When I began investing in real estate, I invested for positive cash flow. I bought my first rental property in 2006 before the crash of 2008. Buying for positive monthly cash flow, I was able to weather the recession as I watched numerous investment properties go into foreclosure. I used the buy-and-hold strategy and kept that property for 13 years.
Before investing in real estate, you will also need to choose a real estate investment strategy.
Buying properties to hold for many years while collecting passive income and selling later for a profit is one real estate investing strategy. Another strategy is the fix-and-flip strategy—buying properties to rehab and selling within a short time period, typically less than one year.
The right strategy for you depends on your skills, resources, and long-term goals. If you’re a new investor, it’s best to begin with one strategy instead of dabbling in multiple ones. As you develop your skills and knowledge, you may consider trying other strategies. For example, if you choose the buy-and-hold investing strategy as I did, you should gain experience in buying and managing rental property before attempting a fix-and-flip. It will make your life easier, and you can still reach your goals.
Real Estate Investing Strategies at a Glance
Real estate strategy
How It Works
Properties to buy and own long-term
Earning monthly rental income
Properties to repair, fix, and sell for a profit
Turning quick profits
Property that is rehabbed, rented, and managed
Not having to manage property
Paper assets consisting of large developed properties
Passive real estate investing
Investors pool small amounts of money
Small initial investment
Investors are middlemen between buyers and sellers
No money to invest
Tax Liens & Deeds
Pay delinquent taxes; acquire deeds at auctions
Waiting for profits
Buy-and-hold land for future appreciation
Investors who can pay carrying cost
Development & Redevelopment
Develop raw land or redevelop a site with building
Large amount of capital
1. The Buy-and-Hold Strategy
Buy-and-hold real estate is the most popular real estate investing strategy with benefits like steady rental income, property appreciation, and tax advantages. Rent to great tenants and maintain the property at a high level. The buy-and-hold strategy is good for investors who want to manage the property and tenants. Many investors hire a property manager as their portfolios grow.
You may choose to invest in one type of rental property like residential real estate or have a mixed portfolio of both residential housing and commercial properties such as office buildings or storage units. The key to a successful mixed buy-and-hold portfolio is knowing the different landlord-tenant laws for residential and commercial tenants.
Types of buy-and-hold real estate include:
- Turnkey real estate: A move-in ready property with one or more units, often in another state, that comes fully rented and has a property management company in place.
- Multifamily real estate: A two-to-four unit property that provides residential housing to tenants.
- Apartment buildings: Residential properties with five or more units. Apartment buildings are more management intensive, but per-unit repair costs can be lower.
- Vacation rental property: Short-term rental properties in touristy locations. Investors advertise on sites like Airbnb.
- Commercial real estate: Real estate that is used for business purposes like an office building, storage unit, or retail store.
The real estate market is unpredictable, so as I mentioned at the outset, don’t make the focus of your strategy future appreciation or equity. Instead, focus on positive cash flow and consider future equity “icing on the cake.” Positive cash flow is rental income that exceeds property expenses. It can fluctuate with vacancies or if rents decrease, so include a vacancy rate in your projections and make sure the rental income exceeds expenses and repairs since unexpected repairs can swallow profits.
I was so relieved to have purchased rental property for positive cash flow. Even though market rents took a dive during the 2008 recession—and I lost all previous equity—I was able to weather the storm until the market turned around. I sold that property 13 years later for a decent profit. So, I was able to collect income for 13 years, then a lump sum of equity when I sold.
2. The Fix-and-Flip Strategy
The fix-and-flip real estate investment strategy has the potential to make a lot of money quickly if done properly. It’s ideal for investors who have rehab experience or plan to hire a general contractor who has done a fix-and-flip project and can stick to the deadlines. The key to a successful fix-and-flip involves buying low and selling high. Profits can be reinvested into more fix-and-flip deals. I’ve never done a fix-and-flip but have considered it since I love rehab work and can do a few things myself in addition to hiring a contractor.
A successful fix-and-flip requires evaluating rehab and carrying costs and making sure the selling price exceeds expenses. Carrying costs are expenses that occur during the rehab period like mortgage payments, taxes, insurance, and utilities. Other expenses, in addition to rehab and carrying costs, include marketing and selling the property, whether the investor sells it or pays a real estate commission.
To find properties to fix-and-flip, drive through neighborhoods you wish to buy in and look for homes in disrepair. Ask your network of real estate and service professionals, such as agents, lawyers, and contractors, if they’re aware of distressed properties or highly motivated sellers. A fix-and-flip doesn’t necessarily mean a total rehab. Sometimes, you can find owners who need to sell a home quickly that can be spruced up easily with fresh paint.
For further reading on how to become a successful fix-and-flipper, check out our fix-and-flip library:
- How to Make Money Flipping Houses
- Flip Houses With No Money Down
- How Much Does It Cost to Flip a House?
- How to Start Your Own House Flipping Business
- 25 Fix-and-Flip Projects With High ROI
- How to Flip a House for Maximum Profit
- Top Signs You Hired a Bad Contractor
3. Investing in Turnkey Real Estate
Turnkey real estate is a buy-and-hold real estate investing strategy where an investor buys a property that is fully renovated, rented, and sometimes has a property management company in place to handle the day-to-day operations and manage tenants. It’s a great option for investors who want to own rental property but don’t want the hassles that come with property management and dealing with tenants.
Expect to pay more for rental properties purchased through a turnkey real estate company since all the work has been completed. Turnkey real estate property management fees can be as high as 10% to 20% with additional fees for the property manager to handle evictions and leasing. When evaluating profitability, make sure to include all the fees plus future repair costs.
Although turnkey real estate companies should provide you with a pro forma―seller’s income and expenses―you must do your own research and due diligence to determine if the property is in a good location, what the local rents are, the local vacancy rate, potential repair costs, and what your expenses will be as these can vary by location or property.
4. Investing in REITs
When you invest in real estate investment trusts (REITs), you are buying paper assets that include investment real estate. The REIT companies that sell shares of the REIT either own or finance large pieces of real estate within a single sector or across a variety of property types and sectors. The income from the properties is divided among the REIT shareholders through dividend payouts that can be reinvested into the REIT.
REITs are an excellent way to invest in real estate without having to come up with a large down payment, get financing approval, deal with tenants, repairs, routine maintenance, and property management. You invest in REITs the same as you would in buying stocks or investing in mutual funds. You can even allot a portion of your retirement contributions to buy REIT shares as I have. I love my REIT shares. I can own real estate without any of the work.
REITs are one investment strategy that can be part of your investment portfolio while you invest in buy-and-hold or fix-and-flip rental properties since they’re a relatively passive real estate strategy. Historically, REITs have performed well. According to the National Association of Real Estate Investment Trusts (Nareit), REITs have outperformed leading United States benchmarks for most periods during the last 45 years, making them a great way to begin investing. Talk to your financial advisor about how to get started investing in REITs.
5. Real Estate Crowdfunding
Real estate crowdfunding is where investors pool small amounts of money to invest in real estate. Crowdfunding real estate doesn’t require a major down payment like buying a rental property does. Investors can begin with as little as $500 and, such as REITs, there are no properties or tenants to manage and no waiting for lender approval.
There are two types of real estate crowdfunding—equity and debt. With equity crowdfunding, investors own a share of the property and make money from the rental income and as a portion of the equity when the property is sold. With debt crowdfunding, investors receive interest payments on the money they invest but don’t receive equity when the property is sold.
Real estate crowdfunding is a great option for passive investors who want to invest a little bit of money and receive regular income. You can get started investing in real estate crowdfunding by doing an online search for companies that offer these services.
6. Wholesaling Real Estate
Real estate wholesaling is when an investor finds a distressed property and puts it under contract to sell to another buyer or investor. To succeed as a wholesaler, investors need to sell the property for more than the contract amount less any incurred expenses. Investors make money from the difference between the contract and selling price. The key to succeeding as a real estate wholesaler lies in being able to sell the property quickly after going under contract.
Some ways to find distressed properties include:
- Bank-owned properties: Also known as real-estate owned (REO), these are properties that have been foreclosed on and are held in the bank’s inventory.
- Preforeclosures: These are properties that are in the foreclosure process. Zillow and other sites list preforeclosures, and you can check newspaper public notices.
- Multiple listing service (MLS): Typically listed with a real estate broker. Look for short sales and listings that say “motivated sellers.”
- For sale by owner (FSBO): Many distressed sellers need to sell the property themselves to avoid hefty real estate commissions but lack the expertise to price and sell the property quickly.
- Direct mail: This involves sending letters or postcards directly to the owners of properties not listed on the MLS in the neighborhoods investors want to buy.
Wholesaling is illegal in some states, so check state laws to determine how wholesaling can be done legally. To decide if wholesaling is right for you, research the laws in the states you wish to wholesale and talk with an attorney to make sure you’re complying with state and local laws.
7. Tax Liens & Tax Deeds Investing
Investing in tax liens and tax deeds involves finding owners delinquent on their property taxes. Buying a tax lien certificate means paying the property’s back taxes to the city and profiting by getting paid the interest and fees the owner pays to the city when they pay their delinquent taxes. If the owner doesn’t pay the taxes, investors can foreclose and sometimes get the property for pennies on the dollar.
Tax deeds are auctions held by municipalities to collect unpaid taxes. Investors bid and the winning bid covers back taxes and fees. Excess payment is paid to the property owner. The winning bidder can take ownership of the property the same day unless there is a redemption period for the owner to pay off their indebtedness. You can find tax lien and tax deed investment opportunities through online auctions, local newspapers, or county offices.
Not all states offer tax lien certificates. Some county offices bypass tax liens and go straight to tax deed auctions or tax deed sales without an auction. Tax liens and deeds are not without risk. Some properties require major repair. Reluctant owners often won’t let you inspect the property. Tax lien and deed investing is not right for everyone since it requires knowledge, patience, and research. Investors not wanting to take the time to learn how to do it right should find another strategy.
8. The Land Banking Real Estate Strategy
Land banking is when investors buy relatively inexpensive raw land in a location with future growth potential and either develop or sell it in the future for a profit. To do this successfully, it’s important to research the location and understand its potential for growth. Investors should research the economic feasibility and the zoning laws for the land they’re considering before buying to avoid potential loss.
Land banking is right for investors who don’t mind waiting for property values to increase or local growth and development to occur. Investors can flip land if they purchase it below market value, but it is more common for land banking investors to hold the land until it appreciates, or they can develop it. A downside to buying raw land is the ongoing expenses like property taxes and mortgage principal and interest payments if the land is financed with no rental income to offset the expenses.
To profit from a land banking strategy, investors need to first find a property in an area with anticipated growth. Then, they should calculate the ongoing expenses or carrying costs over the number of years they plan to hold the property until it sells. Expect property taxes to increase over time. You can find the average annual property tax increase rate for the location where the land is located by searching online or contacting the local tax office.
9. Investing in Real Estate Development & Redevelopment
Some investors buy raw land and develop it into subdivisions, condos, or commercial buildings. With development, timing is key. Real estate development can be very profitable with the right property at the right time. If home sales are stagnant, newly developed housing can sit on the market for a long time or sell for a lower price than expected. Developing raw land is very expensive.
Redevelopment is when an investor buys property with buildings on it and redevelops or improves it. One example is buying old mill buildings and converting them to residential housing, retail units, or a mix of both, known as a mixed-use property. This is another area of real estate investing I’d love to get into. I love old building conversions with their aged bricks and other fixtures. There is significant expense when redeveloping property.
Real estate development and redevelopment are good options with the potential for big returns but require extensive knowledge and capital. Real estate developers usually are partnerships or development corporations. They buy the land to develop or the properties to redevelop and build or have general contractors do the building. Typically, they manage the project from beginning to end. Some real estate developers also fund development and redevelopment projects.
Summary & Quiz
If you haven’t decided already, you are now prepared to choose which real estate strategy to implement. The two main real estate investing strategies are either to buy-and-hold real estate for rental income or fix-and-flip properties for quick profits. It’s best to choose one and not attempt both concurrently. Within the buy-and-hold strategies are multiple options like investing in turnkey rental properties.
I can’t wait to hear from you about which strategy you choose and how it is going. Review our key points, and don’t forget to test your knowledge with our quiz.
Key Points to Remember
- The real estate strategy you choose depends on your skills, resources, and long-term goals.
- Focus your buy-and-hold strategy on positive cash flow and not future equity.
- It’s better to have rehab experience or work with a general contractor who has experience with fix-and-flips.
- Turnkey rentals often are fully renovated, rented, and sometimes have a property management company in place to handle the day-to-day operations and manage tenants.
- You can invest in REITs while buying rentals or fix-and-flips.
- Investors can get started in real estate crowdfunding with as little as $500.
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