10 Real Estate Investing Strategies for Beginners and Pros
May 22, 2022
Understanding the many real estate investing strategies you have at your disposal can help you diversify your portfolio and take advantage of real estate investing. Today, there are opportunities for just about anyone to add real estate to their investment portfolio.
Learn how to start investing in real estate assets and become a real estate investor, whether you're a beginner or an experienced professional.
How to Invest in Real Estate: Popular Options
There are many ways to invest in real estate. The right real estate strategies for you is the one that fits within your financial goals, timeline, and risk tolerance. Some investments involve a lot of work, such as rentals (active investments), and others require only your money to earn passive income.
You can invest directly in physical real estate, such as rental properties, or invest indirectly by investing in real estate companies that buy and hold real estate.
As you choose your real estate investment strategy, you should understand the different types of real estate you can invest in.
Residential Real Estate Investing
A real estate investment in residential real estate could mean many things. You could buy a single-family home and rent it out, earning cash flow monthly. You'd be the landlord and responsible for the home, its maintenance, property taxes, and insurance.
Using the same investing strategies, you could also invest in multi-family properties, condos, or townhomes. If you invest in a large number of rental properties, you may want to consider hiring an investment property management company to manage the properties for you.
Residential investment properties also include fix and flip properties. Rather than buying, holding, and renting, you buy an undervalued property, fix it up, and sell it for a higher price, potentially earning a profit.
Commercial Real Estate Investing
You could also invest in commercial real estate. This real estate investing strategy usually requires more capital since commercial real estate is generally more expensive than commercial real estate. Still, if you have the capital and can secure financing, it can provide regular cash flow and capital gains in the right market.
Land Real Estate Investing
Land real estate investing strategies can be profitable if buying rental property does not appeal to you. You can buy developed (ready to build on) land or undeveloped land. Be sure to check the zoning rules before investing, so you know what the land can do, whether you plan to sell it for a higher price in the future, rent it out, or build on it yourself.
Industrial Real Estate Investing
Industrial buildings can also be an excellent real estate business idea, especially if you invest in an area where warehousing, manufacturing, and assembly plants are popular. You invest in the real estate, and companies rent the space from you, providing you with cash flow while also earning capital gains if the property appreciates.
Passive vs Active Real Estate Investment
As you learn how to get into real estate, consider the role you want to play. For example, do you want an active or passive role as a real estate investor? Your real estate investment strategies will help you choose the right investment.
An active real estate investing strategy means you actively participate in the investment. The most common method is buying and holding real estate. You own real estate property and rent it out, acting as the landlord. There is a lot of responsibility that falls on your shoulders with this strategy.
A passive real estate investing strategy means you don't have an active role in the investment. Instead, you provide the funds and sit back while someone else manages the properties. Most passive real estate investments are crowdfunded and invest in a real estate company that owns the properties or invests in loans that fund the real estate properties.
Choosing a passive or active real estate investment strategy will help you decide which of the top 10 strategies for the beginner real estate investor or experienced real estate investor is right for you.
10 Real Estate Investing Strategies for Beginners and Pros
1. Buy and Rent
When you buy and rent real estate, you buy properties you can rent to tenants and manage either yourself or hire a property management company to do for you. Most real estate investors purchase single-family properties, condos, or townhomes for rental property. It's important to do your research in the area to see what most renters prefer and to make sure there's enough profit in the amount of rent you can charge to earn a positive cash flow.
You can also use the BRRRR method to buy and rent. With this method, you buy an undervalued property (B), rehab the property to make it livable so you can charge at least the market rent (R), rent the property to tenants (R), refinance the property when you have equity in it (R) and repeat the process using the equity you just earned (R).
If buying a separate property to rent out and manage is too overwhelming, house hacking is a great strategy for beginner investors. Instead of purchasing a separate property, you buy a multi-family unit (1-4 units). You live in one unit and rent out the remaining units to tenants, using the cash flow to pay your mortgage payments and possibly earn a profit.
If you have the patients to handle tenants and the ability to maintain and fix properties whenever it's needed, you can benefit from the buy and rent strategy. You could also benefit from it if you have the extra funds to hire a property management company, as this allows you to invest anywhere in the country, not just in your local area.
Pros and Cons
- May provide monthly rental income
- You can leverage your investment with financing
- There may be tax advantages
- It can be hard to manage tenants
- You are responsible for anything that happens in the home
2. Buy and Hold
The buy and hold strategy is good if you don't want to be a landlord but want to enjoy a property's appreciation. You buy undervalued properties, fix them up just enough to be able to rent them out, then market the property for rent.
You can buy and hold for the short-term or long-term, depending on your investment strategies. For example, many real estate investors buy properties, fix them up and earn capital appreciation. Then, when they sell the property, rather than taking in cash, they reinvest it in another investment property, using the 1031 exchange rule to avoid paying taxes on the capital gains.
The buy and hold strategy is good for real estate investors who don't have a lot of capital upfront but who can fix up properties, making them worth more, and allowing them to earn rental income and capital gains when they sell the property. It also works best for investors who have a short-term real estate investing strategy and want to continually reinvest funds in other properties to increase their capital gains.
Pros and Cons
- You can save money upfront by buying undervalued properties
- You can have a short-term or long-term investment strategy
- You can use the rental income earned to add to your portfolio
- You must be in the investment for the long-term for it to work
- It could take a long time to earn capital appreciation
If you have the skills to find undervalued properties and have a network of real estate investors ready to buy, real estate wholesaling can be a great investment strategy. It's not a form of passive income, and you must be able to network on both sides - buying and selling to make it work.
Wholesaling real estate means you enter a contract to buy a property but immediately assign the contract to a buyer you've secured. The contract you sign with your buyer will be for the property price plus your premium for finding the property.
As a real estate wholesaler, you are the middle man in the transaction. You charge a 'finder's fee' for finding the property for the real estate investors that don't have the time to find them.
Wholesaling real estate works best for those who have great knowledge about real estate and how to find it but don't want the hassle of owning real estate themselves. You benefit from making a profit but don't worry about owning real estate yourself.
Pros and Cons
- You can exercise your real estate knowledge without owning real estate yourself
- You don't need a lot of capital to start
- It doesn't take long to earn your money
- You have a short timeline to flip the contract to make money
- You could get stuck with a contract that you have to honor or risk breaking if you can't find buyers
4. Flip and Sell
The flip and sell strategy requires you to buy an undervalued property, fix it, and flip it. The fix and flip strategy can work with a home you buy strictly for that purpose, or you could do a live-in flip where you buy the property, live in it while you fix it up, and then flip it.
Either way, your goal is to fix the property up to increase its value and earn capital gains when you sell it. It's another version of the buy low, sell high investment strategy.
To make the flip and sell strategy work, you must have enough capital to buy the property and the ability to fix it either yourself or by hiring contractors to do the work for you. In the traditional fix and flip strategy, you sell the property within six months of buying it, so you must also be able to act fast.
Pros and Cons
- You could potentially make money quickly if you flip and sell within a few months
- You don't have to hold onto real estate long-term and manage it
- You can farm the work out to contractors if there's enough room in the price
- It takes a lot of physical work; it's not a passive strategy
- You need a large network of real estate professionals to make it work
If you'd rather not own physical real estate, a real estate investment trust can be a good passive investment. With a REIT, you invest in a real estate company that buys properties and holds them. The companies usually invest in income-producing properties that bring in monthly rent or quarterly cash flow that the REIT must pass along to its shareholders.
REITs are great for anyone interested in investing in real estate without owning investment properties themselves. You get to earn the returns real estate investing offers without the burden of owning physical real estate.
Pros and Cons
- You can invest in real estate with only a little money since the money is pooled together from many investors. You don't need a lot of money to be able to invest in real estate
- It's a completely passive real estate investing strategy since you don't have to do any work
- You might earn dividends from the monthly or quarterly earnings
- You have no say in the properties the REIT invests in
- You don't have a say in how the company manages the properties it owns
Real estate investment groups are groups of private investors who pool their funds together to invest in properties. REIGs are more private than real estate investment trusts, so there's less red tape and requirements but somewhat higher risks because of the lack of regulation.
If you have an interest in real estate investing but aren't quite ready to go out on your own, working with a real estate investment group or a group of real estate professionals can be a great way to start. You'll learn about the real estate industry, learn about real estate investing strategies and be able to decide your next moves when the REIG matures.
Pros and Cons
- You can work alongside other investors sharing ideas and learning from one another
- You and the other members set the parameters of the investment
- You can crowdfund the capital needed to invest in real estate
- There's little to no governing over it, which could lead to losses or mismanagement
- There could be an imbalance of power and disagreements in a real estate investment group
7. Crowdfunding and Syndications
A crowdfunded real estate investment strategy brings together investors with the same goals and ideas to invest in real estate. You use a real estate investment platform to connect with real estate developers and other investors. The real estate platform vets the projects available for investing, so you can gauge the risks and decide which investment is right for you.
If you wonder how to invest in real estate with little money, crowdfunding could be the answer you need.
If you want to invest in real estate but want a happy medium between owning the physical properties and not having a say in what a company invests in, crowdfunding could be a resolution. You can see what the investment will be for, its risk level, and its timeline.
Pros and Cons
- You can invest as little or as much as you want in as many investments as you want to make diversification easy
- You can diversify your real estate investments across many geographic areas
- The real estate platform does all the due diligence for you
- There are generally minimum investment periods with no option for early redemption
- Real estate platforms generally charge management fees
8. Fractional Investing
Fractional investing allows you to invest in 'parts of a real estate investment' without owning the entire property outright. As a result, you can invest in real estate with a much lower investment and without the stress of making important real estate decisions.
With fractional investing, you have access to institutional-sized real estate investments without the large amount of capital that's usually required. You can invest in fractional shares using real estate investment apps, some of which have minimum investment requirements as low as $1, and who do all of the due diligence for you, so your only decision is which property to choose.
Fractional investing is great for any real estate investor who wants to diversify their portfolio and take advantage of commercial real estate investing. There are options for both accredited and non-accredited investors and at minimum investment thresholds that start at just $1.
Pros and Cons
- You can invest in commercial real estate even if you only have a little money
- You don't have to make any important decisions regarding the investment
- You might earn dividend income
- There's no guarantee of a positive return
- You may only earn dividends quarterly or semi-annually, depending on the investment
9. Property Tax Lien Investing
Investing in property tax liens means you buy the tax liens homeowners owe. This gives you the right to collect the taxes plus any interest or penalties. Ideally, the homeowners will pay their back taxes owed, and you earn a profit in the interest and penalties charged. You can buy property tax liens at auctions or through property tax lien investment funds.
Anyone with the capital to buy tax liens themselves can benefit. You hold the right to the tax lien and collect all payments. If the homeowner doesn't redeem their taxes, you then have the right to foreclose on the property, but this rarely happens. Tax liens can take a few years to get paid, though, so it can be a decent investment if you can wait for the funds.
Pros and Cons
- You don't need a lot of capital as you can choose which tax liens you buy
- You don't have to own and manage real estate
- They are easy to get
- There's a cap on how much you can earn
- Buying tax liens can be competitive
10. Hard Money Lending
As a hard money lender, you lend money to real estate investors who buy and hold or fix and flip properties. You set the terms for the financing and earn the interest and any fees charged.
Most investors that require hard money loans have little credit or bad credit, so the risks are high, but the rewards can be even higher.
If you have the capital to lend real estate investors the funds needed to invest in real estate, you can indirectly invest in real estate this way. You don't have to own any real estate and just collect payments, including interest, monthly.
Pros and Cons
- You can invest in real estate without owning any real estate yourself
- You help other real estate investors have the funds to invest in the real estate markets
- You set the terms of the loans
- There's no guarantee borrowers will pay their loans back
- It requires a lot of due diligence on your part
How to Choose the Best Real Estate Investments
Choosing the best real estate investment strategy means knowing your investment style and understanding how to identify scams.
1. Know the potential risk and returns
No two real estate investments have the same risk or returns. So do your research and determine which offers the returns you'd hope to receive with the level of risk that allows you to sleep at night.
2. Understand your level of control
Know how much control you want in an investment and choose real estate investment strategies that allow that level of control. If you want a completely passive investment strategy with no control, you can choose investments that do the due diligence and management for you. If you prefer control, you'll want to focus on real estate investments you manage yourself.
3. Diversify your investments
Regardless of your investment style, always diversify your real estate investments. Choose a combination of active and passive investments along with risky and conservative investments to maximize your returns.
Property Investment: Risk vs Reward
The more risk you take when you invest in real estate, the higher the returns when you make them. Identify your risk tolerance and how much risk you can take to determine the level of returns you can get. No real estate investment is without its risks, but some are more conservative than others.
Real Estate Investing Strategies FAQ
Is Airbnb a Type of Real Estate Investment?
You can offer short-term rental properties on Airbnb and earn passive income. It's another source of real estate investments that can help you earn income on real estate you own. Airbnb investments are active real estate investment strategies, so make sure you can actively manage the property to be successful at it.
What Is the 5% Rule in Real Estate Investing?
The 5% rule pertains to the three main costs you'll incur if you own real estate investment properties. These costs include property taxes which should be no more than 1% of the property's value; maintenance costs should be around 1% of the property's value, and the cost of capital should be approximately 3% of the property's value.
What Is the 70% Rule in Real Estate Investing?
Real estate investors shouldn't pay more than 70% of a home's after repaired value minus any renovation costs to buy a fix and flip. This minimizes your investment and maximizes your profits. Also, since you don't know for sure how much you can sell a property for, this protects your investment, leaving room for profits even if values fall.
What Is the 1% Rule in Real Estate?
To determine if an investment property is worth it, the 1% rule states that the rent you charge should be at least equal to 1% of the property's value. This can help you gauge if a real estate investment is worth it, but you must do your due diligence on market rent before investing.
What Is the 50% Rule in Real Estate?
The 50% rule helps investors gauge a property's profitability. With this rule, you allocate 50% of the rental income toward operating expenses to keep potential profitability realistic, so you don't overestimate how much you'll make.
Real Estate Investing Strategies: Key Takeaways
Real estate investing strategies are important to learn to diversify your portfolio. Adding real estate to your investment portfolio is a great way to diversify your income and reduce the overall risk of your portfolio.
Choose the strategies that suit your investment style the most. Whether you're looking for an active or passive investment strategy, many opportunities are available for you. Learn more by signing up and visiting our blog.
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