Are you thinking of taking a swing at real estate investing? You're not alone. But before you jump in, take a second to learn about the different ways to invest in real estate and how you can determine the best options for you.
Ways to make money through real estate
Before we look at strategies, let's cover the two ways investors make money through real estate: appreciation and income.
People will always need a place to live; because of this, real estate will always have an inherent demand that other investments do not.
From 1990 to 2020, home values in the United States appreciated 200%. Between the Covid-19 pandemic and 2022, limited supply and new construction delays have caused housing prices to sky-rocket. This boom, while beneficial to many, has caused some to fear a looming bust.
Market ups and downs are inevitable, but homeowners and investors alike can remember that real estate has an intrinsic demand and will always make a comeback. We can look to 2008 as an example when home values plummeted and steadily rose back to pre-crisis levels by 2012.
The second way real estate investors make money is through income. This is typically through rent but can come in other forms as well.
- Residential property income
When people think of real estate investors, they typically imagine a landlord collecting a monthly paycheck from tenants. This can be done through short-term or long-term rentals and will be a fixed monthly rent.
Residential property investors take this income to pay for taxes, maintenance and upkeep, and property management. What's left goes in your pocket. Landlords can adjust rent prices to keep up with demand and inflation.
- Commercial property income
Commercial properties include office buildings, shopping malls, warehouses, industrial buildings, and more. The tenants will be businesses and pay a fixed monthly rent.
Typically, commercial investments have a high-income yield and can be relatively low maintenance. Just like with residential properties, commercial property investors can adjust the rent to keep up with demand and inflation.
- Raw Land
Some investors make a profit by owning raw land. They can use the land for agricultural development, storage, business developments, livestock, advertising space, and more. Companies can also pay for access to the land or build structures such as pipelines.
Easiest ways to invest in real estate
If you're new to real estate, you might consider the most straightforward, easy-to-manage investing strategies. Here are some of the most common "beginner" ways to invest in real estate.
Whether you purchase a residential or commercial property, a long-term rental is a great way to collect a monthly paycheck without getting too involved in day-to-day matters.
Your top priority will be finding dependable tenants - this can often prove difficult. Many rental investors hire property managers whose responsibility is to vet and supervise tenants.
- Steady cash flow
- Tax deductions
- Relatively hands-off once you find the right tenants
- Interviewing and managing tenants (if you don't hire help)
- Lower ROI than short-term rentals
- Upfront cost
If you don't like the idea of people staying in your property for long periods, you can use the home as a short-term rental. This can be done through Airbnb-type platforms or as a vacation rental.
The choice is yours as to how often you rent and to whom, and it allows you to stay up to date with the home's condition and any repairs needed. While there is always the risk of getting bad tenants, there is a high dollar profit to be made with short-term rentals.
- High ROI
- Visiting the property between guests makes it easier to keep up with property maintenance
- Tax deductions
- Expense of hiring help (cleaners, property manager, etc.)
- Potential fluctuations in demand during on and off seasons
- The risk of renting to bad guests
For a more hands-on project, consider house flipping. And no, it's not just for HGTV budgets! This investment strategy is ideal for those who have handyman or design skills and are willing to put in a little elbow grease.
The great thing about flipping is that you can decide whether to sell the property for a profit or keep it as a rental. The choice is yours!
- High ROI
- Lower upfront cost
- Flexibility to rent or sell
- Higher risk
- More hands-on
- Costly to hire contractors for repairs (if you can't do the work yourself)
Long-term real estate investment strategies
If you've been around the block once or twice as a real estate investor, you may be ready for next-level investing opportunities. Here are a few "intermediate" ways to invest in real estate.
Buy and hold
The buy and hold method is a long-term strategy for using your home as a rental. The goal is to sell for more than you paid. And once you've determined the right time to sell or refinance, your home's value will have increased due to appreciation and inflation. Just be sure you're keeping up with regular maintenance.
The BRRRR method
The BRRRR method is a strategy that combines buy and hold and house flipping. This strategy is commonly known as "house hacking" and involves five steps: buy, rehab, rent, refinance, and repeat.
- Step one: Buy - Purchase a distressed home for a low price
- Step two: Repair - Make all necessary repairs and renovations
- Step three: Rent - Use the property as a residential rental
- Step four: Refinance - Cash-out refinance on the home's equity
- Step five: Repeat - Use proceeds from refinancing to purchase your next investment property
House hacking is a long-term strategy and requires more time, energy, and patience than other investing methods. But if you're willing to put in the work, it can be very profitable.
- Source of long-term passive income
- Tax benefits
- Build a diversified portfolio
- Loan terms may be less favorable
- Closing costs for purchase and refinance
- Involves a lot of time and involvement
The bottom line:
Investing in real estate can be very lucrative. That does not mean, however, that every purchase is a good one. Before making your final decision on an investment strategy, be sure to really consider the pros and cons of each and evaluate your circumstance. Some strategies involve more time, while others require more money upfront.
Real estate is not a one-size-fits-all way to invest, so be sure to choose the best option for your unique situation. Happy investing!