Are you entertaining the idea of investing in real estate?
If so, it’s a good idea to learn real estate investing in all its facets. This way, you’ll be able to find a strategy that aligns with your skills, financial position, and knowledge.
Real estate is one of the five fundamental asset types and one that’s been around since the dawn of civilization. It can give you tax benefits, liquidity, profits, and portfolio advantages. You’ll also learn that real estate has several distinct advantages that you may take advantage of.
So we invite you to continue reading five real estate investment strategies. You’ll discover the fundamentals of real estate investing and how to purchase various real estate assets.
But first, let’s talk about the general categories of real estate investing you can get into.
Real Estate Investment Categories
There are many different forms of real estate investments. Yet, the majority of them fall into one of two categories.
The first category is physical real estate investments, such as:
- Residential properties
- Commercial properties
The second category is non-physical real estate investments, such as:
- Real estate investment trusts (REITs)
- Crowdfunding platforms
Traditional, physical real estate investing can yield a high return. But, it also necessitates a larger initial investment and might have significant recurring expenditures.
Crowdfunding platforms and REITs provide a reduced financial barrier to entry. They allow you to invest in a variety of real estate investing opportunities for a fraction of the cost of a traditional property.
So as you can see, now we have five investing types split between physical and non-physical real estate investing categories. However, keep in mind that sometimes there are options where you can invest in traditional, physical real estate via investment instruments. For example, you can invest in some forms of land through exchange-traded funds (ETFs).
Let’s now look at the five strategies for investing in real estate. We like to look at these strategies as a sort of “real estate investing for dummies.”
Strategy 1: Buy and Hold
The buy and hold strategy, simply put, is just renting out property. It’s a tried-and-true investment strategy that can help you generate consistent, passive income for the rest of your life.
This method entails finding properties, fixing them to make them rentable, leasing the property to renters, and collecting the rents. If you can purchase homes at a reasonable price, you will be able to profit handsomely in the long run.
You may require a dependable source of finance, such as a traditional loan, personal cash, or funds from a partner. To reduce your legal liability and taxes, you can create a legal company such as a corporation or limited liability company (LLC).
You may choose to manage the property yourself if you reside in the region and have the time.
If you don’t, hiring a friendly and competent property manager to handle the essentials of business operations may be more cost-effective. They can take care of maintenance issues, manage repairs, screen renters, maintain track of finances, and collect the rent.
Buying Tip: Keep an eye out for homes that need repair or are poorly maintained. You can purchase, improve, and profit from them.
Types of Rental Property
These are just some of the various types of real estate you can buy and rent out:
- Family homes
- Vacation homes
- College rentals
- Commercial real estate
The prices for these property types will vary a lot. If you have a large budget, it’s well worth looking into commercial real estate as an option.
Advantages of Buy and Hold Strategy
Buy and hold is one of the most efficient real estate investing methods for building wealth. It’s a fantastic source of passive income, which is what most investors strive for. The increasing demand for real estate across the country may lead inflationary forces to rise.
Rent costs are affected by inflation because they rise. For the investor, this would result in more significant cash flows. The purchase and hold approach also has the benefit of increasing in value over time.
Home prices in many states and towns will likely continue to rise as long as inventory remains low and supply is scarce. The increase in property values will increase your equity, allowing you more room to develop.
Disadvantages of Buy and Hold
First and foremost, you must thoroughly examine and choose the tenants for your property. To avoid difficulties later, it’s usually a good idea to pick cooperative and considerate tenants.
Another risk is the market could crash. Given the current epidemic, this may be a greater worry these days.
Strategy 2: House Flipping
House flippers are real estate speculators who purchase homes that most normal homebuyers would pass over. These homes tend to look ugly, and the previous owners may have abused them.
So house flippers will buy the property at a low price, carry out repairs, and improve the house’s overall aesthetics. Then they will try to sell the house in a short period for a lot of profit.
The concept is simple. Purchase a home, renovate it, and resell it for profit. Executing a lucrative flip, on the other hand, is a little more challenging.
An investor must keep their expenditures in check, and there are a lot of them. There are finance expenses, insurance, taxes, carrying costs including utilities, and HOA fees. Plus, there are purchasing and selling charges.
Finding the proper houses for such a purpose is a difficult task in and of itself. The costs of repairs are a small percentage of the total cost of a flip. For flips, the competition is fierce, but you may find reasonable prices through auctions, for-sale-by-owners, referrals, wholesalers, and direct marketing.
One disadvantage of flipping is that the longer you have the home, the less money you make. This is only the case if you’ve taken out a mortgage, mind.
You lose money because you’re paying a mortgage without generating any revenue. You can reduce the financial impact by staying in the property while it is being renovated. As long as most of the changes are aesthetic and you don’t mind a little dust, this works.
Strategy 3: Wholesaling Real Estate
Wholesaling is when you purchase a house or put one under contract and resell it to another investor. You don’t need to maintaining or fixing up the house when using this strategy.
It is feasible to wholesale properties without having to use your own money to purchase them. One option is to put the home under contract and then transfer that contract to another investor who will be the actual buyer.
Another option is to close the deal twice. The investor will acquire the house on the same day that he sells it to another investor in this way. Some firms will allow the first investor to reimburse the original seller with the revenues from the second sale.
The main idea is that you don’t have to fix up the house or seek renters to find another investor ready to buy it. You can sell the house to a rehabber if it needs some cosmetic improvement, for example. Or, if it’s in good condition, you can sell it to an investor who wants to rent it out.
You may not even need to come up with the cash to purchase the home. Instead, you can make an offer to purchase the property from the owner.
Then you draft a contract to obtain authorization to sell the property to someone else and then sell it. It isn’t complicated. Many wholesalers handle numerous transactions each month and easily make money in the thousands of dollars per deal.
Strategy 4: Commercial Real Estate Investing
Large office buildings, for example, are examples of commercial real estate (CRE) investing. These contracts are usually long-term.
Commercial real estate investments generally demand a large quantity of money, which is difficult for a single retail investor to provide.
The most common ways to invest in commercial real estate are fractional ownership and real estate investment trusts (REITs). This type of investment lowers the barrier to entry into CRE for individual investors by reducing the ticket amount. A lower ticket size, on the other hand, does not automatically suggest a good investment opportunity.
The Benefits of This Strategy
Because it’s real estate, it’s insulated from market fluctuations. It’s a safe, long-term investment option with a predictable rate of return.
Furthermore, this strategy includes a lock-in period that safeguards your money while ensuring that you get your money back.
Any CRE in a strategic location may be a golden opportunity. This is because it will be sought after by a particular segment of the rental market, guaranteeing that the investment pays off. Thus, this is an excellent way of passive real estate investing.
More on REITs
When a trust or company utilizes money from investors to manage income properties, it is known as a real estate investment trust, or REIT. This sort of investing is also available on the stock market. In addition, certain REITs may contain some unique investments with minor market rivalry, such as land investments.
One advantage of buying into REITs is that corporations have to invest 90% of profits taxed in the form of dividends. As a result, corporations with REIT status can avoid paying a corporate income tax. A regular company would have to pay this tax and decide if they want to distribute it after-tax dividends and profits.
Strategy 5: Lease Options
In a lease option, you rent your property to a renter but allow them to buy it at the end of the agreed-upon lease term.
People often overlook lease options as a real estate investment strategy. The reality is that it has the potential to create enormous profits. It’s also and an excellent approach for real estate investors who are getting started.
How Do Lease Options Work?
A lease option provides a possible buyer more freedom than a traditional lease-purchase arrangement. A lease-purchase agreement forces a renter to purchase the house after the lease ends.
In lease options, the renter and the owner agree on the residence price in advance. The price is usually set at the house’s current market value, allowing the renter to purchase the home at that price in the future.
You, as the owner, would charge the tenant an upfront fee, which may be as much as 1% of the home’s sale price. If the renter decides to buy the house after the lease, you can use the charge for the downpayment.
If you choose this strategy, you may miss the opportunity to sell the property for a greater price. So, to balance out the potentially lost appreciation amounts, tenants who choose a leasing option pay a higher rent than they would normally.
Paying Rent in a Lease Option
For the option to buy at today’s price when the lease ends, you can charge a premium in addition to the standard monthly rent. The premium might be a percentage added to the present rate, such as a 10% extra on a property of that size’s regular rent per month.
If the renter exercises the option to purchase your house, the premium, also known as rent credit, becomes part of the downpayment. The extra money paid over the regular rent is forfeited if they don’t buy the property after the lease.
Some owners may accept a one-time cash payment, known as valuable consideration. This is comparable to the premium you pay in the financial markets for an option. And it’s not a deposit for the property purchase; thus, you don’t have to refund it. The charge might be as high as 5% of the estimated buying price.
Learn Real Estate Investing the Right Way
It’s a good idea to do as much research as possible before jumping into the deep end with real estate investing. If you want to learn real estate investing the right way, take your time and start small. Over time you’ll find your bearings and then can climb the lucrative real estate ladder.
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