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Real estate investing can be a powerful tool for wealth generation and financial independence. There are hundreds of different strategies and paths to achieving wealth through real estate. Below are six common types of real estate investing- each with its own pros and cons and varying levels of work needed. Before you begin your real estate journey, research the different types and choose one to start with that most fits your lifestyle.
Great for: generating passive income, supplementing retirement income, creating long term investments
Long-term rental investing is a very popular real estate investing strategy that builds a foundation on the slow and steady method of buying properties with no intention of selling them off in the near future. This strategy is good for people that want to minimize their risk but seek tangible gains that will pay out far into the future.
With the buy and hold approach of long-term rentals, investors have the benefit of reliable monthly rent income, tax claims for depreciation, tenant mortgage pay-off, and home value appreciation over time.
Great for: newbie real estate investors, lower risk investments, introduction to being a landlord
House hacking is a great strategy for new homeowners to reduce, or completely get rid of, their mortgage. House hacking involves buying a multi-family home (like a duplex), living in one side, and renting out the other. This is a great way to generate rental income that can help cover your mortgage. This method also provides a good introduction into being a landlord. This strategy can also be implemented by purchasing a single-family home and renting out rooms.
Great for: hands on wealth generation, large lump-sum payouts, higher risk tolerant investors
House flipping can be a great source for large investment payouts over a few months’ time. However, with the potential for great reward, comes a higher level of risk for the investor. House flipping entails buying a home that is not in the best “ready to sell” shape at a good price, fixing it up yourself or using a contractor, and reselling at a higher value.
There are multiple house flipping strategies including quick flips which occur over a few weeks to a few months’ time. There are also more long-term flipping strategies like live in flips, where the investors purchase a home with the intent to fix it up but live it for two years during the process so they are not taxed on capital gains.
Depending on your timeline and ability to manage an efficient fix-up, investors can cash in fairly quickly sizable returns which allows to expedite their investing timelines. However, house flipping can be risky. If the market takes a down turn during the middle of a flip, an investor can lose all of their potential value before the first hammer hits the wall. That is why it is important to have an exit strategy and be able to convert that property into a rental until the market rebounds.
For more info: The Best Books on Flipping Houses
Great for: higher risk tolerant investors, investors that want to quickly build their portfolios
BRRRR investing stands for Buy, Rehab, Rent, Refinance, Repeat. BRRRR investing is a cross between house flipping and short- or long-term rental investing. Let’s break down the different pieces.
The first step to BRRRR investing is getting a good deal on a property- much like the house flipping strategy. The better the deal, the better the profit margin possibilities. Fixer-upper investments can be hard to finance through a typical mortgage, so other types of loans may be necessary like private lenders, hard money, or cash.
Next, the investor fixes up the home to increase the overall value of the property.
The investor will then rent out their property to tenants and either self-manage or hire a property management company.
Now that the investor has a fixed-up rental home, they can refinance with a lower interest mortgage loan. This will allow the investor to recoup their initial investment while generating positive cash flow from a property that already has forced appreciation.
With the investor receiving all of their initial capital investment back they are able to go look for their next great deal and start the process all over again.
As you can see, BRRRR investing can be a great way to quickly acquire rental property investments with minimal capital investment. However, with minimal capital investments in the properties you will be exposed to higher risks (and rewards) based on the performance of the properties and the markets. The forced appreciation and good initial deals on the properties will help cushion that risk.
Great for: investors with minimal capital, good negotiators, active investors
Wholesaling is the art of contracting a property at a really good deal and turning around and selling it for a profit before you actually own it. This strategy is good for investors that are good at negotiating and finding good real estate deals. Wholesalers typically have a network of investors they will market their real estate finds to in the hopes that they can sell them at a small mark up.
Typically, wholesalers will find a good deal and put the home under contract. Then, they will immediately start marketing their purchase, with a small upcharge, to their network. If they find an interested party, they will close the deal with their own title company and will have made a small profit within a matter of weeks. If the wholesaler cannot find a buyer, they will typically back out of the contract through language they intentionally included in it. This can absolve the investor of financial obligation but if done enough, can garner an unfavorable reputation that can hurt deals in the future.
Real Estate Investment Trusts (REIT’s)
Great for: truly passive investors, easily liquidated investments
REIT’s allow investors to invest in real estate without managing their own tangible properties. An investor can invest a certain amount of money into an REIT and profits from the properties will be redistributed to investors similar to dividends from stock market investments. There are multiple benefits to investing in REIT’s. One benefit is that they are truly passive investments. REIT’s also allow you to more easily liquidate your investment. With real estate, a lot of an investor’s capital may be tied up in actual properties that cannot easily be accessed. REIT’s can be a great tool for generating passive income while researching other more hands on types of real estate investing.