Investing in real estate is an excellent alternative to other forms of investment.
To begin with, real estate has a low correlation with the stock market, which means it suffers less from volatility. You also enjoy many tax breaks that other types of investments simply lack.
Finally, if you build a portfolio of geographically diverse assets, you can become a more resilient investor capable of weathering various storms. Let’s take a look at the many different investment strategies available to you.
1. Invest in Rental Properties
So long as you have good tenants, you’ll enjoy stable passive income.
For this reason, screening to ensure successful residents for your rental property is an essential skill. It goes part and parcel with performing gestures to show tenant appreciation and knowing how to write a great rental listing. This way, you can start with tenants who are more likely to stick around and can make them feel adequately valued so they’re more likely to stay in your property year after year.
To ensure that real estate remains a passive investment, you can use a property management company. For 6 to 12% of the collected rent, a property management company will handle everything from tenant screening and security deposits to maintenance between tenants and even evictions.
Knowing which amenities to offer tenants and how to correctly price rent relative to the market is also essential. Too few amenities and rent that’s too high, and you’ll end up with vacancies.
2. Buying and Holding Properties
Buying and holding is also known as rehabbing. To make this strategy work, you want to perform just enough rehab to rent your property and no more.
The underlying idea is that, due to inflation, properties will always appreciate over time. And as a result, you get to enjoy the benefits of a steady income flow as well as your property going up in price. Excessive rehab only eats into your profits.
In addition to a regular income flow and appreciation, the more of your real estate you own, the greater leeway you get if you want to take out a low-equity line of credit. And when the time to sell comes, you can avoid paying capital gains taxes by doing a 1031 exchange, which entails using the profits of selling your property to purchase one or more investment properties of equal or greater value.
Buying and holding can be applied to any type of asset class, from single-family homes to apartment complexes. The key to finding a suitable property to hold onto is research. You need to know the ins and outs of your target market, what appeals to renters in the area, and how to increase your property’s value over time.
It’s useful to know how to get a fair cash-on-cash return, which is the measure of how much money each of your investment dollars gets you, and how to calculate the cap rate, which is the measure of how long it will take for you to recoup your investment. Using figures such as these will help you find the best property to invest in.
3. Flipping Properties
The difference between rehabbing for a rental versus a flip is that flipping entails rehabbing and then selling instead of rehabbing and holding. You still want to do just enough renovations to sell the place for the maximum amount and no more to make as much of a profit as possible.
On its surface, flipping may seem like a get rich quick scheme because you buy a place at a below-market rate, fix it up, and sell it ASAP. But there are much easier ways to make money than flipping houses! That’s because everything has to be executed just right since the longer you hold the property, the greater the risk of losing money.
Ideally, you have a whole process in place that the property can seamlessly fit into. This would include everything from being able to purchase materials at an affordable rate, a crew who can provide high-quality work at a fair price, and a real estate agent who specializes in flipping or you have the skills to sell the property yourself. If done right, flipping should only take a few months.
Flipping houses is not a passive investment.
Wholesaling, like house flipping, is also not a passive form of investment. While wholesaling is one of the investment strategies you can do with no or bad credit, it’s not one of the investment strategies you can do with little to no time. Wholesaling requires every skill that one could imaginably make use of in real estate investment. That’s because you put together the plan that guides a property from purchase to sale and guides that property from a seller to a buyer with the intention of collecting a finder’s fee.
The steps of wholesaling are as follows.
- Find a property, arrange the price and conditions that work, and assemble a purchase agreement.
- Find someone who will buy your property, like someone hoping to flip or buy and hold.
- The buyer buys the property per the terms of the agreement you’ve arranged.
- The buyer is now the homeowner, the seller gets paid, and you collect your finder’s or assignment fee.
As you can tell, wholesaling is not for beginners! But, if done correctly, it can be a satisfying and rewarding process.
Real Estate Investment Trusts (REITs) invest in or provide the operating costs for real estate assets. REITs invest in various real estate assets, from data centers and apartments to office buildings and single-family homes.
Many REITs are traded on popular stock exchanges just like stocks, making them an accessible and highly liquid way to invest in real estate. REITs are required to pay out 90% of their profits to investors in the form of dividends, which means they’re a great source of reliable income.
5. BRRR Investing Method: Buy, Rehab, Rent, Refinance, Repeat
Buy, Rehab, Rent, Refinance, Repeat (BRRR) is a popular long-term investment strategy. Initially, the strategy entails performing the steps that constitute the acronym BRRR: buying a property at below market value, rehabbing it, finding tenants, refinancing, and then using the funds saved from renting and a potential cash-out refinance to repeat the process.
Eventually, however, BRRR allows you to repeat the process using economies of scale, which means that the project’s cost is more manageable because the amount of capital invested into the project allows you to negotiate better deals on labor and materials.
As a result, the greater the scope of your investment portfolio, the more resources you have to invest in it, letting you purchase more lucrative properties and enjoy larger returns. Using BRRR, you can truly build a real estate empire!
6. Rental Debt Snowball and All Cash Rental Plans
Rental debt snowball and all cash rental plans are two strategies that use the same principle: snowballing all of your money to accomplish a goal. Rental debt snowballing entails utilizing the income from all your various revenue streams to pay off your mortgages one-by-one until you’re debt-free.
All cash rental plans, similarly, involves snowballing all of your income to purchase property debt-free. Doing so minimizes your risk and helps you build wealth!
Bottom Line on Real Estate Investing Strategies
With so many investment strategies out there, there’s one out there that will suit your cash reserves, time, and how involved in your investment you want to be.
And when you know how to choose the right legal entity for your real estate investment, you also benefit from various tax incentives.
It takes self-knowledge to know which strategy works best for you and a willingness to experiment. Luckily, you aren’t limited to just one approach since the skills are translatable. That’s the beauty of real estate investing: there’s something for everyone!