Real estate investing can be particularly daunting for the beginner investor. Remembering where I was as a new real estate investor at the beginning of 2019, it seemed incredibly complicated, daunting and overwhelming.
In our opinion, the key as a beginner was to focus on one strategy singularly until you had success with it. A very common issue with any type of investor is when they succumb to “shiny object syndrome” and bounce from one thing to another, never getting any traction along the way.
With all of that said, investors in real estate can make money in a variety of ways, the most common being through direct ownership of investment properties. There are 13 real estate investing strategies that can be used by beginning (and more experienced) investors.
Pick one and learn about it.
13 Real Estate Investing Strategies For Beginners
Real estate investing is not a one-size-fits-all endeavor. The best strategy for you will depend on your goals and how much time you are willing to invest.
1. Buy and Hold Rental Property
The buying and holding strategy for SFR homes is a way to make money from renting them out, profiting from the increase in value of the property over time, and getting special tax benefits that real estate investors are entitled to.
SFR properties are popular among beginning and sophisticated investors alike. According to the most recent U.S. Green Street, an independent real estate research and advisory firm, has released a report on the outlook for single-family rentals. The report finds that SFRs represent 35% of all rental units in the country.
While SFRs may be easy to find and operate, they may be relatively difficult to own. There are plenty of ways to finance your residential real estate, from conventional and government-backed loans to private and portfolio lenders.
In the past 20 years, the median sales price for houses in the U.S. has more than doubled, and there is still high demand for rental properties. Despite this, net income from rental property can go up and down depending on things such as maintenance and repairs, or if the property is empty for a while, and some investors may prefer a less hands-on approach.
For us, Turnkey Real Estate investing has been a cornerstone of our buy and hold strategy. This maximizes our return on time and allows us to leverage the expertise of others to get most of the advantages of real estate.
2. Reinvest Rental Income
Many real estate investors who use the buy-and-hold strategy also reinvest their rental income.
Significantly increasing your rental income portfolio can be achieved by using the “snowball effect.” This is when the net cash flow from one property is saved and used as a down payment for another property. The goal is to have enough saved up from the cash flow of the first two rental properties to put towards a third rental property.
The more rental properties an investor has, the more cash they will generate, similar to a snowball rolling down a hill.
Some owners also use rental income to make additional mortgage payments to pay down a property loan faster. The investor refinances their mortgage to get cash to buy another rental property when the value of their property has gone up and they have made some payments on their mortgage.
The BRRRR strategy involves buying a fixer-upper property using short-term financing, making any needed repairs, renting to a qualified tenant, then refinancing and pulling cash out once the property has a stabilized history of positive cash flow.
The BRRRR strategy for real estate investing is similar to the snowball effect in that an investor does the same thing repeatedly. Having a network of contractors and handypeople to help with remodeling is generally a better strategy for an active investor.
One of the potential problems with the BRRRR method is that short-term financing often has high loan fees and interest rates. Therefore, an investor needs to be careful not to run out of money before the property starts generating positive cash flow.
REIGs allow investors to pool their money to purchase rental properties. The group then manages the property, so the investors don’t have to.
The REIG will take care of marketing, screening tenants, collecting rents, managing the property, and doing maintenance in exchange for a percentage of the monthly rental income. Investors in a real estate investment group make money from the group’s shares of recurring rental income and from the appreciation in value of the homes in the group when they are sold.
An REIG (Real Estate Investment Group) may be a good option for people looking for a more hands-off real estate investing strategy. However, it is still important to research the management of the REIG and their previous track record of success or loss.
REITs are public or private corporations that invest in various types of real estate, such as residential BTR subdivisions, commercial real estate, or special-use properties like data centers and cold storage facilities.
ROITs must pay out at least 90% of their profits as dividends to shareholders. Real estate investment trusts can add diversification and income generation to your investment portfolio without the hassle of property ownership. Properties that are investment-grade and held by a REIT are usually leased to tenants with good credit on leases that last a long time. This type of real estate investment is more liquid than others because you can buy or sell the shares on an exchange.
However, REITs don’t have some of the same advantages as directly owning a rental property, such as having direct control over property management decisions.
Crowdfunding for real estate investing is done online, where investors pool their money to buy shares of commercial or residential assets, such as new home developments, apartment buildings, or stabilized commercial real estate.
Investing in a crowdfund can give you exposure to properties that you would not be able to invest in otherwise. Crowdfund investors receive regular distributions of net income, provided that a project is profitable, and a share of any profits when a project is sold.
One drawback of crowdfunding is that shares are not very liquid and may be locked up for a period of time until the project is more stable or during periods of economic uncertainty. The success of a crowdfunding investment hinges on the sponsor’s ability to identify profitable opportunities, finance and develop the project, and lease and manage the property.
7. Private Lending
Private lenders provide financing for real estate projects by lending money to developers in exchange for a return on their investment, rather than investing money in the equity of the property. Private lenders loan money to real estate investors looking for an alternative to traditional financing sources, such as home flippers, rather than purchasing rental property themselves.
In the same way that a traditional bank does, private lenders make money from loan fees and interest rates. However, fees and interest rates are generally higher.
While private lending may be a good way to generate recurring interest income, there is a risk that a borrower will default and a private lender will have to take back a property that is only partially renovated. The reason private lenders have real estate investing experience is so they understand how to protect themselves if a property needs to be foreclosed.
8. House Hacking
If you want to make some extra money by investing in real estate, house hacking could be the right strategy for you. House hacking refers to buying a property (typically a multi-family home or a single-family home with extra bedrooms) and then renting out part of the property to tenants.
Making extra payments on your mortgage can help lower your overall costs and help you build equity in your home. Diversifying your real estate portfolio by house hacking can help improve your financial situation.
Some things to keep in mind if you’re interested in house hacking are as follows. First, you will need to find a property to rent that is zoned for rental use. To find good tenants, you should screen them carefully and have a strong lease agreement. Additionally, you should be ready to take care of any maintenance or repair problems that come up. If you’re new to real estate investing, house hacking is a great place to start. Once you’ve tried your hand at house hacking, you can move on to other investing strategies.
Wholesaling real estate is an investing strategy where an investor buys a property and then assigns, or sells, the purchase and sale agreement to another investor or buyer for a fee. They make money by finding good deals for others.
An investor will not be successful at wholesaling real estate if they cannot find an undervalued property. They must also be able to build relationships with other real estate investors who are interested in the properties they have found. Investors who invest in real estate wholesaling can make a profit without ever owning a property. Wholesaling is a good option for people with low credit scores, bad credit, or no credit.
10. Fix and Flipping
Fix and flipping is a real estate investment strategy where you buy a home for below market value and sell it for a profit. Most investors who fix and flip homes try to buy a property for 75% of its after repair value minus the cost of repairs. The goal is to sell the property for a profit, typically within a few months.
To find good deals on investments, people often go through wholesalers or real estate agents that focus on properties that are not publicly available. This method of real estate investing often relies on private money and hard money lending.
Fixing and flipping houses can be a profitable way to make money, but it does come with some risks. The real estate market is unpredictable, and there is always the possibility that a property will not sell for the expected price. You should research and be aware that flipping houses may require a higher risk tolerance than other methods on this list.
11. Air BNB
An increasing number of people are investigating the possibility of investing in Air BNB rental properties, especially in areas where there is high demand for short-term rentals. Short-term rentals can improve your cash flow and get you started in owning real estate.
If you invest in a property that doesn’t generate enough income to make it cash flow, you could make more passive income by renting it out on AIR BNB.
This can be a great method of real estate investing, especially in luxury or tourist markets where there is always a high demand for rental properties. Investing in rental property can provide you with a steady source of income. Whether you are a first time investor or have experience with investment properties, this type of investment can help you generate income.
You should check with your local planning and zoning to see if you are allowed to rent your property in this way. The best time to investigate a property is while it is still under contract. This is known as the due diligence phase.
Many real estate investors are looking for new opportunities in the current market. The popularity of vacation rental by owner, or VRBO, has increased in recent years. VRBO allows investors to buy entire properties and advertise them directly to customers through its platform.
If you’re looking to get into the real estate game, VRBO is a great way to start off. You don’t need to hire a property manager, as VRBO lets you list your rental properties directly to customers. The two platforms are very similar and both are highly rated by property owners and tenants.
13. Short-Term Rental
If you want a more fun and flexible way to travel, you should consider a short-term rental property. Properties that are available for rent by the night, instead of monthly, are known as short term rentals. If you’re looking for a vacation option that includes accommodation or a place to stay while you’re visiting a tourist destination, this is a great option for you. Staying in a vacation rental is more fun than staying in a hotel and you’ll have more space and privacy. This type of arrangement can be more flexible than monthly rent since you are only paying for the nights you stay.
There are a few things you should keep in mind if you’re interested in investing in short-term rental properties. Before you can start your business, you need to learn about the local market and any regulations that might apply to your business. It’s important to have systems and strategies in place to manage the property effectively, since you’ll likely be dealing with multiple tenants. While owning a short term rental property entails more work than simply collecting rent from a long term tenant, it can be a great way to make money from your real estate investment.
You can achieve financial freedom by investing in real estate. Our financial freedom plan calls for achieving it in less than 10 years.
When you invest in real estate, you are essentially building equity. This equity can then be used to help fund your retirement or other financial goals. Real estate investing can provide you with the time freedom you desire by generating passive income in addition to the other benefits it provides.
I’m not saying that passive income is never as passive as people want it to be. However, if you work hard for a few years, it can allow you to live the life you want. Real estate investing can help you achieve your financial and time freedom goals.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.