I love real estate investments as a source of income. Whether you’re looking to earn a quick return through wholesaling or flipping, or earn ongoing passive income from rental properties, there are dozens of strategies for real estate investing.
Most real estate assets fall into one of three classes:
- Residential: Properties with 1-4 units. This type of real estate investment is most regulated and the most popular among mom-and-pop investors.
- Commercial: This wide umbrella includes multifamily (5+ units) apartment buildings, office space, retail, industrial, and other types of commercial real estate.
- Land: From completely raw land to semi-developed land to working farms, land can make an extremely profitable investment, but it comes with its own quirks and niche knowledge required.
Real estate investments make a particularly effective source of income for financial independence and/or retiring early (FIRE). If, that is, you know what you’re doing. And if you diversify your investment portfolio to include a wide range of stocks, real estate, and other asset classes.
Strategies for Real Estate Investing
As you expand and diversify your real estate portfolio, consider the following types of real estate investments.
More diversity means less risk, and less exposure to shocks in any one real estate market!
1. Buy-and-Hold: Long-Term Leasing
Deni and I have over 50 years of long-term landlord experience between us. And that says nothing of our other team members, most of whom own rentals in their own right.
Long-term leasing represents the most common buy-and-hold real estate strategy, where you sign a lease agreement for a tenant who plans to stay for at least a year. Because most of the costs and headaches of owning rentals hit during turnovers, the most successful landlords aim to place excellent tenants and then keep them as long as possible.
Buy-and-hold landlords benefit from a wide range of rental property tax deductions, too. From mortgage interest to maintenance, property management fees to insurance and property taxes, every cost is deductible. Landlords can even deduct for paper expenses like depreciation!
Investors can buy turnkey properties ready to rent, or buy fixer-uppers using the BRRRR method and re-borrow most of their down payment when they refinance with an investment property loan. And in today’s world, real estate investors have more financing options than ever before. From conventional mortgage lenders to portfolio lenders, from HELOCs to unsecured business lines of credit, investors can compare all investment property loan options before choosing one. In fact, many portfolio lenders allow the down payment to be borrowed, unlike conventional mortgage lenders.
Of course, new investors need to be careful not to overleverage themselves with high mortgage payments and negative cash flow. But one enormous advantage to rental properties as an investment is the predictability of returns: investors can forecast their average monthly cash flow with a rental income calculator.
When you know how to accurately calculate a long-term rental property’s cash flow, you can avoid ever making a bad investment again.
2. Buy-and-Hold: Short-Term Rentals
With the explosion in popularity of Airbnb and similar vacation-rental-by-owner websites, more landlords have started trying their hand at the hospitality industry.
Which comes with its own pros and cons, like all real estate investing strategies. Landlords in some markets can earn higher profits, but at the cost of dramatically higher labor. Units must be cleaned between each guest’s stay, and you or your property manager must maintain constant contact with guests and future guests. Landlords must also provide furniture, decorations, and utilities including electric, gas, water, and internet.
As with long-term rental properties, landlords should run the numbers carefully before committing to furnishing a unit and launching their own micro-hospitality business. Pay particular attention to vacancy rates, getting accurate figures for every single month of the year. Remember, many vacation rental markets are seasonal.
Property owners can outsource labor to a property management company, just like long-term landlords. Make sure you budget for property management fees alongside other expenses like maintenance costs and vacancy rate!
Like every type of real estate investing, vacation rentals require their own unique skill set. If you’re new to the industry, read up on these 12 Secrets to Success for New Airbnb Landlords.
3. House Hacking
Who wouldn’t want to score free housing? At its core, house hacking means finding a way to have someone else pay your housing expenses.
The classic house hacking model involves buying a small multifamily property, moving into one unit, and renting out the other(s). Ideally, the rent from your neighbor(s) covers your own mortgage and other property-related expenses. (Read this duplex house hacking case study for a detailed example.)
But that’s far from the only option to house hack. I’ve rented to housemates, who paid the majority of my mortgage. Deni has hosted a foreign exchange student, whose stipend covers her mortgage. My friend Renee rents out her spare bedroom on Airbnb.
The list of ideas goes on. We’ve hosted webinars with families who reached financial independence in under five years through serial house hacking, moving into one multifamily property after another.
Regardless of how you do it, you can finance the property with an owner-occupied mortgage. That means lower interest rates, lower down payments, and lower fees than investment property loans. Compare today’s interest rates and fees on Credible.
Play around with our free house hacking calculator to get a sense for how much of your housing expenses you can cover with different house hacking scenarios. As your largest personal expense, cutting your housing costs offers the greatest opportunity for savings.
If you’ve ever wondered how to invest in real estate when first getting started, house hacking makes a great first strategy for real estate investing.
4. Fractional Ownership in Rental Properties
In today’s world, you don’t have to shell out $300,000 to buy a rental property. Or even $60,000 for a 20% down payment on a rental property.
Instead, you can buy fractional ownership in properties through some real estate crowdfunding platforms. You buy an ownership share in a rental property for $20, or $50, or $100. That lets you spread a few hundred dollars over many properties, for broad diversification across several cities and states.
You collect rental income in the form of distributions while you own the property. When the property sells, you also collect capital gains from appreciation.
Some crowdfunding platforms, such as Ark7 and Lofty, let you sell your shares at any time. Others, such as Arrived, hold the properties for five to seven years before selling and paying out fractional owners. Arrived even offers short-term vacation rental properties, to help you diversify even further.
Accredited investors can also buy shares in entire portfolios of rental properties through Roofstock One. The more money you have, the more real estate investment strategies open up for you.
5. Fractional Ownership in Commercial Properties (Syndications)
Heard that apartment complexes pay huge returns, but don’t have $50 million lying around to invest in them?
Few people do. Instead, a commercial investor will take out a loan to cover 50-75% of the purchase price, contribute some of their own money to the down payment, and raise the rest from passive investors like you and me. This type of real estate investment is called a real estate syndication, and it’s one of the best kept secrets in the industry.
As a passive investor, you become a fractional owner in a large apartment community or other commercial property. You collect cash flow and distributions while owning the property, then get a hefty paycheck when the property sells. Real estate syndications routinely pay 15-50% returns, and come with all the tax deductions of rental properties, along with other tax benefits like accelerated depreciation.
Some syndicators refinance the property to return passive investors’ capital to them, opening the possibility of infinite returns. You get your initial investment back, but you keep your ownership interest. You keep collecting cash flow, which continues rising over time. When the property finally sells, you get another big payout.
Sound too good to be true? Real estate syndications do come with several big drawbacks. First, they’re long-term investments with no liquidity: once you invest, your money is locked up until the syndicator sells or refinances the property. But the greater challenge for middle-class investors is the high minimum investment, usually $50,000 – $100,000. To get over that hurdle, we created a investment club for group real estate investments, where we pool our money to invest in these types of syndications.
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