There are a multitude of ways to get involved in real estate investing, and so it’s not surprising that new entrepreneurs often have no clue where to start.
Wholesaling, property flipping, landlording and rental properties, crowdfunding, real estate investment trusts, and house hacking are all great investments. Which type you choose depends largely on your commitment as well as your financial goals and resources.
So, let’s jump right in, shall we?
Here is a basic introduction to seven great real estate ventures for both new and seasoned investors.
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1: Real Estate Wholesaling
Wholesaling real estate is a popular investing method for people who don’t want to incur the costs of rehabbing or renovating a flip. Basically, you—the buyer, secure the contract of a distressed or neglected property at a discounted rate, and then turn around and sell it to another real estate investor for a 5% to 10% fee.
Real estate wholesalers look for rundown or unkept properties listed below market value. Generally, these properties tend to need a decent amount of work, and the owner is typically motivated to sell, with no interest in hiring a realtor.
If you’re thinking about becoming a real estate investor but aren’t sure if you have enough money in the bank to get started, wholesaling may be a great choice for you.
For a more in-depth look at this investment technique, read our recent blog post all about real estate wholesaling.
2: Property Flipping
Flipping real estate involves purchasing often foreclosed or dated properties at a lower price, fixing them in a short period of time, and then putting them back on the market for a profit. Unlike wholesaling, flippers take on the costs of a mortgage and funding the renovation. Real estate investors favor the flipping option because of the potential for significant profits—especially for the more handy investors among us. If you’re able to save on the cost of labor, that’s a win-win.
This type of real estate investment is great if you have a fair amount of cash on-hand. Fixer-uppers give investors the ability to buy properties in areas or neighborhoods that might’ve previously been out of their budget—all because the home needs repairs and updates.
The downsides of property flipping are the amount of time, effort, and money they require. It’s not uncommon to encounter major issues during a rehab, especially in older homes. If you’re not prepared to go over budget, it can cost your bottom-line big time. If you’re only a passive investor, flipping properties is likely not a viable venture for you.
3: Short-Term Rentals
Investing in vacation rentals, also known as short-term rentals, can be one of the best ways to generate a passive income. As a vacation property landlord, you’ll be able to charge higher daily rates than longer term rentals. There is also the added bonus of being able to use the property when it’s not occupied by vacation-goers. With the availability of platforms like Airbnb and Vrbo, finding renters has never been simpler.
Where short-term rentals fall short are the expenditures they require. Maintenance and cleaning fees add up quickly, and that’s without the expense of a property manager.
This real estate investment strategy is great for investors who are hands-on and have a sizable available budget.
4: Long-Term Rentals
Landlording long-term rental properties is a brilliant way to create a steady stream of income. It’s also one of the most common ways entrepreneurs invest in physical real estate. Some investors pay cash for their properties and others take advantage of financing options. It’s important to note that financing with a lender comes with far more risk, so if paying in cash is possible, always opt for that.
The biggest difference between long-term rentals and short-term rentals is the stability. Year long leases offer a far more reliable source of income than weekly rentals do.
Having said all that, being a landlord comes with plenty of challenges, financial ones not excluded. Repairs, maintenance, plumbing issues, public amenities, you name it—you’re on the hook for it all. Sure, you can delegate by hiring an outside property manager but that will only eat into your profits. Ultimately, you’ll have to rely on your tenants to be timely with rent payments. If they don’t, you could be forced into pursuing legal action and all that costs yes, you guessed it: money.
5: Real Estate Investment Trusts (REITs)
Real estate investment trusts, also known as REITs, can serve as a solid addition to your portfolio. These investments are characterized by singular companies that own commercial real estate like apartments, office buildings, restaurants, hotels, and retail spaces. They typically pay high dividends and are used widely by people investing retirement funds because of the non-tax benefits they boast. The type of REIT you pick will ultimately determine your risk.
As for the cons? Like stocks, some REITs are publicly traded, while others are not. Public trusts are easier to value and less difficult to sell. Additionally, these investments take longer to generate profits and usually come with a steep minimum buy-in price.
6: House Hacking
House hackers think inside the box when looking for ways to generate income streams—they use their own home. The traditional definition of house hacking means buying a multifamily property, like a duplex or triplex, living in one unit and renting out the others to pay for the mortgage (and then some) and build equity.
Now, young investors aren’t just buying previously established multifamily properties, they’re buying homes and splicing them into multifamily properties, often starting with their own home first. It’s a great way to decrease living expenses, but it could also be the beginning of a very lucrative career as a real estate investor or landlord.
However, house hacking does not come without cons. Like long-term property rentals, you will be responsible for all expenses associated with maintenance, repairs, management, and up-keep. Especially if the property is older, in those cases you should always expect problems to arise. If you don’t want the added stress of being a landlord, this real estate investing method is probably not for you.
7: Real Estate Crowdfunding
One of the easiest and cheapest ways to invest in real estate is to do it with crowdfunding apps. Platforms like Arrived Homes, Fundrise, RealtyMogul, and HoneyBricks give investors the opportunity to purchase just a portion of certain residential, industrial, and commercial real estate projects for a fee. Even better, these apps take care of any and everything related to the property as well as diversifying your portfolio, so you don’t need to lift much more than a finger.
The main downside of real estate crowdfunding is the longer time commitment it requires, typically five years or more. If you don’t love the idea of having inaccessible funds for a significant period of time, this likely isn’t the investment option for you.
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