Summary: In this article we will share our top three best real estate investing strategies by category. Categories include short-term real estate investing strategies, long-term real estate investing strategies, the best passive real estate investing strategies, and other popular investing strategies.
Whether you are trying to determine the best real estate investing strategy for you or simply looking to learn more about your investment options, you’ve come to the right place. Because there are so many different types of real estate investing, I have broken down three of the best real estate investing strategies by category: best beginner strategies, best short-term strategies, best long-term strategies, and best passive real estate investing strategies.
Let’s start off by defining the clear difference between goals, strategies and tactics.
The Difference Between Real Estate Goals, Strategies and Tactics
Goals are what you are continually trying to work towards and achieve. Strategies are the routes or plans for how you will reach your goals. Tactics are the tools you’ll need along the way.
The best real estate investing strategies should get you to your destination (goals) the fastest and in the safest way.
Examples of real estate investing tactics include:
- Analyzing markets
- Performing due diligence
- Finding good deals
- Running the numbers, and more
Investors can get distracted by tactics, especially when they don’t have a clear understanding of why they’re actually doing them. To avoid getting caught up in tactics, educate yourself on basic real estate investing goals.
A goal could be owning a certain number of income-producing properties or financial independence (where you work because you want to, not because you need to).
Then, pick your two favorite real estate investing strategies. With two clear strategies in mind, tactics will be much more useful because you will know exactly what tools you need to stick to your strategy and reach your financial goals.
Top 3 Best Beginner Real Estate Investing Strategies
For beginner real estate investors, a live-in-then-rent strategy may be a good long-term investing option. This strategy is basically buying a house as your primary residence, living in it, with the plan that it will eventually become a rental property.
A good way to build a small real estate portfolio is to successfully execute this strategy a few times. This may be appealing if you prefer to not live next to your tenants, like a strategy known as “house hacking.”
#2 BRRRR Investing Strategy
Buy-Remodel-Rent-Refinance-Repeat or BRRR is a great way to build your rental portfolio and not run out of cash, but only when done correctly.
How BRRR investing works…
- Buy a fixer-upper property below market value.
- Use short-term cash or financing to buy.
- After repairs and renovations refinance to a long-term mortgage.
- Ideally, investors should be able to get most or all their original capital back for the next BRRR investment property.
BRRRs are another investing strategies that can work well for investors just starting out. Down the road, you should consider moving to a lower leverage, lower risk strategies, like the Rental Debt Snowball, which I’ll explain below.
#3 House Hacking
Living in a home that simultaneously produces income is a real estate investing strategy known as “House Hacking.” These types of investment properties include:
- Multi-family homes (I.e. A duplex, triplex, or fourplex)
- Extra rentable space (I.e. a basement, spare bedrooms or guest house)
Perhaps the biggest immediate benefit to pursuing a house hacking investing strategy, is that it reduces your housing costs. Essentially, your tenant(s) pay for part of your mortgage. House hacking can also be invaluable because it gives you the opportunity to learn how to be a landlord. Living in such close proximity to your tenants as a new landlord will make your job easier and keep a pulse on the condition of your rental property.
When you are ready to move out, you can hang onto the property and turn it into a long-term, income-producing rental.
Top 3 Best Short-Term Real Estate Investing Strategies
Short-term investment strategies can be much riskier than long-term strategies. Because all markets work the same way, they always correct themselves. So when there’s a booming market, sooner or later it will correct itself and level out.
#1 Flipping Properties
When investors buy a property, fix it up and try to sell it for a profit, it’s called flipping. This is the most popular form of short-term real estate investing. One of the tricky parts of flipping a property for profit is to accurately plan for expected (and unexpected) costs.
You must plan for the following expenses when flipping an investment property:
- Repairs and renovations
- Property taxes
- Closing costs
- Monthly debt service
- Property Insurance
- Sales costs
- Miscellaneous out-of-pocket expenses
On top of all of these expenses, you should add 10 percent to make it worth your time. Plus, at least a 10 percent cushion in the event the market dips when you are looking to sell the property.
Example of Flipping a Property
Consider the following example from Kathy Fettke’s book, Retire Rich with Rentals:
Betty wants to invest in real estate to make money fast. She does a little research and finds a home she thinks will work. It’s currently selling for $80,000—but, after some improvements, she thinks she can get $100,000 for it.
She purchases the home, hires a contractor, and puts them to work. After about 3 months, the work on the home is done and she can put it up for sale.
It sells a month later for $100,000. It seems like she might have made a nice little profit in only about 4 months time. This can be very enticing. $20,000 is more than some people earn in half a year or more. The problem with this strategy can be found when we look just a little deeper into the details.
- The house was $80,000.
- Let’s say the closing costs came out to about $1,000.
- She had to pay the mortgage for 4 months, so that comes to roughly $3,000.
- Property taxes for that time period add up to around $1,500.
- She also spent $10,000 on fixing up the house.
When we run all of the numbers, we see that her $20,000 profit is more like a $4,500 profit and it took her 4 months to get there.
- Essentially she made $1,125 per month, but how many hours did she put in? Sure, she made a profit but what did she really make on an hourly basis?
- All in, it cost her $95,500.
That’s a lot of money to bet on such a risky gamble! A simple change in the market would have put her in the negative.
What a Successful Flipping Investment Should Look Like
To make a nice profit flipping a home, it should meet the following criteria:
- There is money to be made.
- The market won’t fall apart. Booming markets are usually the best time for flipping properties.
- You can find a buyer.
- Profits exceed costs.
#2 Airbnb or Vacation Rentals
This type of real estate investing strategy is unique because it’s a buy-and-hold property, but it’s used as a short-term rental. Vacation rentals are a whole different beast in real estate.
Investors should ask themselves the following questions before moving forward with a vacation rental strategy:
- Will you manage the turnover between tenants?
- What are the rates of vacation occupancy in your property’s area?
- What are the legal regulations for short-term rentals and/or Airbnb properties?
Some investors have experienced healthy returns from Airbnb properties. And with the influx of investors pursuing this particular real estate strategy, many have outperformed traditional investments in regard to ROI.
#3 Live-In-Flip Strategy
The live-in-flip strategy is where you buy a property, move in, fix it up, wait two years or more, then resell it for (hopefully) at a profit. The trick to this investing strategy is to make sure you are following the rules set by the IRS so that you can qualify for the tax break.
If you follow the IRS rules, you pay zero tax on the profit up to…
- $250,000 for an individual, or
- $500,000 for a couple filing jointly
Many investors have successfully mastered the live-in-flip strategy, saving enormous amounts of money through tax savings.
The Trouble with Short-Term Investing Strategies
There are two main factors that can impact your short-term investments and expose you to more risk:
For short-term investments, you must get into the market at just the right time and get out at the right time (before it nose-dives). Of course, predicting market trends can be a near-impossible task. Even investing experts can’t definitively “time” the market to their advantage. The only thing we can be absolutely sure of is that all markets will correct themselves. It may happen tomorrow or years from now, there’s no way of knowing.
It’s always nice to have some luck when investing. I’m sure many of us know someone who stumbled into an investment right before it skyrocketed. In real estate, you need some luck to have the opportunity to buy a property that increases in value and turns out a profit, in just a few months or years.
In her book, Retire Rich with Rentals, Kathy Fettke, Co-Founder and Co-CEO of RealWealth shares her views on short-term investment strategies,
“This makes it less like investing and more like gambling. You’re essentially betting on your ability to get lucky at just the right time. You need luck and timing twice, once to buy and once to sell.”Kathy Fettke, Retire Rich with Rentals, 2014.
Top 3 Best Long-Term Real Estate Investing Strategies
Unlike short-term investing, the greatest asset in a long-term investment is time. The longer you hold onto the investment (assuming it was a smart investment to begin with, the less risk associated with it. This is, in large part due to inflation. Every year things get a little more expensive. This holds true for real estate values as well.
What We Like About Long-Term Real Estate Investing
- More stable with lower risk
- Inflation automatically builds property values.
- Rents increase along with inflation.
- Higher return on investment potential
- Higher cash flow potential
The goal of a long-term buy and hold strategy is to find and keep quality tenants in the property. Tenants who rent single-family homes are much more likely to live there for a longer period of time, so there is less turnover and less turnover costs.
In our opinion, a long-term real estate investment is not only the best option, but the simplest one. You don’t have to be a market expert to make money on a long-term investment.
#1 Long-Term Buy-and-Hold Rentals
In order to make a long-term property investment successful, investors must research the market where they are looking to buy, neighborhoods and property expenses.
Things to consider with buy-and-hold properties:
- Can I manage the property yourself?
- Or, do I want to hire a property management company?
- Should I buy a single-family or multi-family home?
- Or, should I buy an apartment, condo, apartment building, etc.
The benefits of a long-term buy and hold real estate investing strategy include:
- Rental income
- Tax breaks from depreciation expenses
- Amortization of loans
- Property appreciation
#2 The Rental Debt Snowball Strategy
This is a popular plan for investors who have been investing in real estate for awhile. As mentioned above, the rental debt snowball strategy is a great transition from BRRR investing.
The rental debt snowball plan is where you collect all the cash flow from your current rental properties and then use all that cash flow to pay off one mortgage at a time. The cool part about this strategy is that it figuratively works like a snowball – the debt payoffs begin to snowball or accelerate over time.
Benefits of the rental debt snowball strategy include the following:
- Predictably build wealth
- Reduce risk
- Ongoing income stream
- Lower debt and increase equity
Clearly this investing strategy won’t work for new real estate investors. But new investors can start with BRRR investing and work their way towards the rental debt snowball strategy as they acquire more properties.
#3 The Exchange Plan
A 1031 Exchange, also known as a Starker Exchange or Like-Kind Exchange, is a tax-deferment strategy. Under section 1031 of the IRS Code, investors may (1) “defer” paying capital gains taxes on an investment property when it is sold, (2) as long as another “like-kind property” is purchased with the profits gained by the sale of the first property.
Saving yourself from taxes on capital gains is a huge advantage of doing a 1031 exchange, but it’s not the only advantage. If you own a high-maintenance, low-income producing property, you can essentially exchange it for a similar property that is low-maintenance and higher-income producing property.
The four types of real estate 1031 exchanges include:
- Simultaneous Exchange
- Delayed Exchange
- Reverse Exchange
- Construction Exchange
There are specific rules you must follow in order to successfully complete a 1031 exchange. For simplified details and information on how to do a 1031 exchange, check out our complete overview here.
Top 3 Best Passive Real Estate Investing Strategies
Passive investing requires less day-to-day time and energy than the strategies we’ve discussed previously. While most passive real estate investing strategies still involve some level of upfront work to get started, they don’t demand much, if any, ongoing work or maintenance.
Next, is our top three best passive investing strategies.
#1 Real Estate Syndications
Syndications and crowdfunding share a lot of commonalities. This strategy is simply pooling your money with other investors to either buy real estate or lend money. Syndications allow investors to implement any of the above strategies, but without personally having to put deals together. It’s the syndication manager or partners job to find and manage deals for you.
A real estate syndication is an effective way for investors to pool their financial and intellectual resources in order to acquire properties and projects that are much bigger than what they could afford or manage on their own.
The two most common types of syndications are:
- Entitlement deals
- Single Family Fund (SFR)
Why We Like Real Estate Syndications:
- Invest in larger properties by pooling money
- Greater ROI potential
- Diversification of risk / passive investing
- Tax deferred status
At RealWealth, we believe the key to success lies within the experience of the management team. Make sure you perform your due diligence and understand your deal structure, SEC regulations and consider protecting your assets using an LLC.
To learn more, check out our guide to real estate syndications here.
#2 Crowdfunding Investments
A newer form of syndication investing, crowdfunding uses online platforms to market deals to invest in. Many require you to meet certain income requirements, also known as an accredited investor.
However, crowdfunding companies differ in their income, assets and minimum investment requirements. You can usually begin investing in crowdfunding with as little as $500 up to $1,000.
There are crowdfunding sites for pretty much any purpose. People can pool their money together to help tech and creative entrepreneurs fund their projects, like Kickstarter. Or GoFundMe, where people contribute to a personal fundraiser, (i.e. emergencies or charitable causes).
For the purpose of this article, below are examples of popular crowdfunding sites for real estate:
- Realty Mogul
Remember, with crowdfunding, make sure you are still performing your due diligence, by screening all partners and deal opportunities, before investing.
#3 Real Estate Investing Trusts (REITs)
REITs or Real Estate in the Stock Market, is an alternative way to invest in the stock market, without actually buying properties yourself. In 2016, real estate was given its own sector on the S&P stock exchange. This change effectively took away the financial umbrella of banks and traditional lending institutions.
Investors looking to take advantage of the real estate market should pay attention to the direction of recent trends and the impact these trends have had on the stock market. That’s because REITs are similar to mutual funds. Rather than owning a piece of stocks or bonds, you own a piece of several commercial or income-producing properties.
Different types of REITs include:
- Mortgage REITs
Benefits of REITs include the following:
- Passive investment aka hands-off
- Higher return potential with less risk
- Portfolio diversification
- Ongoing dividend payouts
With growing interest and popularity, REITs have actually outperformed the rest of the S&P 500, according to REIT.com. Investing in a REIT can generate nice monthly or quarterly dividends (depending on how often it pays out). If you are looking to diversify your portfolio and implement a new real estate investing strategy, REITs continue to be an appealing option.
The best real estate investing strategies are diverse ones. Short-term real estate investments can be enticing because you can make a lot of money fast. But they carry much more risk than long-term investing strategies, rarely build wealth, and never generate ongoing income.
Pick a couple investing strategies that are the most appealing to you, fits with your lifestyle, and most importantly helps you reach your goals and achieve financial independence.
Want to learn about the best real estate markets to invest in and why? Join today and check out our best markets page…
Fettke, Kathy. 2014. Retire Rich with Rentals.