Does real estate investing seem like a black box — and everyone but you knows what’s in it? You might be looking for a way to solve the mystery of putting money into real estate and earning returns.
Fortunately, you can get started by learning about the top 10 real estate investing strategies.
Why Invest in Real Estate?
Diversifying your portfolio with real estate — with a low correlation to stocks -— can mitigate risks. Other reasons to become a real estate investor include the low volatility of the real estate market, the typically higher yield premium compared to U.S. Treasuries and the potential to benefit from both immediate income and long-term appreciation.
10 Best Real Estate Investing Strategies
Not all real estate investing strategies are equal. Here are 10 of the best.
1. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) can help you get started if you’re new to real estate investing. Think of a REIT as a mutual fund (where you can own a piece of several stocks and bonds) but with commercial property that generates income. You buy ownership shares in office buildings, shopping centers, apartments, and other properties.
A REIT managed and operated by someone else can be publicly or privately traded. Its profits are paid out as dividends, and you can also benefit from the sale of an appreciated REIT. While the dividend is treated as ordinary income, you can claim a 20% deduction on your tax rate.
Other tax advantages include classifying the dividend as capital gains to reduce taxes paid. Consider consulting a tax attorney for the tax treatment of a REIT payout.
2. BRRR: Buy, Rehab, Rent, Refinance
BRRR stands for “buy, rehab, rent and refinance.” However, some investors call it BRRRR, with “repeat” as the final R. With this strategy, you buy a property below market (typically with a short-term loan), fix it up, rent it out and refinance it with a long-term loan.
This last part is cash-out refinancing, taking a loan that exceeds what you owe and receiving the difference as cash at closing. The keys to this strategy are finding undervalued properties and improving the look of each property to increase your investment return.
3. Flipping Properties
Television shows may make flipping properties look easy. However, I know that house flipping requires hard work, considerable knowledge, and potential risks. If you want a property for less than the market, you must consider the location, demographics and valuation after repairs.
With a fixer-upper, you increase your risks through cost overruns, legal and zoning issues, market changes and overestimating your skills.
Estimating your overall cost and profit can be tricky; for example, you have to account for possible higher capital gains taxes and your ongoing mortgage payments. You must also have good partnerships with experienced professionals, and flipping requires a solid plan for every step of the process.
4. Real Estate Crowdfunding
With real estate crowdfunding, you pool your money with others to invest in development projects you can select. Crowdfunding is for beginner investors with little capital or experience. You can invest a few hundred dollars on some platforms to get started.
Many platforms allow anyone to invest, but some require you to be an accredited investor worth $1 million beyond your primary residence or earning at least $200,000 a year.
5. Real Estate Wholesaling
Wholesaling requires good communication and negotiation skills. You act as a seller’s and buyer’s middleman.
You review tax and property records to find owners who may need to sell quickly and offer a seller less than market value. Once you have a contract, you find a buyer, sell the contract to the buyer at a markup and exit the deal, pocketing the difference between the initial contract price and what you sold it for.
6. Real Estate Investment Groups (REIGs)
Real estate investment groups focus on buying, renovating, selling and financing commercial properties. They generate income by pooling money from multiple partners or private investors and investing in multiunit properties. REIGs are structured differently from REITs and are not subject to the same rules.
7. House Hacking
House hacking lets you get into the home rental business with limited capital. Instead of renting a house outright, you purchase a multiunit home you plan to live in. That qualifies you for an FHA or conventional loan with lower down payment requirements.
You move into one unit and rent out the rest, covering some or all of your mortgage with rent from the other units while gaining experience as a landlord.
8. Real Estate Syndications
In syndications, accredited investors pool their money to purchase a large commercial property, typically one larger than any individual could afford alone. A sponsor, a syndicator or a general partner leads the group and identifies, acquires and manages the property.
The sponsor also handles day-to-day operations and makes important decisions about the property. The other investors, or limited partners, are there to provide the capital.
9. Buy and Hold
Buy and hold for real estate is like buy and hold with stock investing: Buy a property intending to rent it for an extended period, generating a steady income for you and your family. Holding on to it long-term allows you to build equity. You can use this strategy with different types of properties, but it requires homework.
10. Live-In-Then-Rent
Live-in-then-rent means buying a property to live in initially, with plans to turn it into a rental property. You only rent the property after you have moved out. This is similar to house hacking but differs in that you don’t live on the property simultaneously as your tenants.
Benefits of Real Estate Investing
Real estate investing provides several benefits: it enhances your portfolio’s risk-and-return profile, delivers competitive risk-adjusted returns, and infuses your investment portfolio with low volatility compared to equities and bonds.
Historically, real estate also has produced an outsized yield premium compared to the 10-year U.S. Treasury note while adding diversification to your portfolio.
Risks of Real Estate Investing
Real estate is illiquid; it is harder to sell and turn into cash than stocks and bonds. Investing in real estate also has high start-up costs, and it might take a long time to realize a profit. While real estate is good for diversification, it can also be subject to financial market volatility, local market conditions and economic downturns.
Find the Real Estate Investing Strategies for You
Investing in real estate can balance your portfolio, create the potential for high returns and provide immediate income. Whether you’re a beginner or a seasoned investor, real estate investing strategies abound. With so many options, you might now be able to find one or more that fit you.
Frequently Asked Questions
What is the best strategy for investing in real estate?
Each real estate investment strategy has risks and rewards. The best strategy for you depends on your circumstances and current market conditions.
What real estate strategy makes the most money?
Many consider a strategy that balances short-term gains with long-term appreciation and risk management to be the most profitable. Rental properties may fit this approach.
Which real estate investment is best for beginners?
If you have limited funds and aren’t looking for a primary residence, consider crowdfunding or REITs. Buying a rental property is another good way for beginners to invest in real estate, especially house hacking.
