Investing in real estate is a time-tested, proven way to build wealth. Real estate investing has many benefits, including predictable cash flow, tax advantages, and portfolio diversification.
The following presents different areas of investing that you may choose to explore. There are plenty of books, articles, and podcasts that provide more details on each subject.
I encourage you to find an area of real estate investing that you find interesting and do some research on the subject before starting down the path to building wealth.
Real Estate Investment Definition
Real estate investing refers to purchasing a property that will generate income and not be a primary residence.
Real estate is land and any manufactured or natural permanent attachments, such as buildings, homes, fences, plants, and other natural resources. Unlike personal property, you cannot take real estate with you when you move. You can only transfer the ownership.
You can classify various properties by their use. These include:
- Residential – single-family, duplex, triplex, townhouse, and condominiums
- Commercial – apartments, hospitals, shopping centers, office buildings, and restaurants
- Industrial – warehouses, factories, distribution centers, transportation facilities, and power plants
- Land – agricultural land, undeveloped property, vacant land
- Special Use – schools, places of worship, cemeteries, parks, government buildings
What is the Best Real Estate Investment Strategy
The best strategy is the one that you find the most profitable. There are several effective real estate investing strategies, so it is up to you to find the one you are comfortable pursuing.
The method you choose to follow will differ from another investor you know. If you are making a profit, then stick with the working strategy. Here are a few strategies that you may consider:
- Buy-and-hold – Keeping an investment property for many years
- Short-term rental – Using an investment property as an Airbnb
- BRRR – Buy, Rehab, Rent, and Refinance a distressed property
- House hacking – Purchase a multifamily home, live in one of the units, and rent the other units to tenants
- Fix-and-flip – Buy a distressed property, renovate the property, then sell it
- Wholesaling – Find a property for sale, put it under contract, and sell it without ever owning the property
- REIT – Purchase stock in a company that owns and operates income-producing properties.
Active vs Passive Real Estate Investing
One of the things to consider as you start your real estate investing career is if you want to be an active investor or a passive investor.
Active real estate investing involves purchasing a property for the sole purpose of selling it at a higher price or renting it out. You find a property and seek financing to buy the property.
Buy and hold and fix-and-flip are amongst the most common strategies that active real estate investors use. Most real estate investing strategies involve some form of active investing.
Passive property investing is a hands-off way of profiting from real estate. You can use your money to invest in real estate-based mutual funds, REITs, private equity groups, and online real estate crowdfunding companies.
Passive investing is best if you do not have the time or interest in actively purchasing and managing a property.
Single Family Home Investment Strategies
Investing in a single-family home involves purchasing a house, condo, or townhouse to rent it out to a single tenant. You may need to do some decorating or minor renovations to attract new tenants.
Most real estate investors start by investing in single-family homes because they are easy to buy. Investors can find numerous ways to finance purchasing a single-family home.
Here are three strategies to consider that fit different investing styles and approaches to single-family residential investing:
- Buy nearby – You may feel more comfortable investing in an area you know. Most new investors purchase a single-family investment property within a one-hour drive from their residence.
- Online marketplace – You can purchase an investment property from the comfort of your home without traveling out of state. A management company will oversee your investment property.
- Single-family home REITs – Some REITs specialize in investing in single-family homes. You can purchase stocks in these companies through an investment broker.
What is Multifamily Real Estate Investing?
There are two types of multifamily properties. Residential multifamily properties have two to four units, including duplexes, triplexes, and quads. However, commercial multifamily properties have five or more units, such as apartment complexes.
There are many benefits to multifamily investing. These benefits include:
- Property hacking – You can live in one unit and have the other tenants pay down your mortgage.
- Shared amenities – Having the same amenities helps to lower maintenance costs.
- Financing options – Multifamily property investors receive generous financing options from lenders.
Fixing and Flipping Real Estate
TV viewers love fixing and flipping real estate shows because the participants make it look easy and make a considerable profit. Unfortunately, this investing style is a lot tougher than it appears.
The cost of the renovations plus loan payments can eat away at your profit. Yet, you have the potential to make the type of profits you see on TV.
Fixing and flipping involve buying a single-family home, renovating the property, then selling the house for a profit. The key is to renovate and sell the home as soon as possible, usually three to four months.
Another key to successfully fixing and flipping a property is to buy a property at a discount. Always look for properties that need major renovations to get a bargain compared to the other properties in the neighborhood.
Wholesale Real Estate Explained
It often takes a lot of time to buy and sell a property. In addition, it usually comes with a hefty price tag, mainly when you include commission and fees.
Wholesaling is one way to begin your real estate investing career when you do not want the hassle of purchasing a property.
Wholesaling is a short-term strategy where you put a distressed home under contract with someone trying to sell the property at a specific price. Your goal is to find an interested buyer.
For example, you put a house under contract with a seller for $200,000. Next, you contact your network of investors and find one who wants a fixer-upper project and is willing to purchase the home for $210,000. Next, you assign the contract to this investor and make a $10,000 fee without owning the home.
Who are Motivated Sellers?
A motivated seller has a solid need to sell their property. Their need to sell their property is more than a desire. It often motivates them to agree to a lower offer or flexible financing terms.
They may have a strict timeline to meet, such as selling the property to move out of state for a new job or inheriting a home they do not want.
People need to sell their property for a variety of reasons. Some common reasons are:
- The homeowner is in pre-foreclosure or foreclosure
- The homeowner is delinquent on their property taxes
- The homeowner does not want to renovate a property that is in poor condition
- The homeowner is tired of dealing with problem tenants
Investing in Foreclosure Properties
Finding a home in foreclosure for sale is just as easy as finding any other home for sale. Many real estate companies specialize in helping people buy or sell homes in foreclosure.
The main benefit of purchasing a home in foreclosure is the low selling price compared to other areas. The downside is that these homes tend to be in poor condition, making them popular with flippers.
There are five types of foreclosure, including:
- Pre-foreclosure – the homeowner is in default, but the mortgage company has not put the home up for auction.
- Short sale – the lender will accept less money on the home sale than the mortgage. The homeowner does not need to be in default, but they must prove financial hardship.
- Sheriff’s sale auction – After the mortgage default grace period is over, the lender puts the home up for auction at the local courthouse. The local sheriff’s department runs this auction.
- Bank-owned properties – Homes that do not sell at auction are given back to the banks to become Real Estate Owned (REO) properties. You can search for these properties online and buy them.
- Government-owned properties – Properties bought with FHA, VA, or other government loans become government-owned properties when they go into foreclosure.
How to Invest in REO Properties
Investing in REO properties is lucrative if you do it the right way. REO properties present an excellent opportunity for you to find properties that are way below market value.
Yet, these properties can be challenging to obtain. You may need to make multiple offers before one is accepted. You may also need to make bulk purchases of REO properties.
REO properties are harder to find compared to conventional properties. Yet, there are many resources that you can use to help you find and purchase an REO property. Real estate brokerage firms, REO listing sites, banking sites, and government lending sites are good resources for finding REO properties.
What is Real Estate Investing with REITS?
One of the best ways to passively invest in real estate is through REITs. Real Estate Investment Trusts own, operate, and finance income-producing properties. Most REITs specialize in one type of investment property, and some invest in multiple types of properties.
In addition, REITs fall into several sectors, including:
- Office buildings
- Industrial properties and infrastructure
- Clothing outlets, shopping centers, and freestanding retailers
- Residential properties
- Health care facilities
- Self-storage and data centers
- Lodging and resorts
- Timberlands
- Diversified
REITs make money by leasing space and collecting rent payments. REITs must distribute at least 90% of their gross income to shareholders. This high distribution makes REITs a great source of income for investors. Investors can purchase REIT stocks through a broker.
How does Crowdfunded Real Estate Investing Work?
One of the best ways to invest in large real estate projects is crowdfunding. You may not have enough money to fund a large project. Still, crowdfunding allows you to join multiple investors who pool their money and collectively invest in large real estate projects.
As one of many investors, you purchase a portion of a property and hold an interest in it. It is a lot like owning shares in a company.
A real estate developer uses the capital from the crowdfunding deal to purchase, build, or renovate an income-producing property. When this property generates an income, you receive a portion of the proceeds based on the ownership percentage you have in the property.
Crowdfunding is an excellent way to create passive income for you to do more real estate investing.
What’s Real Estate Development?
Real estate development is a series of complex steps that start with an idea and develop a fully developed income-producing property.
Before the developer begins the project, they must create a budget and meet with government officials to present the preliminary designs. The developer must also get the necessary permits and licenses to start the project. Finally, the developer can start the project once everything is approved.
You can go into residential or commercial real estate development if you decide to pursue this career. However, commercial real estate development projects are much larger and require more money than residential development projects. You can also develop new properties or renovate and improve existing ones.
Vacation Rental Real Estate Investing
Investing in vacation rental properties has grown in popularity in recent years, thanks to listings on Airbnb and Vrbo. As a result, more travelers are booking vacation rental properties each year, which can increase your profit potential.
The key is finding a property in a popular location with great views or is close to amenities like the beach, entertainment, dining, and the airport.
The primary benefit of investing in a vacation rental property is income. Your vacation rental property can help meet the demand for lodging in popular tourist areas.
When you upgrade certain property features, you can increase the return on your investment. Plus, you can use this home when you decide to go on vacation and save money on the cost of a hotel.
How does Commercial Real Estate Investing Work?
Commercial property owners typically lease out to other businesses. Commercial real estate investors lease out space and collect rent from other companies.
There are many different types of commercial properties, as you saw in the section on REITs. Residential apartments with five or more units are also commercial properties. You should research the type of property you feel comfortable in before deciding to invest.
Commercial real estate is more expensive than residential properties. However, these properties are often worth millions of dollars.
You may consider going through crowdfunding or investing in REITs if you do not have the money to purchase a commercial property.
What is a Real Estate Investing LLC?
One of the first steps you should take as a new real estate investor is to create an LLC. A Limited Liability Company is a separate legal entity that allows you to establish a separate bank account and file taxes with an Employer Identification Number (EIN). It also provides you with personal liability protection.
An LLC offers your real estate business many tax benefits, and it does not cost much to establish. You can have multiple LLCs, and each LLC can hold one investment property or multiple investment properties.
Real Estate Investing with No Money Down
Successful real estate investors know how to use other people’s money to make real estate investments with no money down. Using other people’s money is often how new investors with limited financial resources and credit usually start in this field.
Veteran investors use other people’s money to free up their available finances to make additional property investments.
Banks, hard money lenders, private money, an equity partner, and family members are all sources of other people’s money for no money down real estate investing.
Types of Creative Real Estate Investing
There are many creative ways to invest in, control and or purchase real estate. Creative Investing has many benefits, but it may not always be worthwhile if you have a superb credit score and some cash in the bank.
If you are in this situation, you can find a more comprehensive array of options to obtain working capital, giving you more control over your finances.
You can use creative real estate investing methods to control lots of properties at one time, make a deal more profitable or work better for the seller.
However, there are some situations where using other people’s money or creative investing options make more sense than going through traditional ways of financing the purchase of an investment property.
Some different types of creative real estate investing include:
- Private money lenders
- Lease Options
- Joint Ventures
- Delayed Closing
- Renting with an option to buy
- Installment contracts
- Seller financing
- Microloans
Real Estate Investing with Lease Options
One of the most common creative strategies for real estate investing is through lease options. A lease option is a contract between you and the seller where you become a master tenant (control the property) for the seller for 12-24 months (or longer). You both agree on the sale price for the property after a specified time.
Once you establish the lease option, you lease (control) the property as an end buyer/tenant. The lease fee can be as low as $1. At the end of the contract, you decide to move away or purchase the property.
Lease options are generally used when something needs to happen in the future (development permission, price rises etc.). The seller can then potentially realise maximum value and the investor can move on with a project that suits his or her needs.
You can do lease options in most states, while other states have restrictions. Check the local laws in your state before doing a lease option.
Real Estate Investing for Passive Income
Passive income is one of the best ways to achieve financial freedom and security. Yet, many real estate investors prefer to take a more active investment approach.
Passive investing does not mean you will not be involved in your investments. Instead, your involvement will vary based on the investment type. The best sources of passive investing are REITs and crowdfunding.
Long Term Real Estate Investing Strategies
Long-term real estate investing has many benefits, including earning a substantial stream of passive income and many tax breaks. It is also a great way to diversify your portfolio because real estate has a low correlation with the stock market. Long-term real estate investing also provides a hedge against inflation. Some long-term investing strategies include:
- Buying and holding rental properties
- Living in and flipping a property
- BRRR investing – Buy, Rehab, Rent, and Refinance
- REIT investing
What is Syndication Real Estate Investing?
A real estate syndication is simply a partnership between several investors who combine their skills and resources to purchase and manage a property. Your skills determine your role in the syndication.
Your strengths may be finding and securing a property, managing a property, managing a portfolio of properties, or providing financial resources to purchasing a property.
After acquiring a property, every member can receive a portion of the revenue.
Long Distance Real Estate Investing Summary
Long-distance real estate investing involves purchasing property in another real estate market, including another city or state. Anyone can be a long-distance real estate investor. Yet, finding an investment property outside your local market can be challenging.
However, long-distance real estate investing is an excellent way to find properties bargain prices. The right amount of due diligence will go a long way in helping you become a successful long-distance real estate investor.
Investing in Out of State Real Estate
It is much easier to invest in out-of-state real estate than in the past. Thanks to apps and websites, you can find real estate agents in any area who can help you find potential investment properties. In addition, this technology allows you to do your research from the comfort of your home.
Investing in out-of-state real estate allows you to protect your real estate portfolio because there is natural diversification in the different markets throughout America.
The economic swings in these markets do not move in unison. Investing in out-of-state properties can shield you from economic downturns. When one real estate market goes down, the rest of your portfolio can make up the difference to give your portfolio some stability.
How to Make Money with Virtual Real Estate?
Virtual real estate is a legitimate way for you to make money online. Virtual real estate is any digital asset that you can own, buy, or sell. There are many forms of virtual real estate, just like there are many forms of physical real estate.
Virtual land can be purchased in many metaverse games such as Axie Infinity, Decentraland, Sandbox and many others. With Facebook’s recent change of name and focus to Meta and the metaverse, virtual real estate is definitely going to be big business in the future. Some virtual land is already selling for millions of dollars.
Be careful though, virtual real estate can increase or decrease in value, just like physical real estate.
Using Your 401k for Real Estate Investing
401(k) plans generally do not allow you to purchase investment properties or participate in crowdfunding organizations. You could only invest in real estate if there is a real estate investment fund on your employer’s 401(k) menu of investment options.
Invest in Real Estate with an IRA
You cannot invest in real estate through a 401(k), but you can invest in properties through a real estate IRA. A real estate IRA allows you to pick, buy, hold, and sell real estate in your account.
Your investment options in a real estate IRA include all the real estate categories, such as single and multifamily homes, commercial properties, international properties, mortgage notes, and land. All the income you generate through your real estate IRA is tax-deferred until you take a distribution.
Real Estate Investing with a VA Loan
VA loans have many benefits, but this type of loan is only available to active-duty service members and veterans. These loans have the backing of the Department of Veterans Affairs, have no minimum credit score requirements, no down payment requirement, and provide 100% financing.
The VA loan program helps members of the military and veterans purchase a home as their primary residence. Unfortunately, they cannot use this program to purchase an investment property. Yet, they can buy a multifamily dwelling with no more than four units and live in one of the units while renting out the other units (house hacking).
Real Estate Investing with Mortgage Notes
Investing in mortgage notes is an alternative asset class with many benefits with high returns. A mortgage note is simply a home loan. Yet, many people do not know that these notes actively trade behind the scenes.
For example, when you receive a letter from your lender to send your payment to a new lender, that new lender bought your mortgage note.
When you invest in a mortgage note, you become the lender and have all the rights of a lender. You do not own the property, but you can auction off the property if you do not receive the mortgage payments.
You can purchase and manage mortgage notes on your own, but you will need to do a lot of research and due diligence. You can invest in mortgage REITs (mREITS) or mortgage note mutual funds if this is too daunting.