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If you’re considering getting involved in this business, there are a number of different real estate investing strategies for you to consider. This begs the question, which ones are the most lucrative?
When you take both existing homes and new builds into account, 6.5 million homes were bought and sold in America last year and an projected 7.1 million will trade hands this year.
While many of these transactions represented a move of residence, many more were investments. Real estate investment is big business in America, and residential property is only one slice of this very large pie.
The great thing about real estate investing is that anyone can do it. You don’t need a college degree, a high GPA, or the right family connections.
Below I explain seven ways anyone can get rich using the real estate investment strategies described below.
1. Buy & Hold
One of the secrets of real estate investment is timing. If you buy at the right time, you’ll increase the value of your investment massively.
With the buy and hold approach, you aim to get a good deal on a property now and selling it later for a profit. Personally, this is my very favorite real estate strategy, because I like to buy turn-key properties that I can rent out (at a profit) from the day I take ownership.
Because rents usually rise over time while a fixed-rate mortgage will stay fixed, this approach is an effective way to collect cash flow that grows larger each year you own the property.
2. Buy, Rehab, Rent, Refinance (BRRR)
You can glean the basics of this strategy simply by looking at its name. You buy a property, carry out any necessary repairs or maintenance work, rent it out, and then refinance this property after a time in order to buy a second.
The key to this strategy is in the building up of equity during the renting phase. By increasing the value of your property in this way, you create the potential for greater value each time you refinance.
It is important to observe market trends when attempting this strategy. A drop in property market values could seriously hurt the value of your investment.
If you execute this strategy properly over time, there is a potential for huge growth.
Many people repeat this strategy multiple times, growing a small initial investment into a property empire. This is known as “Buy, Rehab, Rent, Refinance, Repeat,” (BRRRR).
3. Fixing & Flipping Homes
If you live in an area where property demand is running high, this can be a great way to make money.
Fixing and flipping involves buying a property whose value is diminished due to lack of maintenance, fixing what’s wrong with it, and selling it for a profit.
The issues in question might be poor paintwork, structural failures, or a lack of garden maintenance. These factors will put time-poor buyers off but can add huge value for an investor who’s willing to put in some work.
This strategy relies on demand and rising prices. Along with the value your maintenance work will add, you’ll usually be relying on inflation from the market as well.
Just be aware, the IRS classifies house flipping as active income and will tax your profit at a rate of 10% to 37%. This is higher than the capital gain tax rate of 0% to 20% that you’d pay for properties held for a year or longer.
4. Short-Term Accommodation (AirBnB)
Online accommodation providers like Airbnb have brought about an explosion in this kind of property investment in recent years. You rent out your property for short periods, typically a few days to a few weeks, then clean up after your guests before the next ones come along.
One of the key advantages here is that you don’t have to invest anything in many cases. If you have a spare room or area in your house that you don’t use, you can start renting it out to short-term tenants.
If you have a stand-alone house, this can be a major source of income as people will pay high rates to get on-demand access to a private home and yard during their travels.
Personally, I own a beach house that I rent out for short-term accommodation and it has been a phenomenal investment, particularly during the COVID crisis.
5. Running a Guesthouse (Bed & Breakfast)
This is probably the most labor-intensive option on this list. In truth, it’s probably going to be your full-time job if you decide to pursue it.
However, if you have a nice property in a good area (particularly one with a lot of tourism) it could be a great money-maker.
If you have a background in hospitality, or you just enjoy meeting and interacting with people, this could be the right fit for you.
6. Crowd-Sourced Real Estate Investing
This is a viable option for anyone who wants to invest in real estate but doesn’t have the resources required to buy a property outright.
By buying into a crowd-sourced real estate investing company, you can team up with others in your position to pool resources and make a property investment. You can pursue this investment option with as little as 500 dollars.
This investment strategy is quite new to private investors. Until the initiation of the JOBS Act, non-accredited investors (those with a net worth of less than $1 million and annual earnings of less than $200,000 for the previous two years) could not invest in crowdfunding companies.
Since 2016, however, more and more private investors have been adding these companies to their portfolio. If you’re interested in this option, you can get started with Fundrise for as little as $500.
7. Commercial Leasing
Commercial properties include apartments, office space, retail space, industrial space, mobile home communities, and in some cases, land.
As an investor, commercial leasing has many of the same features as buying to rent. However, there are also important differences.
Firstly, commercial property generally costs more to buy. Commercial tenants also tend to have special requirements that residential tenants do not.
Additionally, not all banks will finance commercial properties. This can cause the mortgage process can be more involved and you will usually need to put 20-30% down.
On the upside, disputes with commercial tenants are rare and easier to resolve when they do arise.
Because commercial tenants are businesses, they are assumed to have an understanding of the risks of what they’re doing. Thus, courts usually act swiftly to evict them when they fail to pay rent or breach lease terms.
Real Estate Investing Strategies
Real estate is currently in the midst of a unusual market cycle that has sent residential home prices soaring.
However, the COVID-19 pandemic has also created pockets of opportunity. The best real estate investing strategies will seek to make use of this recession, rather than avoiding it.