Andrew Carnegie, one of the richest Americans in history, famously stated that 90% of millionaires acquired their wealth through real estate investment.
Property investment is overwhelmingly stable as an investment and secured by a physical asset. This makes it a very popular investment strategy.
Are you considering investing in real estate, but aren't sure what your options are?
Let's take a look at 5 real estate investment strategies.
1. Long-term Rentals
A classic property investment strategy is to buy properties that you rent out to tenants as their long-term home. Tenants might rent your property for several months or for several years.
As a landlord, you'll be responsible for drafting a lease, marketing the property, making repairs, screening tenants, and collecting rent.
This can be a very stable real estate investment strategy. If your tenants pay on time, you can be assured that your mortgage will be covered. You can also build up a rental property portfolio over time, and properties producing positive cash flow can be a nice source of passive income.
The drawback of long-term rentals is that issues with tenants can result in property damage or significant financial losses. Potential tenant issues include but are not limited to refusal to pay rent, your building developing a bad reputation, tenants that disrupt the neighbors regularly, and high turnover.
This is why thorough tenant screening is crucial.
2. Short-term Rentals
Short-term rentals provide vacation accommodations for people and are found on sites like VRBO and Airbnb.
While short-term rentals can be very profitable, they have to be managed differently than long-term rentals. Landlords generally foot the bill for utilities and the internet. Additionally, these apartments are almost always fully furnished.
The scheduling of short-term rentals is flexible, allowing owners to live in the property part-time if they choose. It's also possible to rent out one room in your house short-term.
Short-term rentals have been particularly susceptible to the fall-out from the COVID-19 pandemic. Many property investors had built up portfolios relying on vacationing renters. It's advisable to be aware of this issue before investing in short-term rental properties.
3. Flipping Houses
Throughout the country, there are countless homes with plenty of charm that are in need of some TLC.
Flipping houses involves buying distressed properties and rehabbing them. Then they're sold for a profit. Investors with contracting experience and are very knowledgable about their local real estate market can do well flipping houses.
One of the drawbacks of buying distressed properties is that it can be hard to estimate repairs beforehand. If the new owner is hiring out the contracting work, the cost of rehabbing the home can cut into profits.
You'll also want to watch out for potential legal issues. Distressed homes might not come with a clear title. You could also possibly get sued by new buyers for not addressing certain rehab issues properly.
Similar to house flipping, the BRRRR method involves buying a distressed property and fixing it up.
Instead of immediately flipping, though, owners rent out the property to tenants. After several months of renting and building equity, owners can refinance in order to get better interest rates. This allows them to obtain enough money to invest in another property.
This combination of several strategies is aimed at scaling your real estate portfolio quickly and maximizing profits.
One of the dangers of the BRRRR strategy is the same as with flipping houses: unexpected repair costs can cut into profits. You also have to keep in mind the potential drawbacks of renting, including tenant issues that are stressful and costly.
5. Real Estate Investment Groups and Real Estate Investment Trusts
Real estate investment groups (REIGs) are ideal for people who are interested in owning rental properties but aren't interested in running them.
If you're looking for a more hands-off approach to real estate investing, REIGs could be a good option. They are essentially like small mutual funds that invest in rental real estate.
A common structure for a real estate investment group is that a company will build or buy a set of condos or apartment blocks. They then allow investors to buy them through the company. While single investors own one or multiple units, the company collectively manages all of the units.
Companies that operate investment groups take a percentage of the monthly rent in exchange for conducting management tasks.
Real estate investment trusts (REITs), on the other hand, are even more hands-off. This is ideal for investors who aren't interested in traditional real estate transactions but do want portfolio exposure to real estate.
REITs are essentially stocks. They pay dividends but don't possess the leverage associated with traditional rental real estate.
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Real Estate Investment Strategies: Which One Is Right for You?
Whether you choose to rent out a spare room on Airbnb or build a rental empire of your own, real estate investment can be a smart investment strategy. Depending on your financial situation, some of these real estate investment strategies might be more accessible than others.
Are you thinking about buying a home for you and your family? You could consider buying a multi-family and covering your mortgage with the rental income.
Are you looking to invest in real estate without dealing with the issues that come along with being a landlord and property owner? Consider a REIG or an REIT.
Did you find this article with tips for real estate investing helpful? If so, be sure to check out the rest of our blog for more informative articles!