There are several real estate investing strategies for beginners. These can be broadly categorized into active and passive approaches.
Active investing requires a hands-on approach and demands a lot of skill and risk-taking. Hence, they also offer more profit.
Passive investing, on the other hand, is for people who don't want to invest the majority of their time into real estate buying, managing, and selling but still want to generate a steady income.
Each of these seven options that we’ll talk about in this article demands varying time and financial commitments. So, weigh each option and choose the one that complements your goals and situation.
Active Investing Approaches
House Hacking
House hacking is one of the most accessible ways to get into active real estate investing. It means buying a multifamily property, living in one of the units, and renting out the rest to generate income to pay the mortgage. The owner builds equity while maintaining the property.
If you already own a house, a part of which you can rent, you can start this strategy immediately after finding a suitable tenant(s). Other than mortgage, if you have any other obligations like credit card debt, you can use any excess rent to finance debt reduction strategies like the snowball method, avalanche method, debt consolidation program, and more.
If you're looking to buy a new house, consider purchasing a structured property so that you can put a part of it up for rent—for example, one with a large barn or a garage space.
Even if you don't have or afford to get a multifamily property, you can use your spare room on a short-term rental platform like Airbnb or Vrbo.
However, before doing anything, consider the zoning laws or HOA rules that the property is bound by.
Wholesaling
If you have good marketing and negotiation skills but not enough capital to buy and sell properties, wholesaling is an excellent real estate investing strategy.
This is how it goes - you'll identify an undervalued or distressed property and enter into a purchase contract with the seller at a discounted price.
You'll then reassign the contract to a buyer at an agreed-upon higher price. The price difference is the wholesale fee (the amount you earn in this transaction) and can be 5% to 10% of the property price.
This strategy doesn't require much capital investment, so less risk is involved. However, you need good communication skills and an extensive network to succeed.
Buy and Flip
The strategy involves buying a property that needs repairs, making improvements to raise its value, and selling it for profit.
Sounds pretty easy, but it takes a lot of time and upfront cost. It also requires a deep understanding of the local real estate market and expertise in renovation and construction.
Additionally, the strategy is vulnerable to changes in the housing market, interest rates, and unexpected expenses, which can impact profitability. On average, if you do everything right, you can earn a profit of $25,000 to $30,000.
Therefore, before buying in the hopes of fixing and flipping, conduct thorough research, consult experienced professionals, and develop a solid financial plan.
Buy and Hold
In contrast to the flipping strategy rests the buy and hold option. This strategy involves buying a house and renting it out for a long time until the property value appreciates to a desired level when the buyer is ready to sell it off.
It is the most common investment option due to the promise of long-term gains and short-term cash flow. You can use the short-term income to pay off the mortgage and put the extra in your wallet. And the property value will appreciate over time, allowing you to profit more.
So, should you hold, or should you flip? For that, you need to consider your overall risk tolerance.
The flipping option requires more upfront costs as you have to fund the renovation. Also, there are many variables to manage, like - securing a low purchase price, working with trustworthy contractors, staying on a renovation timeline, reducing holding costs, and ultimately selling for a profit.
So, if you have less capital and want a steady income stream, a buy-and-hold strategy ought to be worth it.
But if you have the money to invest in renovation and the network and skills to see it through, you can combine the two strategies - buy a house, repair it, rent it out until the value appreciates to your desired level and then sell it off.
Passive Investing Approaches
Crowdfunding
With real estate crowdfunding, you can use online financial technology or crowdfunding sites to put your money into any pool of real estate investment funds you want.
Most real estate crowdfunding is held privately, which means you can buy property on the private market, which isn't available to the general public.
Crowdfunding is a good source of passive income. You can expect a return rate of 2% to 20%. However, there are some risks that you need to consider.
One of the main reasons crowdfunding is risky is that it isn't officially regulated. So, any company with a project that needs money but doesn't have the adequate skills to manage it can go ahead.
So, you need to research the team behind the project you want to fund to ensure your money goes to the right people and you get the right returns.
REITs
REITs are companies that own, operate, and finance income-producing real estate across various sections.
REITs are like mutual funds. They pool the money of many investors who can earn dividends without buying, managing, or financing any properties themselves.
You can start investing in REITs by opening a brokerage account and buying and selling publicly traded REITs.
However, individual REIT stocks come with more risks. If you have a lower risk tolerance, you can go for an ETF or mutual fund that vets and invests in a range of REITs, thus boosting diversification and lowering risk.
The expected return rate is 7% to 10%.
Syndication
The syndication strategy is pooling your money with other investors, becoming a limited partner, and investing in properties that a sponsor buys and manages.
If you take part in a real estate syndication, your role would be to provide a portion of the capital required to buy a property. You'll get a share of ownership in exchange for your monetary contribution.
From that ownership, you'll get passive income every month (or every three months) and a return on your investment when the property gets sold. You can expect 7% to 8% annual returns and 40% to 60% profits upon the asset's sale in year five.
But remember, there are risks involved in this venture. So, choose experienced and trustworthy real estate syndicators and make your investment worthwhile.
Author Bio: Attorney Loretta Kilday has more than 36 years of litigation and transactional experience, specializing in business, collection, and family law. She frequently writes on various financial and legal matters. She is a graduate of DePaul University with a Juris Doctor degree and a spokesperson for Debt Consolidation Care (DebtCC) online debt relief forum. Please connect with her on LinkedIn for further information.