Whether you are new to the world of investing or an experienced investor, real estate investing is considered to be one of the most stable, predictable forms of investment.
Under the umbrella of real estate investing there are a number of different strategies for investing your money in property and other forms of assets.
The staggering number of choices and strategies can be overwhelming, so we’ve done the legwork to break down the options for you as an investor.
These strategies will give you a comprehensive overview of the different ways to make money in real estate, with or without investing in physical property assets.
Let’s get started on how to start investing in real estate and what strategies might be the best fit for your lifestyle and your budget.
How To Invest in Real Estate
As a real estate investor, there are two primary ways that you can increase your capital through investment returns. These two primary forms of investing are largely dependent on your goals and the investment strategy you choose to use.
If you are a specialist in the real estate industry or have business profits associated with your property assets, there may additional sources of investment growth.
For our purposes in this article, we are going to be focusing on the primary two ways beginner real estate investors can see returns on their investments.
Increasing Your Property Value
Many of the strategies presented below are based on the idea of property appreciation.
In these strategies, the primary return on your investment is through an increase in your property's value over time. There are a lot of factors to consider when using investment appreciation as an investing strategy.
These factors include the cost of living, inflation, rise in property and other taxes, neighborhood development, and the overall economic climate in your area.
The second way you can see a return on your real estate investment is through rental income. Rental income can increase your cash flow and investment capital into further real estate investing. This cash flow comes from tenants paying you monthly rent to live in your property.
How to Get Into Real Estate Investing
Just as with all investment opportunities, we highly encourage you to do your own research before investing your hard-earned money into any real estate opportunity.
Most importantly, we highly recommend finding impartial information on whatever real estate investment you choose to embark on. Enlisting the services of a property management company can be a fast-track to real estate investing expertise.
Real estate investing is a business for many different professionals, and it is important to ensure you are protecting your own interests when making any investment decision.
Particularly if you plan to invest in real estate online, it's important to be fully aware of the market and people you're dealing with.
Here are our top recommendations for excellent resources to learn more about various real estate investing strategies and how you can help to protect and grow your investment.
Strategies When You Buy Real Estate
There are many different real estate investing strategies designed to fit a range of investor budgets, lifestyles, and risk levels.
As a general rule, investing is always a risk, however different strategies carry a different risk weight and a different potential for short-term and long-term gains.
The more stable and predictable your investment, the less likely you are going to significantly increase your returns. It’s all about what risk is palatable to you and how you want your money to grow.
Real estate investing is usually a long-term investment game, but different strategies can also benefit you in the short term.
Investing Strategies for Real Estate 101
Fix and Flip
Fix and flip is the strategy behind many home and garden television shows such as Love it or List It or Fixer Upper. This strategy involves purchasing a property, completing renovations or repairs, then selling the property for a profit.
This strategy is especially lucrative for individuals who are handy and can do most of the renovation work themselves.
While TV makes this strategy look simple, fix and flip real estate investing does involve a solid understanding of your local real estate market and technical know-how on how to maximize your renovation budget.
The critical success factor in this investment strategy is purchasing a home that is selling under value, but with neighborhood and market potential to sell for more.
It is also important to note that this strategy can be risky due to the unforeseen nature of home renovations. Sometimes your home inspection won't show all the work that needs to be done.
Infrastructure issues can be quite pricey and very quickly eat up your renovation budget and shrinking your return potential.
Wholesaling Real Estate
Wholesaling real estate is the strategy for purchasing investment properties at a good deal and then reselling them quickly for a small increase in price.
The foundation of this business model is based on identifying undervalued properties and being able to convince buyers to pay more than what you paid for the same property—no renovations required.
This strategy is an excellent choice for investors who enjoy sales and marketing. Wholesaling can be a risky venture and investors require the capital to purchase and quickly resell each property.
House hacking is a favorite strategy for first-time investors and or even just people looking to decrease their monthly expenses.
House hacking means living in and owning real estate that produces income, such as a house with extra bedrooms or livable space or a multi-family complex like a duplex, triplex, or fourplex.
This is especially common for people who have mother-in-law suites or guest suites in their basement, garage, or somewhere else on their property.
By renting out part of your residence, you reduce your monthly costs, making it less of a financial burden for you—the homeowner—to pay off your mortgage.
We recommend trying house hacking as a first step in your investment journey because it is an excellent, low-risk way to test the waters of being a landlord.
The strategy of living and then renting out a property is also a common strategy for first-time real estate investors. The Live-In-Then-Rent strategy means that you will live in your home for a period of time and then use this property as an investment later on.
This strategy is different from house hacking because you don’t rent the property while you live there.
This is a common strategy for homeowners who want to upgrade to a different home but still have the financial capability to keep their original home and supplement their mortgage with tenant income.
Repeating this strategy several times can help to create a small portfolio of rental properties.
The Live-In-Flip model is a hybrid between Fix-and-Flip and the Live-In-Then-Rent models. In this strategy, the homeowner will buy a property and live in this property while they upgrade and finish renovations and repairs.
After living in the home for two years, the owners then resell this upgraded property for a profit.
For Americans, if you follow the IRS rules on this form of investments, you will not be required to pay tax on the profit of this resale for up to $250,000 for an individual pr $500,000 for couple/family filing jointly.
This hybrid investing model is highly popular and does not require the homeowner to become a landlord.
The Buy-Remodel-Rent-Refinance-Repeat, often called BRRRR, is an excellent way to build a solid rental portfolio in a sustainable way. This model is a hybrid blend of multiple different investing strategies.
The BRRRR model is based on buying fixer-upper properties that are selling below their full value using short-term cash or mortgage financing.
From there, you fix up the property and find renters that will pay fair market value for the improved property. Once you have a tenant strategy established, you refinance the mortgage for a better rate over a long-term amortization period.
If this strategy is successfully implemented, you can use your initial investment out to use as capital for the next deal. This strategy is best implemented early on in your investing journey to help build your portfolio.
Another great short-term strategy to turn your property into a revenue source or investment is through home-share services such as Airbnb. Airbnb is an online marketplace that connects short-term renters with property owners for short-term, long-term, or vacation rentals.
Traditionally, Airbnb is used for visitors to a new city or individuals looking for a fully furnished and functional space. With Airbnb, you can rent out your entire space, a portion of your home, or even a room.
While there are certainly a number of important considerations to factor in, Airbnb can be a very lucrative endeavor no matter your space. This is especially true in large cities or popular tourist destinations, which makes it a good choice for apartment investing or condo investing.
Many condos and apartment buildings have strict rules regarding the use of Airbnb and similar services, so we encourage you to do your research before taking the leap.
There are also risks to you as the homeowner, particularly if you are opening your home to short-term rentals. Some of these risks could involve damage to your property, theft, annoying your neighbors, or criminal activity occurring within your property.
Short-Term Buy and Hold Rentals
This investment strategy involves buying rental properties and holding these properties for a shorter amount of time, usually anywhere from 1-5 years.
This strategy is often used to take short-term action to increase the property’s value such as renovating, doing repairs, raising the rent, and other forms of property appreciation.
This strategy can be very successful in multi-family complexes such as apartment buildings or in highly competitive rental markets.
Long-Term Buy and Hold Rentals
Another form of the Buy and Hold investment strategy is the Long-Term Buy and Hold Rentals. In this strategy, investors buy a property with the intention of keeping the property over a long period of time.
This slow and steady approach is often very successful and can help with short-term goals as well through rental income and tax breaks.
The long-term benefits of this strategy are based on price appreciation, meaning you can sell the property for more than you paid for it after a significant portion (if not all) of the loan or mortgage is paid off.
This real estate investment strategy is particularly successful for people who hope to use these returns for other forms of investment or other long-term goals.
This strategy works well in markets that have high rental values or desirable elements such as prime locations, or up-and-coming neighborhoods that are not fully developed.
The Rental Debt Snowball Plan
The rental debt snowball plan is a sound investment strategy that is designed to increase your chances of stable, predictable returns to help you one day create an ongoing income stream.
This strategy requires a thoughtful and well-planned approach and involves gathering all the cash flow from your rentals to pay off one loan or mortgage at a time.
The real success behind this strategy is the speed that debt payoffs accelerate as you continue to pay off your properties.
The All-Cash Rental Plan
Similar to the Rental Debt Snowball Plan, the All Cash Rental Plan uses rental income for further investment growth. This strategy requires significant upfront investment as property owners use their rental income to target and purchase additional properties in cash.
The basis of this approach is to pay for a property in cash rather than accumulating mortgages and loans. This strategy may not be a fit for high-priced markets such as big cities or tourist destinations.
The Trade-Up Plan
The Rental Trade Up Plan is a sophisticated model of investing that works to quickly build real estate wealth and income.
This model involves juggling a number of moving parts but its basic premise is moving from smaller properties to larger properties using the 1031 tax-free exchange technique.
This section laid out in the United States Internal Revenue Code allows you to avoid paying capital gains taxes when you sell an investment property and reinvest these profits into another property of equal or greater value.
This loophole helps property owners build significant real estate wealth all while taking advantage of the 1031 tax-free exchange tax benefits.
Hard Money Lending
Hard money lending is one of the riskier strategies presented here. It involves giving short-term loans to real estate investors. These real estate investors then buy rentals or fix and flip properties.
Usually, these loans are high-interest with significant upfront fees and lower loan-to-value ratios than more traditional loans or mortgages.
While this strategy can be profitable, it can also place you in financial trouble if you do not have protection against foreclosure and other unforeseen risks.
Discounted Note Investing
Discounted note investing involves buying and selling notes (another name for real estate debt) at a discount to the full value. This strategy then allows you to take on the role of seller financing so you can sell this home to a tenant or other investor.
This type of strategic investment can be very complicated and your best first step should be to consult with a lawyer before making any moves in this approach. However, what is real estate investment without some risk?
Syndication & Crowdfunding
Syndication and crowdfunding are relatively passive ways of making real estate real easy for investors. In this strategy, investors pool their money with other investors to buy real estate or make loans without having to put the deals together on their own.
From there, you can invest your money in syndicates who will manage your investment for you for a fee.
Real Estate Investing Trusts (REITs)
Real Estate Investing Trusts (called REITs) are very similar to playing the stock market with mutual funds. Instead of purchasing stocks or bonds of a company, REITs allow investors to own portions of real estate investments—often income-producing commercial properties.
Unlike the other strategies we've outlined above, this strategy is the only form of true passive investing in the real estate space. Contrary to other forms of real estate investing that involve owning property, REIT investments are still highly liquid, just like stocks.
Real Estate Investment Groups (REIGs)
Real Estate Investment Groups (otherwise called REIGs) are investment opportunities that are perfect for investors who want to own a physical property but don’t want to be involved in the landlord or tenant processes.
However, investing in REIGs does require access to financing and an investment of capital similar to more traditional real estate investing.
REIGs are similar to small mutual funds that invest in large-scale investment properties. In a typical REIG setup, a company will buy or build a set of apartment blocks or condos.
From there, this company will open up the opportunity for investors to purchase units in these buildings directly from the company. Once you own a unit or a set of units, you are part of the investing group.
Once you are an investor, the initial hard work is done and you can watch your investment grow. The company operating the investment group manages the unit as a property manager, therefore taking landlord responsibilities off your plate.
In fact, you might never have to interact with your tenants and they might not even be aware that you own the unit.
For their services, the REIG company takes a percentage of the rent from your unit. The remainder of your tenants' rent can be used to pay off your investment or as additional cash flow.
The Bottom Line
We hope these strategies will help you discover the vast opportunities for real estate investing no matter your lifestyle, goals, or budget.
Building a real estate portfolio can be a highly lucrative, predictable form of investment and many people have found great success and returns when building a portfolio of real estate assets.