Top Real Estate Investment Strategies
There is a lot of upside to real estate investing. Putting your money into properties can be very lucrative, leading to long-term gains, steady cash flow, and substantial passive income.
As with any type of investment, you need to put together real estate investing strategies that make sense for your unique situation. Keep reading to learn about the ins and outs of real estate investing so you can add the best real estate investment vehicles to your garage.
Best 11 Real Estate Investment Strategies
- Flipping houses
- Rental properties
- Multi-family houses
- House hacking
- 1031 exchange
- Real estate investment trusts (REITs)
- Hard money lending
- Bed and breakfast
- Host events
Flipping houses involves identifying properties that are undervalued, buying them at an affordable price, fixing them up, and preparing them for resale.
If you’re flipping a house, the best thing to do if you can afford it is to buy the property in cash. This is the fastest and easiest way to buy a house. It’s risky, but if you are confident that you can resell a property for a higher price and will have positive cash flow after the transaction, you can save a lot of money and time by buying it outright.
Can you get a loan for flipping?
You can get a loan to flip a house, but you’ll have to go through a private real estate lender. Traditional mortgage lenders do not provide loans for flipping projects.
If you need a loan to secure a property, shop around for a lender offering the best rate. You’ll need good credit to make this happen.
Can you flip a foreclosure?
Flipping a foreclosed home is a great way to turn a profit because you can get a house below market value in a short sale, from a lender, or at auction, and then turn around and sell it for maximum value when market conditions are right.
Just remember that foreclosures can be risky to buy, so it’s a good idea to put the house through a rigorous inspection before finalizing a transaction.
2. Rental property
Another common approach that people make when investing is purchasing properties and then renting them out either on a short-term or long-term basis.
For example, you may buy a place in a town that has frequent tourism — such as a beach town or ski town. By taking this approach and building a rental strategy, it’s possible to use surge pricing to generate some significant rental income. Of course, you can also opt to buy a regular house or apartment unit and rent to people on a month-to-month or annual basis.
One of the great parts about a rental property is you can bring in a steady stream of income and use the money to cover mortgage payments. Once your mortgage is paid off and you own the home outright, all the money that you’re bringing in will be profit.
Renting properties can be an exorbitant amount of work. Unless you want to be a full-time landlord — making repairs and dealing with day-to-day tenant issues — it’s a good idea to work with a property management company.
A property manager can oversee all aspects of your rental property, sparing you the hassle of having to do it yourself. You might pay a pretty penny for this service, as it costs hundreds of dollars or more per month, depending on the scope of your real estate business. Still, it’s essential — especially if you’re working with multiple properties.
In addition, a property management company can protect you by serving as a buffer between you and tenants, who can sometimes be difficult to deal with.
3. Multi-family houses
Another interesting type of real estate investment strategies to consider is buying a multi-family house. As the name suggests, a multi-family house is a house that contains room for at least two or three families.
Multi-family homes come with many benefits. For example, you’ll have increased cash flow from three rent-paying tenants. As a result, you may be able to pay down your mortgage faster — putting yourself in a better position to profit.
What’s more, a multi-family house can be easier to look after than having multiple units spread across a town or region.
As an added bonus, multi-family homes also tend to have lower mortgage financing rates. As long as you have good credit and your finances are in order, you stand a better chance of securing a great loan on a multi-family unit.
4. House hacking
If you decide to buy a multi-family house, you may want to consider a strategy called house hacking, which involves living in one of the units that you own and renting out the others.
House hacking is great because you can keep a closer eye on your investment because you’re living there. Some people prefer to take this approach instead of trusting a rental management company to oversee operations. It’s also a lot cheaper than working with a management company.
There are also some helpful tax benefits that you can use if you take this approach. Talk to a tax professional to learn about all the great tax advantages that come with house hacking to see what you may be eligible for.
5. 1031 exchange
Once you own an investment property, you’ll be in a position of power as a homeowner with a valuable asset. Owning property can open some exciting doors from an investment perspective.
If you decide to move on to another property, you should look into a 1031 exchange, which allows the owner of an investment property to exchange one property for another of equal or greater value.
By completing a 1031 exchange, you can trade-in your existing property for another one or even a portfolio of other properties.
Oftentimes, investors complete 1031 exchanges as they near the 27 ½ year mark of owning, and their depreciation tax credits expire. At that point, the mortgage is typically paid off, and the equity in the property exceeds the net value that is being generated by rent — putting the investor in a strong position to trade in the property and diversify the investment.
A 1031 exchange can have strong tax advantages, too. For example, if you complete a 1031 exchange, you can potentially defer taxes on any capital gains that you make. The deferment can last for as long as you own the property.
Suppose you want to get into real estate but you either lack the finances or don’t want the hassle of buying a property outright. If so, wholesaling may be for you.
Wholesaling involves finding distressed properties that are in danger of foreclosure and helping owners find buyers to purchase them at higher prices. In short, the wholesaler acts as an agent in this case — contracting a house with the seller, arranging a sale, and taking a cut of the profit.
Wholesaling is highly beneficial to the investor because it’s far less risky than buying a property outright. You can gain fast entry into the real estate market, you don’t need any cash or credit, and you can wholesale deals from just about any location because you don’t need to be licensed or accredited.
The amount that you make from wholesaling depends largely on the condition of the property, the eagerness of the buyer, and your ability to negotiate and close.
If you’re successful, you can generate a high return on investment without having to put anything down.
7. Real estate investment trusts (REITs)
Another way to benefit from real estate without having to do much at all is to invest in real estate investment trusts (REITs).
REITs are companies that own, operate, or finance properties that produce income. They can be bought and sold just like stocks through leading brokerages like Fidelity or TD Ameritrade. Congress introduced REITs in 1960 as a way to make it easier for investors to capitalize on real estate opportunities.
REITs typically contain many different properties in one fund. They can contain either residential or commercial properties depending on how the fund is constructed. For example, commercial REITs may own cell phone tower land, office buildings, healthcare facilities, or data centers.
Real estate investors love REITs because they can allow you to get into the real estate market for just a small fraction of the cost and effort it would otherwise take. While a typical down payment on a house or property will run thousands of dollars — depending on the cost and on your credit, it’s possible to access REITs for dollars per share.
In addition, REITs are highly liquid compared to direct real estate. It can take months or years to sell a house, but you can sell REITs during normal trading hours just like stocks and ETFs.
8. Hard money lending
The trick to making money with real estate is maximizing your cash flow while contributing as little effort as possible. One of the best ways to do this is through a tactic called hard money lending.
Hard money lending involves acting like a bank and distributing short-term loans to real estate investors who are looking to buy properties to flip.
This strategy carries some level of risk because it involves trusting that the borrower knows what they’re doing and is capable of making good on their loan. It also removes you from the flipping process entirely by merely bankrolling the transaction.
If you’re considering hard lending, it’s a good idea to get to know as much as possible about the situation before you distribute any funds. Learn about who is taking your money and whether they have a demonstrated history of paying responsible borrowing. You should also take a hard look at the property to see if it’s something you can see being sold for profit down the road.
In recent years, many real estate investors have turned to crowdfunding to make money.
Crowdfunding involves using online platforms to find investors who need funding for commercial or residential projects. All you have to do is sign up for a platform like Fundrise or Crowdstreet, and you can connect with borrowers in need of financing.
Crowdfunding is an easy and painless way to invest. But it’s risky. Again, this is where it pays to research who you’re doing business with so that you can get a sense of whether your money is likely to be returned.
Consider participating in a crowdfunding campaign if you are in a position to add risk to your portfolio, you want to benefit from higher interest rates, and you want to expand outside of the stock market.
It’s also a good idea to poke around and find a crowdfunding platform that you like and are comfortable using. Platforms tend to vary in terms of the tools that they offer for investors.
10. Bed and breakfast
If you’re fortunate enough to live in a big house with plenty of space — and you also happen to be in an area that generates a lot of visitors, like a city or a college town — you could consider starting a bed and breakfast.
A bed and breakfast can be a lot of fun if you are the type of person who enjoys being around people and entertaining guests. Oftentimes, bed and breakfasts serve guests around the kitchen table or serve breakfast buffet style. Guests are given access to a private bedroom, bathroom, and common areas.
From an investment perspective, a bed and breakfast can bring in a steady cash flow, helping you pay your mortgage and utilities. Sometimes, the host chooses to stay on-premises. Other times, they choose to stay somewhere else for more privacy.
If you’re considering opening a bed and breakfast, you may want to hire full-time staffers to handle cooking, cleaning, and maintenance duties. A bed and breakfast can be a lot of work, but it’s a creative and fun way to start your own business and profit.
Just make sure to check with your local authorities before you make your space available for public use. Some places make you register, obtain special permissions, or pay fees to start a bed and breakfast or even list your property on a site like Airbnb.
11. Host events
Another creative way to make money with real estate is to use your house to host events.
For example, suppose you live in the country or overlooking a beautiful beach. If you have space, consider renting your property to host private events like weddings, speaking engagements, concerts, and private parties.
As another example, if you own a horse ranch, you could consider offering wagon rides or even a petting zoo for locals. In the fall, you could invite folks over to check out a corn maze or haunted house. This can be a fun way to make money and have a great time doing it.
That said, this is also something you will most likely need to obtain special permission for. However, it could be worth the money if you can attract a steady stream of clientele.
Tips for Real Estate Investing
Outline your goals
First things first: You need to determine why you’re getting into real estate investing. Figure out whether you’re looking to make short-term gains or set yourself up for long-term success.
Real estate investing is a big commitment. As such, it’s important to have a solid “why” before you start buying anything. If you can’t think of one, hold off until you understand the market — and your goals — more clearly.
Assess your financial situation
Once you have your “why” in place, the next step is to figure out your “how.” Take a look at your financial situation and determine how you’re going to make your real estate investment happen.
Do your due diligence to make sure your debt is at a minimal level, that you have a steady cash flow to support your investment, and that your tax returns and other important documents are ready to go so that you can approach banks about loans if needed.
Form a team
If you’re looking to buy a single-family home to flip or rent, it’s better to go in with a solid team of people. Buying a house is a complicated process and you’re going to need all the assistance you can get.
For starters, find yourself a savvy real estate agent who knows the local market and has the ability to negotiate and close deals. You should also find one who is well connected in your area, with plenty of sources to discover properties as soon as they come on the market.
In addition, you’re going to need reliable contractors to help with any repairs or upgrades that are needed after you buy a place. As many flippers find out the hard way, fixer-uppers are almost never in resale condition and may require extensive remodeling.
The right contractors can make critical recommendations and upgrades, making it that much easier for you to attract renters or buyers, depending on what needs to be done.
Frequently Asked Questions
Is it easy to make money in real estate?
The short answer is that it can be easy to make money from real estate. At the same time, it can also be very difficult to make money from real estate — and very time-consuming, too.
Again, spend some time thinking about your personal situation and your goals and determine how aggressive you want to be in the real estate market. If you’re looking for immediate profits with a minimal barrier to entry, you may want to consider REITs or crowdfunding as a lower-risk alternative to buying direct properties.
In this case, it could actually pay to take the easier way out instead of throwing a lot of money into a single property.
To learn more, check out our guide on how much real estate investors make.
Is my home an investment property?
Even if you already own a home, chances are it’s not considered an investment property.
Of course, owning a home is a personal investment because you build equity over time. However, an investment property usually refers to a property that you buy with the sole intention of profiting through either renting or resale.
The exception occurs when you live in a multifamily home or frequently rent your own space. In that case, your primary home is most likely classified as an investment property.
Should I get involved with real estate?
Entering into real estate is a bit like going into the stock market when you’re young. If you’ve never done it before, it can be pretty intimidating — especially if you have aspirations of becoming a real estate tycoon.
Consider starting small and investing in REITs before you jump headfirst into real estate. You should also work with a financial advisor or mentor who can guide you through the real estate investing process, helping you make timely and profitable decisions.
Remember that, when it comes to investing, there is no shame in asking questions and admitting when you don’t know the answer to something. It’s much better to ask someone for help than to guess and make a mistake.
On the bright side, real estate investing apps have made it much easier to get started.
How much of my portfolio should contain real estate?
New investors should consider allocating roughly 5% to 10% of their portfolio into real estate.
It’s easy to go overboard and put a lot more into real estate — especially if you have the money to do so. But keep in mind that it’s better to build a robust portfolio with a diverse arrangement of stocks, bonds, index funds, exchange-traded funds, and mutual funds.
By diversifying your portfolio, you can reduce risk and increase your chances of profiting.
The Bottom Line
As you can see, there is no single method to investing in real estate. The market is more complex than ever, and money-making opportunities abound.
Many investors have entered the real estate market and become incredibly successful. Investing in real estate can open the door to recurring cash flows, great tax advantages, and a lifetime of financial independence.
Just remember that your first real estate investment is your most important one. You ideally want this investment to set you up for your next one. So don’t spend too much on your first investment and wind up in a financial hole. Be smart about making a real estate investment, so you can profit and achieve growth.
Investing in real estate is an excellent way to increase your net worth — or what you own versus what you owe. By directly purchasing a residential property or commercial property — or buying shares of REITs — beginner or experienced investors alike can potentially make a lot of money.
In this post, we discussed the following strategies that investors use to make money in real estate:
- Flipping houses
- Rental properties
- Multi-family houses
- House hacking
- 1031 exchange
- Real estate investment trusts (REITs)
- Hard money lending
- Bed and breakfast
- Host events
Whatever you do, just make sure that you are in a position to move forward with real estate and that your investments align with your goals and financial situation.
Real estate can be a big commitment for an investor. If you’re ready for the challenge before you begin this investment opportunity, it could truly change your life.