The stock market is more volatile than ever so it’s important to find other ways to invest your money. While real estate investing is a proven way to build wealth, there isn’t one single means to do it. And with so many different types of real estate investment strategies there are, how do you know which one’s right for you?
First, it’s important to note that there’s such a thing as active and passive real estate investing. The difference lies in the level or amount of time, control, and risk you put into it.
Active, or direct, real estate investing involves a hands-on approach. You’re directly involved in the purchase, rehabilitation, upkeep, and marketing of the property. It requires a lot of time and effort, but it also has the potential to bring in large profit margins.
Another advantage of this type of investing is decision-making powers you have and potential tax write-offs you get.
Passive or indirect real estate investing is just the opposite. You make money from property holdings without having to put down a lot of money upfront and actively getting involved with managing them.
They usually come in the form of REITs, crowdfunding (more on these in a bit), real estate funds, and buy-and-holds. The goal of passive investing is to get steady cash flow and potential gains from the property’s appreciation – without direct involvement on your part.
The benefits you can expect from this kind of investing are lower financial risks, limited legal liabilities, and a truly passive regular income.
Here are 10 best types of real estate investment strategies that we believe can help you get the most returns out of your money.
There are a variety of ways you could invest in residential rentals. Traditional long-term rentals are probably some of the most common real estate investment strategies for beginners. Also known as “buy-and-hold” and “income property” investing, this strategy involves finding, buying, and managing homes to rent them out. These include single-family houses, duplexes, townhouses, and condominiums.
Many new investors start out by renting out a property they already own. They often do this after they move into a new home, earning a steady, passive income from their previous residence. The challenging part is being a landlord which entails property management, ongoing maintenance, and the likelihood of dealing with difficult or bad tenants.
As you know, STRs are properties rented out by the night, week, or month. Their popularity exploded this past decade owing to sites like Airbnb, Vrbo, and other booking platforms that enable small homeowners to easily connect and market their properties to renters online, worldwide. It’s one of the most lucrative real estate investment strategies available to just about anyone right now.
This strategy would work best if your property is located in an area with strong tourism and business activity, and where short-term rental regulations are lenient. Operating STRs tends to involve higher costs and maintenance, though, because they need more amenities, furniture, and regular care. If you choose to self-manage your rental property, it would take a whole lot of your time and effort.
Read also: Short-term vs. Long-term Rentals: Which One is Right For You?
House hacking is simply renting out a part of your home that you live in. It could be a spare bedroom, an attic, or the basement.
Or you could buy a multi-family property where you live in one of the units and rent out the rest. You earn money by living in your investment property while charging enough rent to cover more than the cost of your mortgage and housing expenses.
BRRR stands for buy, rehabilitate, rent, refinance, and repeat. You purchase a run-down or neglected house, fix it up, lease it out, then refinance it so you can use the capital to buy another house.
It may sound like a great way to cheat the system and make quick money for new investments, but if you aren’t a very experienced investor, you should be careful with this method. Its success hinges on you finding the best property at the cheapest price, then renovating it quickly and affordably. You’ll need to find renters who’ll pay the market rate each month, on time. Lastly, you’ll need to switch from a short-term hard money loan to a cash-out refinance loan. This can be hard to do if you’re a new investor who hasn’t built up enough equity in the property.
Also called “rent-to-own”, a lease option is an agreement that gives your tenant the option to buy your property at a set price, either during the rental period or at the end of it. It also prevents you from selling your property to anyone else. When the term ends, your tenant can use their option to buy your property, or else they lose it.
In exchange for that option to buy, your the tenant will pay you a premium in addition to the monthly rent. This additional fee will be used as credit that will go toward their purchase later.
This type of agreement will be good for both you and your tenant. It lets the tenant build equity in the property while giving you a steady stream of income – at more than the property’s market value.
Tenants who choose this kind of deal usually don’t have enough money for a full down payment on a house of their own. But they’ll take good care of your property since they’re already investing into it for future ownership.
REITs are companies that use investors’ money to purchase and own income properties, whether they be residential or commercial. They allow regular investors to invest in commercial properties like malls, hotels, office buildings, hospitals, warehouses, or even data centers and cold-storage facilities – projects that individual investors aren’t normally able to get into.
Some REITs are bought and sold on major exchanges, like any other stock. By owning shares in a REIT, you can invest without posessing any physical property yourself. But you’ll make money if the price of the shares goes up over time.
REITs are required by law to pay out dividends that are higher than average – 90% of their annual profits – in order to get certain tax breaks. So they’re a great passive investment for people who want both regular rental income and a chance to see their money grow without any personal involvement.
While the fees for investing in REITs can be quite steep, they’re not nearly as high as house flipping or rental property investing. Moreover, REITs are very liquid. You won’t need a realtor and a title transfer to help you cash out your shares.
Another passive strategy you can consider is joining a real estate investment group. REIGs are groups of private investors who pool their money and knowledge to invest in real estate using different methods.
Unlike a REIT, a REIG is not a tax-paying corporation with a strict set of rules and criteria set by a board of directors. For instance, a REIT needs to have at least 100 investors by the end of its first year, and no more than five people can own at least 50 percent of the REIT.
On the other hand, REIGs operate on private agreements instead of government rules. They can have different structures, levels of participation, and membership fees if any.
Next to Airbnb investing, this is probably one of the best-known real estate investment strategies out there – thanks to numerous fix-and-flip shows on TV.
House flipping is much like BRRR except that you buy a distressed property, fix it, and then sell it quickly. Your goal is to finish the rehab and sell the house as soon as possible and get the most money back on your investment.
Flipping houses isn’t a passive way to make money, nor is it recommended for beginners. You’ll need to be experienced in finding good leads, real estate valuation, overseeing renovations, marketing the property, and selling it quickly. This can be hard for new investors who don’t have a regular, trusted team of tradespeople like carpenters, plumbers, and electricians.
While the advantage of flipping houses is its strong potential to make large profits in a short timeframe, it also involves a lot of costs. You’ll need cash to purchase a property upfront, and more cash to renovate it. It can also take months to close on a purchase and resale of a property.
Experts like to refer to house flipping as “the wild side” of real estate investing.
Much like house flipping, wholesaling involves buying undervalued properties, then selling them right away. The difference is that you do very few repairs or changes if any. So you only keep the property for a very short time.
Wholesaling is a great way to get started in real estate investing because it requires little or no capital. Wholesalers usually have a network of other investors who want to buy cheap, distressed homes and have access to cash for quick deals.
It’s also called “contract flipping”. You sell or “flip” the right to a purchase contract to someone else. Your job as a wholesaler is to find good deals. You can do this manually by looking around neighborhoods – also known as “driving for dollars” – or by going to popular listing sites like the MLS. Once you’ve secured the right to buy a property, you flip that right to a buyer who can puchase that property in cash.
It really comes down to how good you are at scouting, marketing, and negotiating. If you like research and selling, you’d find wholesaling to be quite fun.
Crowdfunding is one of the more creative real estate investing strategies. It’s a type of syndication where both accredited and non-accredited investors get access to both residential and commercial real estate properties that most investors can’t buy on their own.
Through online platforms like CrowdStreet, FundRise, EquityMultiple, PeerStreet, and RealtyMogul, investors can pool their money and buy shares in high-end urban neighborhoods such as new home developments, apartment buildings, and commercial areas.
It can be a great way to start investing with only a small amount of money at first.
You get a regular share of the income if the project is making money, and you’ll also receive a share of the profits when a project is sold.
One of the disadvantages of crowdfunding is that shares are not liquid and may be locked up during economic downturns.
Keep in mind that with each of the above types of real estate investment strategies, there are benefits and risks. As with any type of investment, there’s a possibility of losing money.
The best thing to do when comparing and selecting is to consider your financial situation, your tolerance for risks, your management skills, the market conditions where the property is located, and your time and patience as you wait for your investments to grow.
But you don’t have to limit yourself to only one strategy. Smart real estate investors use multiple methods not just to diversify their portfolios, but also to minimize risks where possible.
Read also: Best Markets for Airbnb Investing: The 10 Hottest Places
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