Real estate investment offers a variety of strategies, each with its own risk-reward profile. As the old saying goes, “Don’t put all your eggs in one basket” – diversifying across different real estate investment strategies can help manage risk while maximizing returns (Money, 2020). So, let’s look at some of the most common approaches for putting your money to work in real property.
Buy and Hold
One of the most traditional real estate investment strategies is buying a property and holding onto it for the long-term. Often called a “buy and hold” strategy, the goal is to purchase a property and collect rental income from tenants while benefiting from long-term appreciation in the value of the asset (RealtyMogul, 2022). Investors using this strategy need patience and a willingness to weather any downturns in the real estate market, but the payoff can be substantial over decades. Just don’t get “bored and sold” if you choose this approach!
Fix and Flip
If long-term buy and hold investing sounds like watching paint dry, then the “fix and flip” strategy may provide more excitement! With fix and flip, an investor purchases a property in need of renovation, makes improvements, and then sells it for a profit (Forbes, 2021). This can generate returns more rapidly than buy and hold, but requires keen skills in property valuation, cost estimation, and market timing. So aspiring fix and flippers should make sure they do their homework before taking the plunge.
Wholesaling
Real estate wholesaling involves putting a property under contract and then assigning that contract to another investor for a fee. Essentially, the wholesaler identifies a discounted property, sells the right to purchase it to someone else, and profits from the difference without ever actually owning the asset (BiggerPockets, 2022). This strategy relies heavily on building a network of cash buyers and being a savvy negotiator. Wholesaling can offer a relatively quick payday, but those profits need to be balanced against the effort required.
REITs
Want to invest in real estate without actually owning physical property? Consider real estate investment trusts (REITs). These companies own, operate or finance various types of income-producing real estate and trade on major stock exchanges (Investopedia, 2022). Investors can buy shares in a REIT to gain exposure to the real estate market. REITs often offer high dividend yields, diversity across properties and geographies, and liquidity from easy trading. Just be sure to research the REIT thoroughly, as returns can vary based on the specific properties and strategies involved.
The Short-Term Shift
With the rise of Airbnb and other short-term rental platforms, many real estate investors are swapping long-term tenants for short-term guests. Renting out properties on a short-term basis can yield higher returns than traditional leases, but also requires more active management and flexibility (Mashvisor, 2022). Aspiring hosts should carefully evaluate regulations in their local market and their own appetite for taking on the role of hotelier.
Strength in Numbers
Real estate partnerships allow investors to pool their money and expertise. Partnerships can provide access to larger deals, risk mitigation through diversification, and leveraging of different skill sets (MillionAcres, 2020). Just be sure to find partners as diligent about real estate as you are! Clear communication, transparency, and legal documentation are key to successful partnerships.
Think Outside the Box
Beyond residential rentals, investors can consider commercial real estate (office, retail, industrial), specialty assets like self-storage facilities, or alternative options like real estate crowdfunding platforms and real estate investment trusts (REITs). Diversifying across property types, geographies, and investment vehicles can spread risk and allow investors to capitalize on market conditions (Galiano, 2021). Working with a financial advisor can help construct a custom real estate allocation.
The Takeaway
When it comes to real estate investment, there are many strategies investors can choose from based on their goals, time horizon, expertise, and risk tolerance. Being informed and diversifying across multiple approaches and property types can help investors be successful in putting their money to work in real property. As in all investments, there are inherent risks involved, so conduct thorough due diligence before making any major decisions. And maybe leave the rehabbing to the professionals and try a REIT to start!
References
BiggerPockets. (2022, September 1). A beginner’s guide to wholesaling real estate in 2022. BiggerPockets. https://www.biggerpockets.com/guides/wholesaling-real-estate
Forbes. (2021, September 30). How to successfully fix and flip a house: The ultimate guide. Forbes. https://www.forbes.com/advisor/investing/fix-and-flip/
Galiano, C. (2021, March 1). 19 tips for investing in real estate. NerdWallet. https://www.nerdwallet.com/article/investing/real-estate-investing
Investopedia. (2022, August 17). REITs: What they are and how they work. Investopedia. https://www.investopedia.com/terms/r/reit.asp
Mashvisor. (2022, September 6). A real estate investor’s guide to short-term rental regulations. Mashvisor. https://www.mashvisor.com/blog/short-term-rental-regulations/
MillionAcres. (2020, November 24). The benefits of real estate partnerships. MillionAcres. https://www.millionacres.com/real-estate-investing/articles/the-benefits-real-estate-partnerships/
Money. (2020, January 13). 5 principles of diversification and why they matter. Money. https://money.com/diversification-investing/
RealtyMogul. (2022, August 31). What is buy and hold real estate investing? RealtyMogul. https://www.realtymogul.com/academy/what-is-buy-and-hold
