Before delving into real estate investing, you should have a clear idea of what kind of investing you want to pursue.
Jumping in, gaining overnight success, and becoming a self-made millionaire won’t happen. Sorry to break it to you, folks, but we don’t live in a Utopia. The better strategy is to acquire as much knowledge as possible to build a strong real estate investment portfolio with long-term rewards. It won’t be a walk in the park, but hard work will pay off and you can become a successful full-time real estate investor in due time. To get you on the right path, we give you the four main ways of investing in real estate, and it is up to you to decide which investing strategy matches your financial resources and goals in the long run.
The Best 4 Ways to Invest in Real Estate
1. Fix-and-Flip Real Estate Investing
Fix-and-flips are short term, very hands on, and require lots of capital for renovation. It sounds sunshine and rainbows: buying a beat up house for cheap and reselling it for a major profit within a year’s time. But, if you wait too long to sell the house, spend too much on fixing it, and incur unexpected expenses, you will not make a profit on the house. Real estate professionals and experienced investors can sell within a 12-month time, as any time after a year will be too risky and you won’t reap the financial rewards you were hoping for. We don’t recommend this strategy for beginner real estate investors because if you can’t confidently flip a house within a year or less for profit, your best bet is to choose a longer term real estate investing strategy. With fix-and-flip, the aim is to sell the house in the fastest way possible in order to increase potential profit and reduce your holding costs. Holding costs are the costs real estate have to cover until they can sell the property. These include but not limited to: loan payments, property taxes, and utilities.
Ideally, an average return of 15-20% on a fix-and-flip investment strategy is a good benchmark to keep in mind. Moreover, your total costs should not exceed 5% of the property’s sale price.
But, be very careful of the following costs that may eat away into your potential profits:
- Lender fees
- Closing costs (between 2-5% of the purchase and the sale prices)
- Rehab budget
- Monthly utilities
- Property taxes
Risks to watch out for in fix-and-flip real estate investing:
- Higher than expected renovation costs
- Higher than expected holding costs
- Loan extension penalties
The longer it takes a real estate investor to renovate and sell the property, the higher the potential holding costs will be. Make a mental note: many fix-and-flip projects naturally result in higher than expected rehab costs that may increase your expenses.
2. Buy and Hold Real Estate Investing
One of the most popular and go-to real estate investment strategy is the buy and hold investing. Buy and hold real estate investing is a long-term investment strategy where real estate investors buy rental properties to make passive income in the form of monthly rent. Not only are you making money every month from renting out your house, but you are also benefiting from the appreciation of the asset in the long term. So, in a nutshell, by renting out your investment property, you gain a steady flow of rental income and an appreciating asset. Landlords have to be careful in selecting the right tenants in order to eliminate the rise of conflicts, unpaid debts, and a damaged rental property.
Unlike fix-and-flips, the annual return on investment with buy and hold is around 8-9%. Buy and hold investors/landlords typically hold a house for 5-30 years. As long as the landlords are able to keep long-term tenants, the idea is to continue renting out the property for as long as possible until you decide to sell it for good.
Risks to watch out for in buy and hold real estate investing:
- Occupancy risk
- Price depreciation
- Liability risk
3. Commercial Real Estate Investing
Commercial real estate investing is more expensive and requires a lot more capital than residential buy and hold real estate. Investors take out larger loans for commercial real estate properties, which may include office spaces, storage spaces, restaurants, and retail stores. This is a long-term real estate investment and reaps an average return on investment of 9-10%.
Unlike the buy and hold real estate investing strategy, commercial real estate has longer term tenants than the tenants of residential properties. Thus, commercial real estate extends an investor’s average investment timeline and makes commercial real estate investors more likely to buy and hold.
Risks to watch out for in commercial real estate investing:
- Occupancy risk
- Price depreciation
- Liability risk
4. Crowdfunding Real Estate Investing
If you have little to no capital, crowdfunding might be something you would be interested in. In a nutshell, crowdfunding allows investors to get access to the real estate market with small amounts of money, i.e., as little as $5,000. Real estate crowdfunding websites use a pool of accredited investors to fund the loans of various borrowers.
According to the SEC, accredited investors are required to have either:
- $200,000 of annual gross income for two straight years ($300,000 annual gross income for joint income)
- $1 million in total assets ($5 million in assets for entities or companies)
Expect an annual average return on investment of 8-10% and an average investment timeline of 1-30 years.
Risks to watch out for in crowdfunding real estate investing:
- Borrower default risk: If the borrower does not commit to monthly payments, he/she might not be able to repay the loan in full. Since real estate crowdfunding investors make their return on the monthly payments, this reduces their annual return.
Whether you decide to invest in short-term or longer term real estate investing, you must acquire the right amount of knowledge and expertise to follow through and make big bucks. Real estate investing is very rewarding indeed, but only if you conduct the right due diligence.
To keep learning more about this lucrative business, read our blogs on Mashvisor. Happy Investing!