Real estate investing is a great way to diversify your portfolio and build assets.
However, before you jump right in, choosing the best way to invest in properties requires ample amounts of research.
Risk, time, money, knowledge, and location are all going to factor into the way you invest in real estate.
Below are real estate investment strategies broken down into four categories including “Residential Properties”, “Commercial Properties”, Flipper Properties”, and “Indirectly Investing in Properties”.
1. Residential Properties
Owning a single-family rental home provides you with multiple opportunities for finding the best Residents whether they are families, students, etc.
When choosing a residential property, it’s important to consider location. Residents will typically look for a property with good schools and easy accessibility to stores and entertainment. The property class you choose for your single-family home will be a huge deciding factor in the amount of cash flow you will have from your property.
Another type of rental property is a multi-family home. These typically have 2-4 units like a duplex or fourplex. This option is great for bringing in multiple cash flows to your portfolio.
Similar to single-family homes, location is going to be important here as well. Multi-family homes will require you to bring in more Residents and could include more expenses compared to a single-family.
House hacking is usually done in multi-family homes, so the owner has their own space. But, it can be done in single-family homes as well if the owner were to rent out the other rooms.
In a multi-family, you will live in one of the units while renting out the others. Typically, the rate you charge will cover your rent as well as the expenses of owning the property. This means you can save money on living expenses while also earning a profit from your property.
2. Commercial Properties
Apartment complexes such as high-rises or communities will be maintained on-site. Apartments can provide more opportunities for cash flow if you can keep vacancies to a minimum.
Keep in mind an apartment will more than likely need staff to manage the daily routines of the complex. On top of that, larger developments will require more expenses to cover the maintenance of keeping up with the building, parking areas, common-area maintenance, etc.
Businesses can operate out of rental buildings that are owned by you. One advantage to owning a building for office and retail spaces is you no longer have to worry about move-in costs, and leases will typically be longer than a year. Even with the pandemic leaving many office spaces vacant, the office sector is predicted to continue being a strong investment opportunity.
Land might not be everyone’s first go-to when it comes to investing in real estate, but it does come with its own benefits. Owning land requires no maintenance. And, it can be used in multiple ways.
Land can be rented for things like events or farming, or you can hold onto it before selling the land at a higher price in the future. The land can also be used for future developments where you can sell it for an increased price, or you can use it to create developments of your own.
Since Airbnb is a short-term rental that is typically used like a hotel, it is considered a commercial property. Airbnbs can be a great source of income, but location is going to be a big deciding factor in the success of your property.
With an Airbnb, it’s important to understand which properties can be listed as an Airbnb and the expenses that come with having multiple Residents using your property. You will need to have knowledge of Airbnb regulations or know someone who does to help you from getting into a difficult situation.
3. Flipper Properties
Flipping properties is one of the riskiest investment strategies, but if you have experience and aren’t looking for a long-term investment and are okay with paying short-term capital gains, then fixing and flipping might be a good option for you.
Typically when someone flips a property, it has a lot of maintenance issues and needs upgrades. Once someone purchases the property and gets the go-ahead to begin working on their plans, everything needs to be done in the most efficient and cost-effective way.
Contractor delays and unexpected costs can turn flips into losing propositions, so planning and executing correctly is essential.
When everything is completed, the investor can put it back on the market and if the expenses weren’t too high and minimal problems such as delays arose, they can make a decent profit in less than a year.
If the property you are flipping is still habitable, then you can also save money by living on the property. That doesn’t mean you’ll have less risk than any other flipper property, but it does mean you might have more time to get everything fixed and updated.
Most people who live in a flip will stay around 2 years before selling. So, you have at least double the amount of time to get everything ready compared to someone who is fixing and flipping. Then, as the housing market increases and your home has gained new features and amenities, you can sell the home for an increased price from when you purchased it. And, if your expenses weren’t too high, you’ll have a decent profit.
Keep in mind that people who do the live-in-flip method don’t usually do it as a full-time income. It’s more of a side-gig and can be a great way to get started in real estate investing.
Buy-Rehab-Rent-Refinance-Repeat is the full name of the BRRRR investment strategy. How it works is you find a flipper property that you can purchase for less than its full value. Then, you’ll fix it up by tending to any maintenance issues and upgrading any parts of the property that will add value without exceeding your budget.
After the remodel, it’s time to rent out the property at the determined rental price before you refinance. When it comes to the BRRRR method, you will do a cash-out refinance, which means you will take out a larger mortgage to convert your equity into cash that can be used to purchase another property. And, now you continue to repeat the steps.
Like any rehab project, there is quite a bit of risk involved, and with the BRRRR method it could take more money upfront than other real estate investing options.
Wholesaling doesn’t necessarily mean a home needs to be flipped, but most properties purchased from a wholesaler will need a few repairs. This method might seem pretty simple, but it does require a lot of work, and it’s easier if you have a good network of people to connect with.
This strategy is low on the level of risks because unlike real estate investors, wholesalers don’t purchase the property. Instead, they obtain a contract for the right to buy the property, estimate how much maintenance and repairs will cost, and then sell that contract to an investor who will purchase the home for their own use.
4. Indirectly Investing In Properties
Crowdfunding is when a group of investors put their money together to purchase a property or group of properties . Real estate companies use this method as well to start new developments or redevelop larger buildings.
If you want to be a part of crowdfunding projects, what will happen is once the property is purchased by your group or by the company you invested with and any developments or projects are complete, you will receive a return (this is usually done quarterly) as well as a share of the profits when the property sells.
Real estate investment trusts are a fairly simple strategy. REITs can either own real estate that they sell for a profit or they can own rental properties that they lease out for an income. The income that the REIT makes is then given to shareholders as a dividend.
You can invest in REITs by purchasing shares of public stock. Another option is to invest in REITs through your 401(k)s and other retirement plans using mutual funds or exchange-traded funds (ETF). Keep in mind that REITs still come with risk and can still provide a negative return depending on the housing market.
By creating a partnership, you can mitigate risk when it comes to investing in properties and starting projects you might not have complete knowledge of. Partnerships can even offer you more cash to invest with.
When you choose partnership as your investment strategy you can be the engine behind the operation that makes the plans and executes them while someone else funds the projects and vice versa. There are several other ways a partnership can be conducted, but it does provide a sense of security that you won’t be going into investment projects alone.
How To Choose:
So, how are you going to choose which investment strategy is going to work for you? Maybe real estate isn’t even your best option when it comes to investing.
If you are still wanting to get started or even diversify your current portfolio with a new strategy, here are some things to consider:
Risk: Risk is going to be a huge variable. Some people aren’t risk-takers, and that’s more than okay. On the other hand, some people don’t mind taking risks, especially if they’ve already dipped their toes in the real estate industry.
Location: Strategies like indirect investments might not play a huge role in where you are located, but maybe when it comes to residential and commercial rentals, you would prefer to be close to your properties. If that’s the case and location is going to be a deciding factor, ask yourself – are you in an area where there are opportunities available for what you want to accomplish?
Time: If you aren’t looking to invest long-term in a property, then maybe flipping homes is for you (if you have the expertise to do so). If you are okay with investing long-term, then maybe choosing an option where you have a rental property will be your best bet. Choose how long you are okay with not seeing a return and break down the options available.
Monetary Amount: There are investment strategies where you don’t need a lot of money to get started and there are strategies that require a lot of money upfront. You don’t want to put yourself in a bad situation, so ensure that you choose a plan that you are comfortable investing a certain amount of money in.
Investing in real estate can be terrifying, but it doesn’t mean you should shy away from it if you are truly considering getting started or adding other strategies to your portfolio.
One of the best ways to understand the best options for you and your investing goals is to research and talk to people. Connect with others who have used the strategy or strategies you want to use and see what their experiences were like. They might even have more detailed information on the best ways to get started.