulation and equity growth.

4. Real Estate Investment Trusts (REITs)

REITs offer investors a way to invest in property portfolios without directly buying physical real estate. REITs, often traded on major stock exchanges, provide a liquid form of real estate investment, enabling easy entry and exit. 

This strategy focuses on income generation, as REITs are required to distribute a majority of their taxable income to shareholders.

Why this is low-risk

Investing in REITs is considered low-risk because it involves diversified portfolios of income-generating properties, which typically provide steady returns. Also, being publicly traded, REITs offer greater liquidity compared to traditional real estate investments.

Who this is best for

REITs are ideal for investors seeking exposure to real estate without the complexities of direct property ownership. They suit those who prefer more liquid assets and are looking for regular income distributions, such as retirees or income-focused investors.

6. Airbnb Arbitrage

Airbnb arbitrage involves leasing properties long-term and then subletting them as short-term rentals on platforms like Airbnb. This strategy capitalizes on the difference between long-term lease costs and short-term rental income. It’s particularly effective in high-demand tourist or business areas, where short-term rental rates can significantly exceed the cost of long-term leases.

Why this is low-risk

Airbnb arbitrage is considered lower risk because it doesn’t require property ownership. The primary investment is the lease and setup costs. 

The strategy capitalizes on the difference between long-term lease expenses and short-term rental income, potentially yielding high returns without the commitment of property purchase.

Who this is best for

This strategy is best for individuals who have expertise in the short-term rental market and possess skills in hospitality and customer service. It’s particularly suitable for those who prefer not to invest large capital in buying property but are adept at creating attractive rental spaces.

7. House Hack Short-term Rentals 

This is often best suited for individuals who already own a home.

Start by finding a short-term rental in an area of high demand.

From there, put down 10 percent to purchase the property. Then, rent out this property when it’s not in use.

Conversely, when you do occupy it, rent out your primary residence. This strategy leaves you with two cash-flowing properties, and eventually, two properties that you own free and clear. 

Once you’re stable with a single short-term rental, consider doing it again. 

Why this is low-risk

House hacking short-term rentals diversifies income sources, reducing financial risk by spreading it across multiple properties. The strategy typically involves properties in high-demand areas, as this helps maintain steady rental income and property values.

Who this is best for

This approach is suitable for homeowners who are comfortable managing properties and dealing with the dynamic nature of short-term rentals. It is especially ideal for individuals looking to enter real estate investment with minimal disruption to their current living situation.

Watch our video below for more guidance on implementing this strategy.

Final Thoughts

These low-risk real estate investing strategies could be the key that unlocks a stable and profitable future in an industry you love. 

Remember, there’s no need to simultaneously experiment with all six strategies. Choose one, learn more, implement your knowledge, and continually tweak your strategy. This will lead you toward a successful investing future.

Smarten up your 2024 personal investing strategy with Dave Meyer

Set yourself up for a lifetime of smart, focused, and intentional investing with Dave Meyer’s guide to personal portfolio strategy. Play to your unique strengths, make investing enjoyable, and achieve your specific life goals on your own timeline.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Spencer Rascoff, Zillow co-founder and former CEO, joins ‘Money Movers’ to discuss the current state of mortgage rates and applications, what will change the patience of homebuyers, and more.

In November 2023, Fannie Mae implemented a game-changing reduced down payment requirement of just 5% for two-to-four-unit properties for conventional loans. 

This presents a golden opportunity for house hackers looking to purchase or refi a two-to-four-unit property. However, few sources have broken down what this means for investors. Here, I’ll look at this new product, compare it to alternatives, and discuss what this means for real estate investors. 

First, we will walk through eligibility, then compare this loan to its FHA alternative and summarize the impact for investors looking to purchase or refinance.

Eligibility

Fannie Mae laid out these new down payment requirements in their desktop originator release notes. It is important to highlight that this change only applies to someone’s “principal residence.” Lenders are strict about owner-occupied requirements, and this product is only for those living in the property they are purchasing. 

Thankfully, two-to-four-unit properties can be incredibly easy to house hack, as the units are already separated—meaning you don’t have to share the same living room as your roommates. Additionally, they offer a very easy transition to rent them as an investment property if you move out (after the required time period). 

Conventional loans have been an option for a long time, but the down payment requirements were higher. For example, a first-time homebuyer who would have qualified for 3% down on a single-family conventional loan used to be required to bring 15% down to closing for a duplex (or 25% for three to four units), which forced many buyers to opt for the 3.5% down option with FHA. 

FHA loans require a minimum down payment of 3.5%. While this has made these loans attractive, the new 5% down payment requirement for conventional now provides investors with additional flexibility. At just 5% down, investors now have the option to choose between FHA and conventional financing for multifamily investment. 

To take this analysis one step further, I tested the 5% conventional loan option by reaching out to one of our investor-friendly featured lenders on BiggerPockets to compare my FHA loan to a conventional loan. 

I’ll uncover some details you will want to know if you are serious about using this product. If you want to skip to the results, scroll to the comparison summary below. 

Comparison to FHA

FHA loans have long been a popular choice for owner-occupied two-to-four-unit properties due to their lower down payment requirements. However, the reduction to a 5% down payment by Fannie Mae offers a competitive alternative with unique benefits. There are multiple things to consider when comparing. 

The Federal Housing Administration’s primary goal is to ensure that Americans have access to safe, affordable housing. So it is no surprise that when it comes to affordability, FHA loans have the upper hand, with relatively low down payments and interest rates. After all, that is part of the purpose of the FHA. But depending on your situation, a conventional loan could be less expensive and offer a more compelling solution. 

But there is so much more to consider than just APR, fees, and closing costs. You must also consider: 

• The closing process 
• The refinance process
• Mortgage insurance 

Here’s a comparison of multifamily loans:

The Closing Process

Because one of the goals of the FHA is to ensure safe housing, they have more stringent requirements on the condition of the property. The classic example of this is when the seller is under contract and told they need to touch up paint prior to a loan being funded. Although most agents and sellers do not mind getting out a paintbrush to close a deal, this is one example of how FHA loans differ from conventional loans and why sellers sometimes prefer conventional loans. 

Mortgage Insurance

Mortgage insurance is an additional payment paid by the borrower to insure the lender against a situation in which the borrower stops paying their mortgage. One of the biggest differences between FHA and conventional loans is how mortgage insurance works. Both FHA and conventional loan products require mortgage insurance if the down payment is under 20%, but the mechanism to charge this insurance is different. 

A conventional loan also needs insurance if the down payment is under 20%, but this must be purchased from a private company—this is called private mortgage insurance (PMI). With conventional loans, you can have this insurance removed after reaching 20% of equity in the property, which allows you to lower your costs in the long term.

The federal government insures an FHA loan through a mortgage insurance premium (MIP) to make housing more affordable. This mortgage insurance can be removed only in specific situations. You can find all the details here on HUD.gov. 

A workaround for removing mortgage insurance payments (MIP) in some situations is to refinance into a conventional loan. However, you don’t necessarily know what rates will be in the future, and there is no guarantee that your current rate will be available when you reach 20% equity, so using a conventional loan locks in your ability to remove PMI once you reach 20% in the future. 

FHA also has an upfront mortgage insurance premium. Conventional loans do not have this upfront cost, which is an advantage in the short term.

Refinancing

The conventional 5% down option could be an option for those who are refinancing out of an FHA loan and want the ability to take off the mortgage insurance in the future. There are three reasons to refinance: lower your monthly payment, extract equity, or switch loan products. Refinancing into a conventional loan at 5% down could give you flexibility in the future if the rate and terms are attractive to you.

Your lender will be able to tell you what loan product will accomplish your goals. Keep in mind that FHA loans have a streamlined option that makes refinances easier in the future, which is a nice feature when you do not want to go through the whole underwriting process again. 

Comparison Summary

After learning about this new loan product, I decided to put it to the test for myself by running a comparison between conventional and FHA. For help, I used Find A Lender at BiggerPockets. I performed a search in my state and selected “HouseHack” and found Mike Stone with Megastar Financial in the results. 

Full disclosure: I have also worked with Mike in the past, and he is awesome. He helped me with my first FHA loan, so he was the perfect lender to help me with my comparison analysis.

I provided my information to Mike and asked him to compare conventional and FHA on both a refinance that I am considering and a purchase. 

First, I need to point out that your scenario could look entirely different. This is in no way meant to compare between FHA and conventional for any other investor. I am simply sharing what the difference was for me. For your situation, consult with a licensed loan officer. 

Here are the results comparing a 5% down option for both conventional and FHA. 

The results surprised me. Not only did the FHA option offer a lower monthly payment, but it also required $3,000 less to close. 

However, my lender, Mike, shared several important pros and cons to consider beyond just the pricing. 

Conventional advantages 

• Mortgage insurance is more straightforward to remove 
• The closing process tends to be easier 
• Less strict requirements in general 
• No self-sufficiency requirement for three to four units 
• Allows borrowers to qualify based on rental income
• More likely to close faster (although this depends on other factors) 
• Ability to have more than one conventional loan at a time 

FHA advantages 

• Government-subsidized mortgage insurance 
• Less strict credit score requirements
• FHA streamline refinance
• You can always refinance in the future

For me, FHA was still the clear winner, but I am considering conventional on my next property for the reasons I’ve discussed here. Ultimately, comparing loan products on a two-to-four-unit house hack is best done with a savvy, investor-friendly lender who can run through multiple scenarios and coach you through the best option for you. 

Final Thoughts

What we know is that by offering a competitive alternative to FHA financing, Fannie Mae has helped to reduce barriers to entry for house hackers. This new option can provide increased leverage and flexibility. As the real estate market continues to evolve, savvy investors can now choose the option that best suits their investment goals, ensuring they are well-positioned to capitalize on the income potential of multifamily properties.

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Andy Walden, vice president of enterprise research at ICE Mortgage Technology, and CNBC’s Diana Olick join ‘The Exchange’ to discuss the state of mortgage demand, the overall health of housing, and more.