Typically, real estate investing is done in four ways: purchasing fix-and-flips, buy-and-hold investing, purchasing commercial real estate, and buying vacation rental property. Buy and hold investing is the most common type of real estate investment and can usually be done for a 10 percent to 20 percent down payment plus two percent to five percent in closing costs.
Types of Real Estate Investing & Who They’re Best For
|Fix & Flip||Short-term investors who want to purchase, renovate and sell a property and then move onto the next project.|
|Buy & Hold||Long-term investors, such as portfolio investors and landlords, who purchase real estate with the goal of building equity.|
|Commercial Real Estate||Business owner or experienced real estate investor.|
|Vacation Rental Property||Homeowner who wants to offset some of their vacation costs or a beginner real estate investor.|
Here are four ways to get involved with real estate investing:
1. Fix & Flip Real Estate Investing
Fix-and-flip real estate investing is for short-term investors wanting to purchase, renovate, and sell a house, typically within 12 months. Fix-and-flippers look for rehab projects in poor condition that if renovated, can sell for a comparatively high return.
Who Fix & Flips Are Right For
Real estate professionals such as realtors, brokers, and contractors, as well as experienced rehabbers, are most suited for a fix-and-flip project. This is because rehabs are often funded by hard money loans with unique terms and typically require extensive renovations.
As a rule of thumb, fix-and-flip real estate investing is best for investors with two to three-plus past rehab projects. However, fix-and-flippers are sometimes inexperienced rehabbers who instead rely on licensed contractors to help them with renovations. When this is the case, the contractor provides the scope of the rehab work as well as a bid for the expected overall cost.
Fixing-and-flipping properties is the right real estate investment strategy for the following:
- Timeline: Three-plus months to devote to a fix-and-flip project, which gives you time to purchase, renovation, and sell.
- Funds: $30,000 in cash or credit to cover hard money rehab loan. Average fix-and-flip properties sell for $150,000, and hard money lenders typically require fix-and-flippers to cover 20 percent of a property’s expected sale price after renovations, known as After Repair Value (ARV).
For more information on investing in real estate through fix-and-flips, read our ultimate guide on how to make money flipping houses.
Fix & Flip Costs
Holding costs for fix-and-flip real estate investments generally include:
- Mortgage Payments: Interest only payments with rates typically between 7% and 12%
- Property Taxes: Generally around 2% of property’s appraised value
- Utilities: Typically $100 to $200 per month, depending on property size and usage
- HOA Fees: If the property is in an HOA or condominium association, these fees vary based on unit size and amenities
Fix-and-flip investors can also extend the loan beyond the term for additional penalties and fees. This might happen if an inexperienced fix-and-flipper hits unseen issues that extend the rehab timeline. This situation also might occur if a fix-and-flip investor can’t sell the property for the price they expected and hold onto it for longer. Of course, this adds to your holding costs and further eats into your profits.
Funding for Fix & Flip Real Estate Investments
Fix-and-flip real estate investing is typically financed using a hard money loan. These are short-term interest only loans that lump the purchase price and rehab budget together as a single loan. Unlike conventional mortgages, rehab loans can be used to finance a house in poor condition and are therefore the most popular loan option for fix-and-flippers.
Hard money lenders generally offer rehab loans as a percentage of a house’s ARV. A house’s ARV represents its expected fair market value after renovations have been made by a rehab investor. LendingHome, for example, offers rehab loans up to 75 percent of a house’s ARV. This means that you should expect to cover at least 25 percent of a fix-and-flip investment with cash.
Hard money lenders like LendingHome charge interest rates and fees between:
- Interest Rates: 7.5% – 12%
- Lender Fees: 1.5% – 2.5%, which are taken directly out of the loan
Hard money loans are the most common type of fix-and-flip financing, but some investors make real estate investments using all cash. Cash allows investors to purchase houses quicker as compared to rehab loans and also result in lower holding fees, thus increasing an investor’s potential profit.
Costs that eat into your potential profit include such things as:
- Lender Fees: Between 1.5% and 5 % of the loan
- Closing Costs: 2% – 5% of purchase price
- Rehab Budget: Dependent on scope of work
- Utilities: Typically around $100 to $200 per month
- Property Taxes: Roughly equal to 2% of the property value
Average Return of a Fix & Flip
The average return on a successful real estate flip is a 20 percent gross return, calculated by taking the average gross profit of $30,000 and dividing it by the average sale price of $150,000. The average net profit on a fix-and-flip is generally a 15 percent return. This means that if you do it right, you should only incur total costs equal to 5 percent of the property’s sale price including holding costs.
Profit from real estate investing comes exclusively from the sale of the property. The net return is typically considered a short-term capital gain and requires investors to pay taxes at their ordinary tax rate. For more information on real estate tax deductions and benefits, check out our ultimate guide on real estate tax deductions and our free worksheet.
Potential Risks of Fix & Flips
While the reward is high, there are many potential risks when it comes to fix-and-flip real estate investing. This is especially true for real estate investing for beginners, who aren’t used to managing rehab budgets and timelines.
Specifically, fix-and-flip investors are exposed to:
- Higher than expected rehab costs
- Higher than expected holding costs
- Loan extension penalties
The longer it takes to renovate and sell a fixer-upper, the longer the overall timeline and the higher the potential holding costs will be. If this is the case, you also might be at risk for loan extension fees with your hard money lender as you work on an extended timeline. Further, many fix-and-flip projects naturally result in higher than expected rehab costs that increase your out-of-pocket expenses.
“If you’re relying on a general contractor to do your fix-and-flip in the State of Texas, for instance, they are not required to be licensed. Other risks include unexpected costs to develop a project, wrangling with cities and municipalities to secure zoning variances, land entitlement issues, and potential clouds to title on the subject property in which one is looking to invest.” – Ben De Leon, President, De Leon Washburn & Ward, P.C.
Average Investment Timeline for a Fix & Flip
The average timeline for one fix-and-flip project is six months, and the term of a rehab loan offered by a hard money lender like LendingHome is typically around 12 months. However, the faster a rehab investor can sell a fixer-upper, the fewer holding costs a flipper incurs, thus increasing potential profit. Holding costs are the monthly costs that rehab investors have to cover until they can sell the property.
Where to Get Fix and Flip Loans
You can get fix-and-flip loans through online hard money lenders and local hard money lenders. LendingHome is an online nationwide lender that offers fix-and-flip loans for investors. They can get you preapproved online in just a few minutes and they offer competitive rates.
2. Buy-and-Hold Residential Real Estate Investing
Buy-and-hold investors are long-term investors who purchase one or more rental properties. These properties include single family homes, apartment buildings, and multifamily buildings. They make money off of monthly rental income as well as real estate investment appreciation. Some buy-and-hold investors also start as rehabbers, relying on rehab loans to renovate a property before renting it out and refinancing to a conventional mortgage.
Who Buy & Hold Real Estate Investing Is Right For
Buy-and-hold investing is suitable for passive long-term investors looking to purchase residential real estate and hold it long-term. It’s right for portfolio investors with multiple properties, as well as landlords who manage their own properties. Buy-and-hold investing is also right for investors who own duplexes and multifamily properties.
Specifically, buy-and-hold real estate investing is good for:
- Portfolio Investors: Typically own four to ten-plus rental properties and rely on property management companies
- Landlords: Typically own one to three rental properties and manage the properties themselves
- Turnkey Properties: Investor who purchase properties away from their home and purchased them with a tenant and management company in place
- 1031 Exchanges: Investors who want to engage in a like-kind exchange by selling one real estate investment and purchasing another for tax benefits
Buy and Hold Real Estate Investing Costs
Typical costs associated with a buy-and-hold real estate investment include:
- Financing Costs: Loan origination fees and any points
- Closing Costs: Generally 2% to 5% of the purchase price
- Maintenance Costs: Costs to upkeep the property
- Utilities: For common areas that the landlord is responsible for paying
- Property Taxes: Roughly equal to 2% of the property’s purchase price
- Rental Property Insurance: Yearly average $1,473 to $1,596 on a $200,000 investment property
- HOA Fees: If the property is a condo or part of an HOA, fees cover things like exterior maintenance, common area utilities, and amenities
Funding for Buy & Hold Real Estate Investing
Buy-and-hold investors, both portfolio investors and landlords, typically rely on conventional mortgages to fund their investment purchases.
The typical terms of a conventional investment property loan are as follows:
- Loan Amount: 80% – 96.5% of a house’s purchase price
- Interest Rates: 4.5% – 6.5%
- Lender Fees: 0% – 1%
- Terms: 15 years – 30 years
Average Return on Buy & Hold Real Estate Investments
The average return on a buy-and-hold property sale price is generally around 9 percent ROI. A buy-and-hold investor’s annual ROI is inclusive of both annual rental income plus any price appreciation earned through the eventual sale.
ROI is also net of any costs, which include such things as:
- Mortgage Payments: Based on the purchase price and amortized over 15 to 30 years
- Property Taxes: Roughly 2% of fair market value annually
- Repairs and Maintenance for Landlords: Roughly 2% of fair market value annually
- Property management Fees for Portfolio Investors: Typically 15% to 35% of annual gross rental income
Further, an investor can increase his or her returns if REO properties or foreclosures are purchased. This is because the sales prices are generally less.
Potential Risks of Buy & Hold Real Estate Investing
Portfolio investors and landlords face the same buy-and-hold risks with their rental properties. The main risks of buy-and-hold real estate investing is the occupancy rate and the potential for price depreciation. You can overcome low occupancy rates by pricing your rental units correctly. Price depreciation may be unavoidable at times, but by researching the neighborhood and buying in stable or up-and-coming areas, you can help prevent it.
Specifically, buy-and-hold investors are at risk of:
- Occupancy Risk: Rental property won’t be filled by tenants full-time, which eats into the annual ROI. It also describes tenants leaving a rental property in poor condition, which requires the owner to spend more on repairs and maintenance.
- Price Depreciation: The real estate market can dip lower than the total cost of the borrower’s mortgage, causing an investor to become “underwater.” This happens when an investor owes more on a property than it’s currently worth.
- Personal Default: Monthly amortized mortgage payments sometimes become too much of a burden, and buy-and-hold investors might become delinquent on their mortgage payments. This can result in bankruptcy and/or foreclosure, both of which hurt your personal credit. This risk is highest when landlords borrow up to 50 percent of their annual income or when portfolio investors invest in too many properties at once.
- Liability Risk: Landlords and portfolio investors can be found liable for on-site injuries due to negligence or lack of care. Buy-and-hold investors can protect themselves with landlord liability insurance.
Average Investment Timeline for Buy & Hold Properties
Buy-and-hold investors typically hold a house for five to 30-plus years. However, as long as portfolio investors and landlords are able to keep long-term tenants, the trend is to hold onto the investment property for as long as 30 years or more. The benefit is that it builds family wealth through equity and property appreciation.
However, long-term buy-and-hold investors often rely on the real estate market to dictate their investment timelines. If the value of the property is growing, investors are more likely to hold. If the market peaks, buy-and-hold investors are more likely to sell their properties and realize their actual gains.
Where to Get Buy and Hold Investment Loans
For more information on rehab loans for buy-and-hold investors, check out Visio Lending. Rates are competitive for prime borrowers, and prequalification can be done online in just a few minutes. Funding usually takes 21 business days.
3. Commercial Real Estate Investing
Commercial real estate investing is investing in property that is used for commercial and not residential purposes. The sole purpose of the property is for conducting business. Commercial properties are purchased by investors and leased out to companies, and include such things as office spaces, restaurants, and retail stores. Commercial real estate investors, therefore, are long-term investors who earn monthly lease income and price appreciation.
Who Commercial Real Estate Investing Is Right For
Commercial real estate investing is generally right for business owners who want to own the property their business is located in. It’s also right for experienced investors because it can be more complicated and more expensive than investing in residential real estate. It can be right for real estate beginners who have an experienced partner or mentor. Commercial real estate investors are usually people or entities who are flush with cash or willing to take out large loans and become highly levered.
The most common types of commercial real estate investors include:
- Businesses and corporations seeking their own office spaces.
- Real estate investment funds that invest in commercial-only or commercial+residential.
- Limited partnerships that pool funds and diversify risk for smaller commercial investors.
- Experienced individual investors with a higher tolerance for risk, access to funding, and familiarity with commercial real estate.
Each of these investors seeks to purchase and lease a property long term. This is aided by the fact that commercial mortgage terms can span up to 25 years, and average leases range from three to five years, making it a good buy-and-hold opportunity. Large commercial property management companies help these commercial buy-and-hold investors by managing their investments.
CBRE and Jones Lang LaSalle (JLL), for example, are two of the largest commercial real estate companies and help facilitate sales, retain tenants, negotiate leases and more. These companies, of course, charge for their services, which can eat into a commercial real estate investor’s profits.
Commercial Real Estate Costs
Commercial real estate investment costs generally include:
- Lender Fees: Loan origination fees and any points the lender charges
- Closing Costs: Generally 2% – 5 % of the purchase price
- Property Taxes: Generally higher than residential real estate investments, and they can vary widely based on location and building size
- Licenses: Any specific licenses needed to operate the business
- Utilities: Landlord may pay for common areas, and the tenant generally pays all other utilities
Some commercial real estate costs such as property taxes, maintenance and licenses are generally paid in part or in full by the tenant as part of the terms of their lease.
Funding for a Commercial Real Estate Investment
Commercial real estate properties are typically purchased using commercial real estate loans. Commercial mortgages are funded by traditional banks and have loan terms between five years and 25 years, with the exception of commercial hard money loans. The typical interest rates found on a commercial loan can be fixed or variable, and are typically between 4.5 percent and 6.75 percent. This means that some commercial mortgages will have a balloon payment towards the end of the loan.
These commercial loans come in four different types:
- Traditional commercial mortgage
- SBA 7(a) loan for commercial real estate
- CDC/SBA 504 loan for commercial real estate
- Hard money loans for commercial real estate
Commercial mortgages will usually have lender fees known as “points.” For more information on the different commercial mortgage options, check out our article on the types of commercial real estate loans.
Commercial real estate investors sometimes rely on hard money loans to fund their investment purchases. This is typically the case when a commercial real estate investor wants to renovate a property, either to sell or to lease out long term. Commercial investors might also need to move fast and commercial mortgage approval will take too long. When this happens, investors refinance to a commercial mortgage at a later date.
Hard money loans for commercial ventures have the same terms, such as interest rates between seven percent and 12 percent, lender fees between 1.5 percent and 2.5 percent, and term length between one year and 3 years. For more information on hard money lenders for commercial real estate, read our article on the best hard money lenders.
Average Return on Commercial Real Estate Investing
The 20-year average return on commercial real estate shows that the annual return is currently at a 9.5 percent gross return on investment (ROI). Commercial real estate investors earn a return on monthly lease income as well as on price appreciation when they sell their properties. Further, investors can increase their returns if they find a commercial real estate foreclosure or if they buy a property at auction.
However, the return is gross and therefore doesn’t include any costs, such as:
- Monthly Loan Payments: Based on the purchase price specific lender
- Commercial Property Taxes: Roughly 2% of fair market value annually
- Repairs and Maintenance for Investor Managed Properties: Generally 2% of fair market value annually
- Property Management Fees for Commercial Portfolio Investors: Generally 15% – 35% of annual gross lease income
These expenses, similar to buy-and-hold residential investors, eat into the profits of a commercial real estate investor.
Potential Risks of Commercial Real Estate Investing
Commercial real estate investors generally face the following risks:
- Occupancy Risk: Risk of an empty property and the risk of tenants destroying the property (which takes time and money to repair), and which negatively affects the ROI
- Price Depreciation: The commercial real estate market can dip lower than the total cost of the borrower’s commercial mortgage or hard money loan, causing a commercial investor to become “underwater.” This happens when a commercial investor owes more on a commercial property than it’s currently worth.
- Personal Default: Commercial properties are large and carry a hefty price tag. Monthly amortized commercial loan payments sometimes become too much of a burden, and commercial investors might become delinquent on their loan payments.
- Liability Risk: Owners of commercial real estate investors can be found liable for on-site injuries due to negligence or lack of care. Commercial investors can protect themselves with commercial real estate liability insurance.
Average Investment Timeline for Commercial Real Estate Investing
The average investment timeline of a commercial real estate investment is long term. This is because the financing terms are typically between five years and 25 years, and many investors hold commercial real estate properties longer than the maximum financing term.
The average lease for a commercial real estate property is also between three years and five years. Commercial real estate investors, therefore, have longer-term tenants than the tenants of residential properties. This extends an investor’s average investment timeline and makes commercial investors more likely to buy-and-hold.
Where to Get Commercial Real Estate Loans
You can find a commercial real estate loan at your bank, credit union, or through an online lender like Patch of Land. Patch of Land lends on commercial properties such as apartment buildings, mixed-use buildings, and office and retail buildings. They can usually get you funded in as little as ten business days.
4. Investing in a Vacation Rental Property
Vacation rental property is a property that an investor buys to use as a vacation home and to rent out so they can offset the costs of home ownership and vacation-related costs. It’s typically purchased in an area that has tourist attractions and amenities. It’s a great way to get started in real estate investing for beginners because you get the benefit of using the property yourself and renting it when you’re not using it. Typically, you hire a management company to manage the property while you’re not there so it eases you into investing in real estate.
Who Vacation Rental Property Is Right for
A vacation rental property is generally right for the following:
- A source of supplemental income
- Rental property tax deductions
- Real estate investing for beginners because it’s easier than buying another type of real estate investment like an apartment building
- You can enjoy your vacation rental property when you want
- Rental income that offsets home ownership and vacation expenses
People generally purchase a vacation rental property for two primary reasons. First, they want to use the property as a second home with their friends and family. Secondly, it’s purchased as a real estate investment that is rented during the periods they aren’t using it.
Costs of a Vacation Rental Property
Typical costs of investing in a vacation rental property include:
- Lender Fees: Loan origination fees and any lender points
- Closing Costs: Generally 2% – 5% of the purchase price
- Property Taxes: Varies depending on the size and location of the property
- Vacation Rental Property Insurance: The average vacation rental insurance yearly premium is $2,000 – $3,000
- Maintenance & Cleaning: Varies but averages 1% and 2% of the property’s purchase price per year
- Property Management Fees: Typically 15% – 30%-plus of the rent
Keep in mind that a vacation rental property typically generates higher rents than a buy-and-hold real estate investment, but the costs such as insurance, cleaning, and maintenance are generally higher too.
Funding for a Vacation Rental Property
Investors typically fund a vacation rental property with a conforming loan, a portfolio loan, a multifamily loan or, in some cases, a short-term loan such as a hard money loan or a bridge loan. Some investors use all cash to buy a vacation rental property, but using financing is more common.
Conforming Loan for a Vacation Rental Property
A conforming loan used for a vacation rental home generally has more lenient qualifications than if used for a rental property. Lenders realize that borrowers will live there for part of the year, so they’re not entirely dependent on rental income, which reduces the lender’s risk. Qualifications vary by lender, but generally a 20 percent down payment is needed and a credit score over 680 (check your score free here).
Portfolio Loan for a Vacation Rental Property
An investor may use a portfolio loan to finance multiple properties at once or if they don’t meet the criteria for a conforming loan. Portfolio loans usually offer lower personal qualifications and fewer property requirements than conforming loans.
For more information on portfolio loans, check out our in-depth guide to portfolio loans.
Multifamily Loan for Vacation Rental Property
An investor will generally use a multifamily loan to finance a vacation rental property with two to four units. There are four types of multifamily loans: conventional mortgages, government-backed loans, portfolio loans, and short-term multifamily financing. Each type of loan has its own lending criteria.
For more specific information on multifamily loans, check out our in-depth multifamily loan guide, which includes things like where to find multifamily loans and how to apply for them.
Average Returns on Investing in a Vacation Rental Property
Returns on a real estate investment such as a vacation rental property vary based on the purchase price of the property, the location, operating expenses and the occupancy rate. Typical returns on a vacation rental property are similar to a buy-and-hold investment and are usually around 9 percent to 12 percent.
Factors that affect your vacation property ROI are:
- Management Fees: Average 28% for a vacation management company
- Property Taxes: Typically 2%-plus of the assessed property value
- Financing Costs: Interest rate, lender fees and monthly mortgage payments
- Operational Expenses: Cleaning costs, maintenance, etc.
- HOA Fees: If applicable, these can vary based on unit size and amenities in the building
- Occupancy Rates: The more the property is rented, the higher your ROI will be
Potential Risks of Investing in a Vacation Rental Property
There are always risks associated with real estate investing, and buying a vacation rental property is no different. Generally, the major risk will be a vacant property in between tenancies and being able to afford the carrying costs associated with the property.
Some risks of investing in a vacation rental property include:
- Inconsistent cash flow because renters are usually seasonal
- You will have to cover carrying costs such as property taxes, maintenance, and utility bills, regardless of whether the property is rented or not
- You may have to pay a property manager to take care of operations
- Vacation rental properties are usually hit harder during economic downturns because people often eliminate or cut back on vacations to save money
“Some risks associated with investing in vacation rental property are poor weather forecasts, spikes in gasoline prices, beach closings because of either a natural phenomenon or man-made, and unusual wear-and-tear on furniture.” – Chris Dowler, Founder & Owner, Dowler Construction Services
Average Timeline for Investing in Vacation Rental Property
Investing in vacation rental property has a very similar timeline to investing in a primary residence or a multifamily property. Generally, the buyer decides on an area that is a popular vacation destination and works with a realtor who specializes in that area. This may take a few weeks to a few months, depending on the available inventory, your budget and your housing preferences.
After you find a vacation rental property, it usually takes 30 to 45 days to close on the property, if you’re financing it. During this period, you will go through underwriting with a lender if you are financing the property. A title company will conduct a title search on the property and an appraisal will be ordered by your lender. You will also hire a property inspector.
Once all of this is done, the lender will give you a “clear to close” and the settlement will be scheduled for a convenient day for all parties. The settlement usually takes place within one to two weeks of the lender’s final approval and is normally held at the title company’s office. The actual settlement takes about 90 minutes.
For more information on buying vacation rental property, check out our in-depth guide on how to buy a vacation rental property, which includes things like what to look for in a vacation rental property and what areas to buy in.
Where to Get a Vacation Rental Property Loan
Finding the right lender for your vacation rental property doesn’t have to be a headache. Fill out a short form on LendingTree and let lenders compete for your business. Their online marketplace lets you quickly compare rates, offers, and find a good fit. See your options online in minutes.
Alternative Real Estate Investing Options
There are several alternative ways of investing in real estate. These generally include real estate crowdfunding, investing in REITs, and tax liens. Each of these alternative investments has their own risks and rewards and are generally right for different kinds of investors.
Real estate crowdfunding companies provide opportunities to invest in loan-backed, single family homes, apartments, condos, and multi-unit properties. REITs are corporations that own or finance income-producing real estate. They typically own a portfolio of real estate within a specific sector and generally pay out 90 percent of annual profits to investors. Tax lien investing happens when an investor purchases a property after the owner has delinquent property taxes. Investors then earn interest and penalty payments.
Who Alternative Real Estate Investing Is Right For
Investing in alternative real estate investments may be right for people who don’t want to be hands-on landlords. They can be right for passive short-term and long-term investors who want to get involved in real estate without purchasing a property outright.
The most popular alternative real estate investments are:
Real Estate Crowdfunding
Real estate crowdfunding pools money from multiple investors to fund a project or portfolio of projects. Real estate crowdfunding is right for passive accredited and non-accredited investors who want to invest in a project that would otherwise be out of their price range or geographic location.
The idea behind real estate crowdfunding websites is that they use a pool of accredited investors to fund the loans of various borrowers. This means that real estate crowdfunding investors invest in loans using their own cash.
Most real estate crowdfunding websites boast an average return of around 10 percent for both short-term and long-term opportunities. LendingHome, for example, lists average returns for accredited crowdfunding investors between 8 percent and 10 percent of net profit. Returns on a crowdfunding investment come as a portion of the interest rate charged to the borrower.
Since real estate crowdfunding investments are typically made on a loan-by-loan basis, there is always the risk of borrower default. When this happens, the borrower stops making their monthly payments and might not be able to repay the loan in full.
Investing in real estate crowdfunding can be done in about one month, which allows for due diligence and contracts to be executed. The real estate crowdfunding timeline is generally for the duration of the loan the developer took out, which is typically one to five years.
For more detailed information on real estate crowdfunding, read our in-depth real estate crowdfunding guide.
Real Estate Investment Trust (REITs) Investments
REITs are corporations that own or finance income-producing properties. They give investors more liquidity and can be traded like a stock without the investor acting as a landlord. They also have a lower buy-in amount, so it’s generally cheaper to invest in a REIT than to buy a property.
Investors who invest in REITs are putting up their own cash to invest, like they would invest in a stock or mutual fund. They don’t solely own the property, so can’t take a mortgage out on it.
The average return on REITs varies depending on the type of REIT you invest in. You’re generally investing less money than you would invest when you purchase a property using a down payment and a mortgage, so your returns are generally lower.
Risks for investing in REITS include not having much control over your investment. Unlike when you purchase a house outright, a REIT is controlled by a management team that makes the decisions. Another risk associated with REITs is that there aren’t any depreciation write-offs, like there are with investment properties.
It usually takes about one month until you can invest in the REIT, which includes time for due diligence. However, the timeline varies depending on the type of REIT. A private REIT requires investors to keep their investments in the REIT for at least one to two years.
For more information on REITs, read our in-depth guide to investing in REITs.
Tax Lien Investments
Tax liens are a type of real estate investing where investors purchase properties with delinquent tax balances and earn interest and sometimes penalties on the back taxes. They’re right for investors who want to earn interest, penalty income and possibly acquire a property for below-market value, the amount of back taxes owed.
Tax lien real estate investing is done with the investor’s own resources and is generally paid for with cash. In the event that an investor purchases the tax deed, which means they own the property, they may be able to get financing similar to financing for a property bought at a real estate auction.
The average ROI on tax liens once again varies on the amount of interest and penalties being charged and on the amount of the balance owed. The higher the interest and penalties, generally the higher your ROI will be. Tax lien returns vary widely because in some states, investors “bid down” at auction and their bid determines how much interest they will accept. For example, the interest may start at 16 percent and they may bid down to 4 percent, meaning they will accept 4 percent interest on the tax lien payment.
Some of the risks of investing in tax liens are that the homeowner will repay the debt during the redemption period and reclaim ownership to the house. Another risk is purchasing a property that isn’t worth much if you didn’t do your due diligence on researching the property. Keep in mind that when a homeowner files bankruptcy, it can halt all collections and affect your penalty income and interest.
The timeline of the tax lien depends on how much time the municipality gives the delinquent homeowner during what is called a redemption period. This is the time that the owner has to pay their tax balance in full plus penalties and/or interest, after the tax lien sale. This varies by municipality and can be a few months or a few years.
For more information on investing in tax liens, check out our in-depth guide to tax lien and tax deed investing.
Whether you’re a short-term or long-term investor, real estate investing can offer a lot of upsides. The right real estate investments can result in monthly cash flow, asset price appreciation, and diversification, as well as tax benefits. You can learn how to invest in real estate by purchasing a fix-and-flip, a buy-and-hold or a vacation rental property.
If you’re ready to obtain financing for your next real estate investment, get prequalified in just a few minutes with LendingHome. They’re a reputable, online, nationwide lender that offers competitive rates for prime borrowers who want a hard money loan for a fix-and-flip project.