Real Estate Investment Strategies
Investing in real estate potentially offers relatively low risk with high rewards. Often, real estate investing does work out that way, but sometimes it doesn’t. Since there are so many ways to invest in real estate, finding the right real estate investment strategies for your objectives is critical.
Real Estate Investment Strategies
Before getting into specifics, decide which types of real estate investment strategies best suit your goals and abilities. Are you an experienced real estate investor, or new to the game? What is your risk tolerance? Do you want to do this on your own or with family, or prefer partnerships or other business structures? What kind of financing will you need?
Fix and Flip
The premise of fixing and flipping is simple. Buy a house in need of repair and updating cheaply, make the necessary fixes, then sell it for a big profit. The reality is that investors must perform their due diligence before purchasing the distressed property if they are going to make money.
Such due diligence includes knowing the neighborhood, because location, location, location matters in any real estate endeavor. If you’re not a general contractor, have one assess the property so you have a reasonable estimate of repair costs. House flipping is not recommended for those without a solid understanding of construction. That doesn’t mean you have to be a building or design professional, but you must have a team to help you locate, rehab, and sell the property. This is a good real estate investment strategy for those willing and able to provide sweat equity.
As a rule, an investor should not pay more than 70 percent of the after-repair value (ARV) on the distressed property. The ARV is the value after the renovation is completed. For example, find a fixer-upper with an ARV of $500K post-repairs. To do this, you’ll need to look at comparable sales in the neighborhood. After locating the comps, calculate the selling price by square footage and apply it to your potential flip house. These calculations are always estimates since even comparable homes can have significant differences, but it’s a good starting point.
If the dwelling needs about $50,000 in repairs, you’ll have $450,000 after selling the house. The 70 percent formula means you should not pay more than $315,000 for the property to make money fixing and flipping it.
Keep reading for more info on real estate investment strategies.
Buy and Hold
Buy and hold is the opposite of fix and flip. Rather than seek quick profits, this real estate investment strategy is for investors who want long-term gains. Buy and hold investors know that the true way to build wealth is not via getting rich quick schemes, but slowly and steadily over time.
Rehabbing is another term for buying and holding. You want to keep the property in good condition so that it rents easily, but not overly upgrade it. The idea behind buying and holding is that real estate always appreciates over time. For the most part, that’s accurate, but downturns occur. If you have the timeline, you can wait for the rebound.
Residential rental properties can provide stable passive income. However, passive income involves hiring a property manager, and that cuts into your return. For many investors, especially those starting out, becoming hands-on with a multi-family property is the first step toward building real estate wealth.
Multi-families properties range from two-families to apartment buildings. Keep in mind that while two-to-four unit multi-family properties are financed similarly to single-family homes, that’s not the case with larger multi-family units. Those properties are considered commercial real estate, and lenders finance them differently.
Many multi-family investors go the owner-occupied route. They purchase a two or three-family unit, or duplex or triplex, and live in one unit while renting out the others. This arrangement makes property management much easier.
Commercial Real Estate
The biggest financial rewards regarding real estate investment strategies tend to come from investing in commercial real estate. On the other hand, so does greater risks.
Benefits include a higher rate of return, generally between six and twelve percent. Commercial leases are not subject to the consumer protection laws governing residential leases. Overall leasing is more flexible. On the downside, the initial investment is considerably larger, insurance costs are higher and time commitments are substantial.
Commercial real estate includes:
- Apartment complexes
- Industrial buildings
- Mixed-use buildings
Many investors aren’t interested in properties requiring rehabilitation. They want properties ready to rent out right away or already rented, with no need to spend a lot of money on renovations. These turnkey investment properties minimize risk, but there is a caveat. They command a high price, as they should. Another owner has already put in the work, and the new investor won’t have a lot of equity. On the plus side, the buyer of a turnkey property should expect a good cash flow from tenants.
These properties are often the best way for novices to get started in real estate. Obtaining financing is easier because turnkey properties don’t require significant repairs. Rather than take out a short-term loan for renovations, investors can immediately apply for a regular mortgage.
Real Estate Investment Trusts
For many investors, the most sensible real estate investment strategies involve purchasing shares in Real Estate Investment Trusts (REITs). By purchasing REIT shares, traded on major stock exchanges, you can invest in a range of income-producing real estate. REITs either own or manage commercial properties, or own real estate debt, also known as mortgages.
Keep in mind that there are two types of REITs. Most investors place their funds in publicly-traded REITS, which are registered with the SEC. Non-registered REITs are not publicly-traded and lack the liquidity of publicly-traded REITs.
A publicly-traded REIT does not have the tax advantages of an outright real estate investment purchase. However, it can provide high-yielding dividends to investors seeking a regular income stream.
Depending on the REIT, it may invest in:
- Shopping malls and other retail properties
- Residential real estate, especially apartment complexes
- Healthcare properties, such as hospitals, nursing homes and medical facilities
- Office buildings
Real Estate Investment Strategies Considerations
When determining which real estate investment strategies are best for your situation, think about whether you will hire a property manager or if you will manage the property yourself. What is your timeline, are you a short-term or buy-and-hold investor? Are you interested in local properties or those outside your state or region? The answer to these and other questions determines the right real estate investment strategies for your goals.
About Jane Meggitt
Jane Meggitt specializes in writing about personal finance. Besides investing and planning for retirement, she writes about insurance, real estate, credit cards, estate planning and more. Her work has appeared in dozens of publications, including Financial Advisor, Zack’s, SF Gate and Investor Junkie. A graduate of New York University, Jane lives on a small farm in New Jersey horse country.