If you’ve ever watched any show on HGTV, or tuned in to an episode of Shark Tank, you’ve likely seen people who have made it big in real estate investing. It may seem like they had an easy road, and have it all figured out, but chances are that they learned along the way. There are many different real estate investment strategies, and people invest in real estate differently, depending on their interests and resources.
The primary types of investing are:
- Buy & Hold
- Flipping Houses
- Commercial real estate
Part of deciding which type of investing is right for you has to do with finding the right property. Each of these requires looking for different types of homes.
It’s important to learn about the different ways you can invest so that you can decide which one works best for you. Some require lots of money, others are low cost but require plenty of sweat equity. Assessing what you are willing to invest (time, energy, money) and your risk tolerance will help you decide which option is best for you.
Buy & Hold Properties
The most traditional way to invest in real estate is to buy a home and hold it for a long time. This was the way that previous generations invested. I’m sure many of you know a grandmother with a duplex in a popular city, and she probably bought it for pennies 50 years ago.
Buying and holding a property typically involves a multi-family property (anywhere between 2 and 4 units), that are rented out to tenants. This means you become a landlord, you are responsible for collecting rent, making repairs, and dealing with any tenant issues that arise. This type of investing takes a certain type of personality.
Some tenants can be problematic, or stop paying their rent, and the law isn’t always on your side. Make sure you are educated about becoming a landlord before deciding on a buy & hold real estate investment strategy.
House flipping has recently become all the rage in the real estate investing world. When the market crashed, tons of foreclosed homes became available and savvy investors were snapping them up, doing some basic renovations and selling for a profit. This is the premise that many home improvement shows are based on. They make it look fun and glamorous, but that may not be the reality.
There are many steps involved to flipping houses, the first being finding a house that is worth flipping! The ideal house is priced below market-value, requires minimal repairs and cosmetic work, and is in a desirable area where homes sell quickly. This takes some legwork to find.
Thanks to the internet, there are plenty of sites that list foreclosed, auction and bank-owned homes. The process isn’t always straightforward, so you’ll want to make sure that you do your homework. How to Buy a Bank-Owned Home (and Why to Consider It) will give you some important tips about buying a bank-owned home.
The strategy of wholesaling property is much like some of the warehouse stores we all shop in for bulk paper towels. Buy things at a large quantity to sell at a discount, while still making money. Real estate investors who wholesale property must sometimes front large amounts of money to purchase property.
Ideally, they then quickly sell these same properties for a profit, but there is a lot of risk involved. What if the properties don’t sell quickly? What if they don’t sell high enough and the profit margin is too small? With this method, there is definitely some risk for the investor.
Some investors do not use any of their own money to buy and sell these homes, but instead work as an intermediary, finding the home, then finding an investor buyer. Basically, they act as a real estate matchmaker. With the right investment of time, this can be a successful path for someone who doesn’t have a ton of money available to buy discount property.
There is obviously a lot more to wholesaling than we talk about here. If you’d like to learn more about it, check out How does real estate wholesaling work?
Anyone who has traveled recently has likely considered staying in an AirBnB instead of a hotel. These are private homes, apartments, or even single rooms that the owner has decided to rent out to anyone searching for lodging on the AirBnB platform. This option has opened up a whole new world for real estate investors looking to make rental income without the overhead.
One of the benefits of AirBnB is that you don’t have long term tenants, so you don’t need to worry about a lot of the legal aspects of being a landlord. As an AirBnB host you are still responsible for providing a clean and safe environment (your guest reviews will make sure of that), but there is less liability than with traditional rental property.
There are additional maintenance aspects that you should consider: like constant housekeeping, furnishing the property, and preparing for any damages that guests may cause. Also, unlike traditional lease tenants, you can’t guarantee your income. Your Airbnb property may get booked solid for an entire month, but it also may sit empty for a week. Make sure you can cover your costs if this happens.
Commercial Real Estate Investing
Investing in commercial real estate is different than residential real estate but can be just as profitable. Commercial real estate includes properties like office space, retail space, and even warehouses. Like rental properties, each of these types of property has tenants, usually on a lease, and paying rent.
The upfront costs of commercial real estate can be higher than traditional residential real estate because the properties are usually larger and more complex. They may have more infrastructure (HVAC, parking, etc.) and as such, have added cost. Like any investment, crunch the numbers. Even though you need more money upfront, you have a higher potential for profit.
Like traditional rental property, there are laws and guidelines governing the rights of the tenants and you the owner. You’ll want to make sure that you have a good real estate attorney helping you to navigate all of this to keep you and your business out of trouble.
No matter the type of real estate investing you decide to do, it’s important to do your homework and to have a plan. Be smart about how you spend your money and your time, they are both valuable resources. With the right strategy, investing in real estate can be a lucrative endeavor!