There is no doubt that investing in real estate is one of the best ways of making money. Many of the world’s richest people amassed their wealth from real estate. When it comes to real estate investment strategies, there are several options to consider, among them REIT investments, wholesaling, house hacking, and the BRRRR strategy. But here are the best real estate investment strategies for making money in 2020:
1. Traditional Rental Properties
Buying rental property and becoming a landlord is one of the most popular real estate investing strategies. You could invest in a condo, single family home, apartment, multi family home, or townhouse. However, before jumping into the traditional rental property investment strategy, you need to consider the pros and cons.
Pros of the traditional rental real estate investment strategy
- Cash flow – Investing in rental properties means earning monthly rental income from your tenants. This can be a good source of passive income, especially in retirement.
- Tax benefits – The IRS allows landlords to deduct some expenses incurred in running their rental properties. This includes interest on a mortgage, insurance costs, repair expenses, and depreciation.
- Real estate appreciation – Real estate generally increases in value over time. This means that you can make a good profit when you decide to sell your investment property in the future.
Cons of the traditional rental real estate investment strategy
- Operating costs – Running a rental property can be a very expensive affair. You will be required to pay property taxes, insurance fees, homeowners association fees (for condos), and property management fees. In addition, there will be other unexpected expenses for repairs and maintenance.
- Neighborhood decline – If your neighborhood changes over time for the worse, your rental property is likely to decline in value.
- Lack of liquidity – Rental property is not a liquid asset. When you decide to sell, it could take weeks, months, or even years before finding a buyer.
One of the best ways of finding traditional rental properties for sale is by using a real estate investment app like Mashvisor’s property finder tool. You can narrow your search using filters such as budget, property type, and the number of bedrooms and bathrooms. You will also be able to use Mashvisor’s calculator to get estimations of the traditional cash on cash return and cap rate.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
2. Airbnb Rentals
One of the best real estate investment strategies for beginners is investing in Airbnb rentals. An Airbnb is a short term rental property that is leased for a period of thirty days or less. Nowadays, more travelers are opting for Airbnb since it is cheaper than booking a traditional hotel room. This means you could enjoy a high demand for your Airbnb property. Here are the other pros and cons of the Airbnb investment strategy:
Pros of the Airbnb investment strategy
- Wide selection – You can list a wide range of investment properties on Airbnb including apartments, single rooms, houseboats, castles, or moored yachts.
- Higher earnings – Since Airbnb involves short stays, you will be charging a nightly rate. If you invest in Airbnb, you are likely to make more money than with a traditional rental property.
- Tax benefits – Airbnb owners can lower their taxes by deducting expenses such as management fees, cleaning and maintenance costs, utilities, and insurance.
Cons of the Airbnb investment strategy
- Legal and regulatory issues – Some cities have laws that don’t allow short term rentals. In most places, you must obtain a license and get a permit before listing your investment property as an Airbnb.
- Heavier workload – Running an Airbnb can be very demanding. On an almost weekly basis, you will have to take care of the cleaning, communication with guests, key handovers, scheduling, and occasional repairs. You could hire a manager, but that will cost you some of your rental income.
- More risk – Having different people staying at your Airbnb rental property week after week exposes you to a higher risk of theft or damage.
Traditional vs Airbnb Investment?
You can use Mashvisor’s investment property calculator to assess rental properties in order to determine which is the best rental real estate investment strategy. Using metrics such as rental income, cash flow, cash on cash return, and cap rate for both the traditional and Airbnb rental strategy, you’ll easily be able to decide on the optimal one.
3. Buy and Hold
As the name suggests, the buy and hold strategy involves buying an investment property and holding on to it for the long haul. The idea is to wait until the property appreciates in value before selling.
With the buy and hold strategy, there are two options; you can rent the investment property to make some rental income, or leave it vacant and wait for the value to appreciate. Obviously, the first option makes more sense since you can generate some income in the short term while your property appreciates.
Pros of the buy and hold real estate investment strategy
- Income in the short term – If you decide to become a landlord, you can generate some income from your investment property every month.
- High returns over time – When you eventually sell your property after several years, you can make a lot of money due to its appreciation.
- Leverage – You can leverage your home’s equity to borrow money for making improvements or buying more income properties.
Cons of the buy and hold real estate investment strategy
- Fluctuating market conditions – In the long term, there is no guarantee that your investment property will appreciate in value. Things could get worse due to economic, social, or political factors.
- Maintenance costs – Keeping your property in good condition until you sell it can be very expensive. Maintenance costs can be especially high when you have tenants. And if you choose not to rent out the investment property, you will have to pay for all maintenance costs from your own pocket rather than from rental income.
- Lack of liquidity – Choosing the buy and hold strategy means that you will have to wait for years before accessing your money.
4. Fix and Flip Real Estate
House flipping is the process of buying distressed property at a low price, renovating it, and then selling it for a profit. This is an ideal strategy for real estate investors that want to make relatively quick money in the industry.
Pros of the fix and flip real estate investment strategy
- Quick cash – With fix and flip, you can buy a house, fix it, and sell it within months or even weeks.
- Less risky – Compared to buy and hold, fix and flip is a less risky strategy since, if conducted properly in the span of a few months, it’s less likely to be affected by real estate market fluctuations.
- No tenant issues – Unlike real estate rental investment strategies, fix and flip frees you from the hassle of dealing with tenants.
Cons of the fix and flip real estate investment strategy
- High investment costs – Though you can buy a distressed house at a discount, you might have to spend lots of money to fix it up.
- Higher taxes – The local authority will charge higher property taxes once you’ve fixed up the house.
- Difficulty selling – You might not be able to sell your house as fast as you want. This will mean paying more holding costs.
Related: How to Fix and Flip Foreclosed Homes
It’s true that you have plenty of options when it comes to making money in real estate. But the strategy you choose for making money in real estate should fit with your goals, personality, needs, skills, and budget. Take time to understand the pros and cons of all the above-listed real estate investment strategies before landing on one. And if you’re a beginner, it may be best to consider one of the residential real estate investment strategies first.