If you’re thinking about investing in real estate, the sky’s the limit! You don’t need a lot of money (contrary to popular belief), and you can build incredible wealth if you stick it out. The key is understanding the real estate investment options you have, how they may perform, and what risks you take.
Here are the top 12 real estate strategies for investors.
1. Fix and Flip
A fix and flip strategy require you to find undervalued properties, fix them up, and sell them for a profit. You typically turn a property around in 6 months or less, so you can use hard money loans or short-term financing to purchase the property and have the money for renovations.
Pros
- You may make profits fast
- There are more financing options since it’s a short-term deal
- No long-term commitment
- No headaches from dealing with tenants
Cons
- It would help if you actively worked this investment
- It would help if you had a lot of professional input to ensure you make a profit (make the proper renovations)
- Unforeseen expenses can ruin your investment
2. Short-Term Buy and Hold
A short-term buy and hold means purchasing a property (typically an undervalued property), fixing it up, and renting it out. Your goal is to make a significant profit within 2 – 5 years. You can accomplish this by making renovations, increasing rents, and buying in an area you regularly appreciate.
Pros
- You only have the investment for a short period
- If you renovate the property enough or decrease expenses well, you can make a decent profit
- You can use the earnings to level up and buy another property
- A good strategy for high-rent districts with low appreciation rates but high cash flow
Cons
- The potential for a loss is high if the market crashes
- You must actively manage the property and the tenants
- Unforeseen expenses can ruin your investment plan
3. Long-Term Buy and Hold
Long-term buy-and-hold strategies mean buying a property, renting it out, and keeping it for many years (more than 5). With this strategy, you don’t have to worry about investing in high-rent districts or areas with rapid appreciation. The goal here is slow and steady. It works best in popular areas where the tenants are easy and the rents constant.
Pros
- You have the monthly cash flow for the duration of ownership if you have a steady flow of tenants
- You don’t have to worry about quick profits; slow and steady wins the race here
- Allows more time for greater appreciation
- You can invest in properties across the country with this strategy
Cons
- You must hold onto the property for at least five years to earn maximum profits
- Dealing with tenants can be a real headache
- If the market crashes, you’re neither stuck with the property longer nor you will take a loss
4. Airbnb
Airbnb rentals are short-term rentals. You can own an investment property, but instead of renting it on long-term leases, you take advantage of short-term tenants. You may be able to charge higher rents since you’re offering a premium service versus a place to live, and you don’t have to deal with tenants around the clock; you are in charge of when people occupy the property.
Pros
- Has the potential for higher and faster profits than a long-term buy and hold
- You can charge pricing according to demand, holidays, etc.
- You can mark the property ‘unavailable’ when you want and even use it yourself
- You can visit the property more often and know its condition and what needs repairing
Cons
- There’s more (and stricter) legislation on Airbnbs
- You don’t have as much control over who rents your property
- Unless you hire a management company, it’s a lot of work to keep up with
5. House Hacking
If you don’t have the funds to invest in a real estate property separately from your primary residence, combine the two and use house hacking. For example, you buy a primary home with this method, but you buy a 2 – 4 unit property. You live in one unit and rent out the rest, using the funds to cover the mortgage/expenses and possibly earn a profit. Most lenders allow standard financing on a 1 – 4 unit property without charging you higher ‘investment property rates.
Pros
- You may live in your property mortgage-free if the rent covers the costs
- You’re on-site, so you don’t have to travel to take care of the property
- You may have a positive cash flow
- You earn the appreciation of the entire building, not just your unit
Cons
- You essentially share your property with others
- It would help if you were actively involved in the investment (taking care of the property)
- It can be harder to find a suitable property
6. BRRRR
The BRRRR method is the Buy, Renovate, Rent, Refinance, Repeat process. It’s a way to build a portfolio by leveraging the investment made in your original property. Here’s how it works.
You buy an undervalued property either with cash or financing and then renovate it. Once ready, you rent it out and earn monthly cash flow. After six months, you refinance the property taking the equity out of it that you made, and use the equity to buy another property and do the same thing.
Pros
- You may earn immediate appreciation if you buy an undervalued property and renovate it enough
- It’s easier to build a portfolio of properties by leveraging the equity
- You’ll get financing easier if you have large down payments from the previous home’s equity
- You can diversify your risk by investing in multiple real estate markets
Cons
- You must know how to find undervalued and distressed properties
- It would help if you were actively involved in each property which gets time-consuming
- Decent credit is necessary to secure financing for multiple properties
7. Wholesaling
As a real estate wholesaler, you work as the ‘middleman.’ You never own the property. Instead, you do the ‘sleuthing’ finding undervalued properties, put it under contract, and then immediately locate buyers willing to buy the property for more than you put it under warranty. Of course, you keep the difference, which is your profit.
Wholesalers use this strategy when they have an extensive network of investors willing to buy homes but don’t have the time or patience to research as you do.
Pros
- You don’t need any money to be a real estate wholesaler
- You don’t have the headache of managing a property or tenants
- Financing isn’t an issue since you aren’t the end-buyer
- You can make profits quickly
Cons
- You must have the time to act fast, or you’ll end up owing for the home if you don’t find a buyer
- It would help if you had a great marketing plan (and network of investors)
- There are no monthly cash flow opportunities
8. Live-in-Then-Rent
If you don’t have the capital to buy another property right now, you can use your residence as a rental in a few years. While you live in your home, you can fix it up, getting it ready for renters. Then, once you build up appreciation, you can refinance the property, taking out some of the equity and use it to buy your primary residence while renting the original property to tenants.
Pros
- You have a place to live and can work on your investment plan at the same time
- The equity built up in your home that you’re turning into a rental can help you buy a primary residence
- You don’t have to live with your tenants as you would with house hacking
- It’s easier to get financing for a primary home than investment properties
Cons
- If you don’t buy a property in a popular rental area, it won’t work
- It can take a lot of time – the rental of your property, and the purchase of another property for you to live in
- There’s no guarantee your property will appreciate in the time you want to rent it out and move
9. Turnkey Properties
If you’re interested in investing in properties but don’t have the patience or time to find renters, consider turnkey properties. These properties are ready for renters, and many already have renters with an active lease in them. You buy the property as-is with the tenants and become an instant landlord once you close on the deal.
Pros
- You become an instant landlord with little work on your part
- If you work with a platform like Roofstock, they do all the due diligence for you
- You can invest in any area of the country
- It can be a hands-off investment if you hire a property management company to handle the property
Cons
- You don’t have a say in who rents the property since there’s a lease in place already
- You may have to invest long distance
- You’ll need access to financing and a large down payment
10. Live-in-Flip
The live-in flip offers tax benefits if you do it right. A live-in flip requires you to find a property that’s livable but needs updating/renovations. Then, you fix up the home while you live in it and then sell the property after at least two years. If you wait at least two years AND you live in it for 2 of the last five years, you’ll avoid capital gains taxes on the first $250,000 in profits (single filers) and $500,000 (married filing jointly filers).
Pros
- You buy a primary residence, so you get better financing terms
- There’s no separate property to oversee/manage
- The tax exemptions on the capital gains can be quite profitable
- You can renovate the home how you want
Cons
- You have to sell your home every 2 – 5 years
- There’s no guarantee you’ll make a profit when you sell
- You’ll always have work going on in your home
11. Trade-Up
The IRS makes ‘trading up’ easy with the 1031 Like-Kind Exchange rule. With this rule, you can sell an investment property, and if you use the proceeds to invest in another ‘like’ property immediately, you defer the capital gains taxes. Thus, it allows you to invest in something more extensive, possibly make more significant profits and not lose any money to taxes just yet.
Pros
- You can continually ‘up level’ your real estate investments
- You can experience different real estate markets
- Capital gains taxes don’t become due if you keep reinvesting in properties
- Have more purchasing power by offsetting the capital gains taxes
Cons
- There are strict laws and regulations you must follow
- You have a strict deadline to follow
- Any money left that you don’t invest in the new home is taxable
12. Hard Money Lending
If you don’t want to invest in properties themselves, you can invest in the investors who provide the financing. A hard money lender is a private investor (like yourself) who provides funding for an investor for the short term. They are usually loans for fix and flip properties or short-term Buy and holds.
Pros
- You can charge high interest rates for your specialized financing
- You don’t have to deal with real estate directly yourself
- You are in control of who you lend money to
- Your limit is only the amount of money you have
Cons
- If borrowers default, you have to repossess the property and then sell it
- There’s no guarantee you’ll find ‘good’ borrowers
- It would help if you did the work qualifying the borrowers
The Bottom Line
There are many ways to invest in real estate – choose the one that suits your needs, risk tolerance, and goals the most. There is no right or wrong way to invest in real estate, and you can always try one method and move to another as you gain more equity, cash flow, or get up the nerve to take higher risks!