6 Real Estate Investing Methods
Getting started in the world of real estate investment can be daunting for those who are new to the fray so it really pays off to know in advance just which method of investment strategy aligns with your goals and strengths.
To that end, today we will break down six of the ways you can begin your own journey in the world of real estate investing, what they are, and take a look at the pros and cons regarding each of these strategies in this article.
Let’s get into it then!
1. House Hacking
House hacking is a popular strategy that allows one to house themselves and make some rental
cash flow at the same time.
With this strategy, you would purchase a duplex/quadplex or single-family home and either rent out one of the additional units or rent out a room from the single-family unit to offset your mortgage expense or even turn a slight profit, depending on the property and your local rental market.
For instance, let’s say you purchased a duplex and the mortgage locks in at $1,200 a month. If you can rent out the other unit for $1,400 a month then you would be cash flowing $200 a month. Even if you can only rent out the property for $1,000 a month due to the market that still goes towards paying your mortgage and covering your cost of living. It is still better to only spend $200 a month to house you and your family as opposed to the full mortgage payment of $1,200.
This real estate investment strategy is great because it can be accessible to those who might not have a nest egg of capital ready to deploy for large scale real estate investments.
- Solves your own housing needs while also creating a degree of cash flow
- Being so close to your tenant and rental property helps you to keep tabs on
what’s going on with your investment
- Living in the property means you can qualify for home loans with lower down
payment requirements as it is considered a residential sale and not a commercial one
- You’re pulling double duty as both landlord and neighbor with this strategy and that can bring a unique host of challenges to deal with such as decreased privacy and potential issues with your tenant/neighbor
- Extended periods of vacancy can be financially challenging
- You will require a decent credit score and some moderate downpayment in order
to proceed with this real estate investment strategy
2. Rental Properties
Another tried-and-true real estate investment strategy is purchasing a property with the intent to rent it out traditionally to a tenant via leasing.
This strategy is great for building consistent cash flow but there is no denying that there is a higher degree of risk involved, a more challenging cost of entry, and work when it comes to dealing with renters/tenants.
In addition to long term rental you can use your investment property as an Airbnb rental which gives you a higher premium on rents but involves more work with turnover and risk of vacancy. Rental property may provide lower rent but long term lease with less turnover, work and vacancy as opposed to listing the property on AirBnB.
- Long term cash flow is possible with this strategy
- AirBnB is an active platform and people are always looking for rental properties to
lease at so decent properties won’t stay empty for long
- Principal reduction on loan, tax deductions, appreciation are all additional pros to
- Becoming familiar with your local rental market is vital
- Increased levels of risk are involved with this method as there is always a chance
that renters will damage the property in some way, even more so for the AirBnB
variant as there is a higher number of tenants passing through each property
- Some areas and buildings have laws or regulations that prevent a landlord from
renting out on platforms such as AirBnB so it is important to do your research about the area before investing in a short term rental property
3. Fix and Flips
The classic fix and flip is one of the most commonly known real estate investment strategies and is also one of the fastest ways to make money in the world of real estate. It is referred to as transactional income and is a great way to build cash for investing into additional projects.
The fix and flip is when a real estate investor acquires a distressed or mediocre property, invests in restoring it to increase the property value, and then moves to sell the property as quickly as possible.
There is a considerable amount of work and initial investment required when engaging in a fix and flip but many investors rely entirely on this strategy to grow their own wealth or even make a living.
Many investors learn to calculate potential profit margins by using various formulas, software, and rules of thumb such as the %70 rule. The Invest Nest offers many online resources that are meant for investors such as calculators for profits and costs.
- Faster payouts in lump sums when deals are completed properly
- Very profitable when done correctly
- No long term responsibility for each property after selling
- Large, upfront costs to get started buying properties
- Considerable experience, work, and effort required with this method
- Unexpected issues and expenses may arise at times during certain flips.
4. Wholesaling Real Estate
This particular real estate investment strategy means finding a property on the market, locking the property into a contract, refraining from performing any upgrades or repair, and selling it to another real estate investor.
Wholesaling can lead to quicker returns as one does not hold onto the investment property for very long, ideally.
It really helps to increase your transactional income so that you can build more cash for investing, having a solid grasp of your local market, and understanding the costs of improvements associated with these projects when planning your wholesaling strategy.
What this strategy essentially boils down to is that you are basically getting a property under contract that is assignable which allows you to sell the contract to somebody else. The money you make is the fee you charge for the person buying the contract or right to buy the property.
- Wholesaling is one of the quickest real estate investment strategies for seeing financial returns
- Newer real estate investors can benefit from beginning with wholesaling due to the low cost of entry and lack of need for a high credit score
- The lower level of risk with this strategy as one does not need to hold on to the properties for a long period of time
- The sales from wholesaling only pay out once per sale so there is no continued income from each property so you cannot depend on consistent monetary gain unless you keep finding properties to sell
- Studying your local market, analyzing the deals, and handling each transaction can be considerable work
- Finding the right buyer for you wholesale property can be a challenge at times
Yes, there is a method in which one may capitalize on modern real estate investments without having to be actively involved in the process.
If you’re looking to stay a bit more hands-off with your real estate investment strategy then you can utilize a REIT (Real Estate Investment Trust).
A REIT is essentially a group of investors that pool together their funds to invest in larger properties or groups of properties. These passive investors have very little to do with handling the property and passively collect a portion of the profit in return for their invested funds.
There are a variety of methods when it comes to investing in a REIT so it is wise to perform
thorough research and even chat with your financial advisor should you have one.
- There is lower risk involved with this method of real estate investment, providing
you diligently research your REIT
- No hands-on involvement means more free time and no responsibilities regarding
- Moderate to high financial return available, varying with specific opportunity and
- Hands-off investment style will also mean that you have less control over the real
estate you are invested in. If you prefer to have a higher degree of control in your
projects then this method may not be ideal for you.
- Not all REITs are reliable, competent, and ethically managed. It is important to
know what you’re getting into, who you are doing business with, and ensuring
that the investment vehicle is a good one
- REIT dividends usually do not make the IRS guidelines for qualified dividends and
are often subject to higher tax rates
Commercial real estate means to purchase properties that are intended for businesses to lease and utilize it.
This can be a strip mall, small office space, or a commercially zoned house that a
potential tenant can run their business out of.
This strategy is not ideal for newer real estate investors but there is no doubt that it can be incredibly lucrative if you bring the right business in as a tenant. One could consider building their funds through other real estate investment strategies and work your way into being able to enter the commercial space.
Commercial real estate tenants tend to be more willing to sign longer leases and are more prone to be able to pay their rent. It helps to be selective and ask for references when selecting the tenants.
- High level of profitability and stability in the commercial space
- Mutually beneficial relationships with business owner tenants possible
- Business owner tenants tend to have a higher degree of standards for how they
treat your property
- Higher level of complexity means this form of real estate investing is not easily
accessible to newer investors
- Time, effort, and management is increased with the more commercial tenants you
- Higher initial monetary investment required to get started with commercial real
-FAQs for Investing Beginners-
Q: How do I decide which investment strategy is ideal for me to start with?
A: It is important to assess factors such as your own financial resources, desired outcomes, credit score, your own threshold for risk, and more in order to narrow down which of these real estate investment strategies would be ideal for you to begin with.
Q: Do I need to get a real estate license for real estate investing?
A: No, a real estate license is only required if you intend to sell homes and operate as a realtor.
One of the benefits of many of these other real estate investment strategies is not requiring a real estate license to capitalize on modern real estate opportunities.
Q: What is an “ARV”?
A: “ARV” means “After Repair Value”. An investment property would have one property value prior to repairs than an increased property value after upgrades and repairs are completed. An ARV can go up after add-ons to the home are completed as well.
One of the reasons that modern real estate investment is so exciting is just how many ways we can enter into the fray and start making money but this also comes with the unique challenge of discerning exactly how you should plan your entry into the world of real estate investing.
It is important to assess your own needs and wants when it comes to beginning your real estate investment journey so you can make an intelligent choice regarding how to begin and which investment strategy would be ideal for you.
Take advantage of resources such as this guide to really maximize your momentum as you get started down your own exciting real estate path and be sure to check back in here with us at Invest Nest to see what kind of useful content we will put together for you next.