Real Estate Investing Strategies
Today more than ever, a wide variety of real estate investment strategies are available to both the beginning and advanced investor. Regardless of your experience, you must answer a number of questions before pursuing these strategies, including: What are your financial goals? What is your risk tolerance? Do you want to be an active participant in the property’s management or a passive investor? Here are 15 real estate investing strategies to consider when choosing your path to profitability.
- There are a variety of real estate investment strategies to choose from, which cater to different goals, risk tolerance, and involvement levels.
- “Fix and Flip” is a popular strategy, but it also carries a high level of risk if proper valuation, renovation, and sales processes are not managed well.
- Investing in rental properties is another popular strategy, with the potential for profits from rent or from appreciation in property value.
- “Rental Debt Snowballing” involves focusing on paying off loans with low balances first to eventually own rental properties without debt and increase profit.
- “House Hacking,” “Vacation Home Rentals,” “Wholesaling,” and “Tax Lien Investing” are additional real estate investment strategies to consider, each with their unique advantages and challenges.
Fix and Flip
“Fix and Flip” is one of the most popular real estate investment strategies, thanks to the many television shows dedicated to it. With this strategy, you purchase an undervalued or below-market-rate home, renovate it, and quickly sell it for a profit. However, this can also be one of the riskiest investment strategies if the home has hidden issues, you choose the wrong contractors, or you cannot sell the home quickly. To be successful, you must understand how to value a property properly and find a proven, reliable team to help manage the renovation and selling processes.
Another popular real estate investment strategy is to buy (or build) a house to rent out for a certain period. You can make a profit in two ways. One, improve the property and charge more for rent than what you owe on it each month. Two, sell the house after its value has appreciated and it is worth more than what you paid for or owe on it. In the latter case, you can avoid capital gains taxes by reinvesting the profits in another investment property using the 1031 exchange rule.
No, this doesn’t refer to a cold housing market. BRRRR stands for Buy, Rehab (or Remodel or Renovate), Rent, Refinance, Repeat. This expansion of the rental property strategy focuses on long-term investing. You purchase a house below full market value and fix it up as you would any other property. Then once the home has established renters, you complete a cashout refinance on the property, which allows you to access the increased equity and finance the next rental property. This does require the experience to identify the right properties at the right time to minimize expenses and maximize profit.
Rental Debt Snowballing
If you are familiar with a popular debt relief strategy, you might recognize this concept. When you own multiple properties that are financed (preferably with low interest rates), pool your monthly income to focus on paying off the loan with the lowest balance first. You can accomplish this by making much more than the minimum payment each month.
Once you’ve paid that loan off, direct most of your funds to paying off the next lowest balance loan and so forth. With this approach, the rental debt payoffs “snowball,” or accelerate, until you own the rental properties free and clear and their monthly income is pure profit.
These are similar alternatives to the traditional rental property investment strategy. Whether you buy a house or already own one, simply live in it as your primary home for a while, then lease it to renters. Or fix up the home, live in it, then “flip” it for a profit after a few years.
Both strategies allow you to build equity in your home and take advantage of that equity with monthly rental income or by selling the home and making enough profit to invest in your next property. Either way, you should check IRS codes to minimize your tax burden.
Another strategy that can serve as an entrance into owning rental properties is house hacking, or renting out part of the home in which you live. This could mean purchasing a duplex or triplex, for example, where you live in one unit and rent out the other units. It could also mean renting out the basement or a spare room in your single-family home, as long as it provides additional monthly income. This strategy also provides hands-on experience and education in what it means to be a landlord.
Vacation Home Rentals
The last few years have seen a significant rise in vacation home rentals as a real estate investment strategy, as travelers seek out alternatives to hotels. As an investor, you can convert an existing owned property or purchase one specifically for this purpose and list it on a variety of short-term rental platforms. Unlike a long-term rental with one tenant, however, you will be responsible for all cleaning, upkeep, and maintenance of the property, often with a short turnaround time. You should also understand all local laws and regulations regarding short-term property rentals before trying this strategy.
A different type of investment strategy involves short-term property ownership. If you are skilled at finding good deals but are less enthusiastic about managing rental tenants, this could be the strategy for you. As a wholesaler, you might “drive for dollars” through preferred neighborhoods or search real estate listings for distressed properties. Rather than buy the house outright, you put it under contract, then assign or sell that contract to another investor at a profit. You could also serve as a “bird dog” for investors, earning commissions on the good deals you bring them.
Tax Lien Investing
When the owner of a property fails to pay property taxes, the municipality places a tax lien, or a legal claim, on the property. In 28 states, the resulting tax lien certificates are auctioned off to investors. As the purchaser of the certificate, when you pay the delinquent property taxes you might then take ownership via foreclosure. If the homeowner pays the taxes they owe, you earn back the purchase price plus a preset amount of interest on the tax lien. This is a more sophisticated investment strategy, and you should research the process in your local area.
Discounted Note Investing
Similar to purchasing a tax lien certificate, you can purchase a note, or real estate debt, at a discount. You make a profit after you collect the full amount owed. You can also create your own note as an investment strategy by seller financing a house you currently own. For example, if your tenant wants to purchase the home they are renting from you, they pay you a cash down payment and then you finance the remaining balance. This is another advanced strategy that could have legal consequences, so it is important to understand all potential implications.
Hard Money Lending
If you don’t want to embark on a long-term investment strategy such as seller financing but you have extra funds, you might consider becoming a hard money lender. Instead of purchasing properties for flipping or renting, you provide investors with loans so they can purchase those properties. Because these are short-term loans, you can charge a higher interest rate. And because the loans are secured by properties, if you are not repaid within the loan term, you can take control of the property via foreclosure.
Real Estate Investment Trusts (REITs)
Many publicly traded commercial real estate firms are structured as REITs (pronounced reet). To qualify as a REIT, the company must pay at least 90% of its taxable income to shareholders in the form of dividends. Investing in a REIT is similar to investing in an exchange-traded fund (ETF) or mutual fund in that by owning the stock, you own part of every investment-grade property that REIT owns. This is an easier and more affordable way to invest in real estate than finding and purchasing the properties yourself.
Real Estate Investment Groups (REIGs)
If you would prefer to have more involvement in property management decisions or the properties in which you invest, a REIG might be a better choice. These are groups of private real estate owners that work with investors. The REIG manages the properties, maintenance, advertising, and tenants so you, the investor, don’t have to. But because they are not formally regulated like REITs are, you should thoroughly research the REIG and its participants before investing.
The internet has introduced new opportunities to join REIGs by way of online real estate investing platforms and crowdfunding. Given these platforms’ widespread reach, investors can own a fraction of properties for a much smaller investment. You can also choose very specific investments based on geographic region, property type, developer, and more.
Invest in Land
Real estate investing strategies don’t have to be restricted to physical properties. You can buy either undeveloped or developed land and pursue a number of strategies. You can choose to build on the land yourself, rent it to a developer or tenant to build on, or simply hold it until it appreciates in value and then sell it at a profit.
Regardless of which real estate investment strategy you choose — active or passive, individual or group — it is important to do your due diligence before investing in any property. You should be comfortable with the level of risk and control the investment represents and know ahead of time what your exit strategy will be. If you need more guidance, join Infinity Investing, and start building your real estate portfolio today.