Becoming a real estate investor is an incredible way to create wealth and passive income. There are so many options and strategies to consider when trying to enter the real estate investment game, which can be overwhelming. We will break down the different types of real estate and strategies you can invest in to get an idea of what real estate investment would work best for you and your goals.

Buy and Hold

If you are interested in becoming a long-term landlord, buy and hold is the best strategy for you. This category allows you to make money off a tenant, hopefully, every month. The idea is to keep the property until real estate values have appreciated to a place where you feel it would be wise to cash in on your investment.

When considering this strategy, it is essential to look at all possible expenses. You will have a mortgage, taxes, and insurance to pay for and maintenance, HOA fees, as well as renovation fees, depending on how long you hold on to the property. We have probably all heard of nightmare tenants who trash their rental units, so being prepared to have to clean up after a bad tenant is also a cost to plan for.

Property Flipping

House flipping has become a trendy way to invest in real estate. Despite being glamorized on television shows, it can be a very challenging process. If you are willing to take on the risk of flipping a house, there are some things to consider.

Flipping is a numbers game, and you need to learn how to play it. Knowing an area’s comps and the costs of repairs is extremely important when looking for a property to flip Flippers use something called the 70% rule, which states that an investor should pay no more than 70% of the after-repair value of a property minus the repairs needed.

In order to maximize profits, you need to be able to work extremely quickly. Time is money when it comes to house flipping, and the longer it takes you to get the house into perfect condition, the more money it will cost you. 

Wholesale

Wholesaling properties is not as widely known as the other strategies but could have a big payoff for you as an investor. As a wholesale investor, you usually do not ever own any property. How it works is, you, the wholesaler, will find properties at a reasonable price and make a deal with the owner to purchase the property. You will then sell your contract to a buyer who will move forward with the purchase of the property. The goal is to get the new seller to pay more than you and the seller had agreed to, and you would then get to keep the difference. Essentially, you would work as a middle-man between the seller and the new buyer. 

Wholesaling is an excellent way for a beginner to get started in real estate investment because there is little to no initial investment cost. It is also a great way to build up a real estate network since you will be seeking buyers from other real estate agents.

Now that you are familiar with the different investment strategies, it is a good idea to decide what you will be investing in. There are many options when it comes to real estate investing, some you have heard of, some that are less known. You do not need to know everything about each option but should have a basic understanding of what you’re getting into.

Commercial Property

Commercial real estate investment can be a lucrative investment and provides you with many options. There are different categories based on usage to choose from; industrial, office, and retail, which can be further broken down into classes based upon age and condition.

A commercial lease can last anywhere from 1 to 10 years, making a commercial property great for a long-term hold strategy. Commercial Real Estate Investments have historically provided excellent appreciation in value. Properties generally increase in value from wise management choices such as making cost-effective improvements to the property that improves the usability and desirability along with market conditions like supply and demand imbalances.

There are, however, some risks to consider before purchasing commercial property. Turnover can be costly for commercial real estate owners since each new tenant will want to tailor the space to meet their needs. Taking a space from a hair salon to a coffee joint can cost a lot of money in time and renovations. Maintenance costs can also be exorbitant, depending on the size of your building. Replacing a cooling system in a large industrial building, for example, could cost you tens of thousands of dollars. 

Working out the terms of a commercial lease can be a little tricky as well. Taxes and maintenance responsibilities for commercial properties are often subject to extensive negotiations and legal regulations. These requirements vary according to state, county, industry, size, zoning, and many other designations. Overall, investing in commercial real estate requires a lot of research and knowledge about the local area and its regulations but can be an excellent opportunity to make money.

Single-Family Homes

Single-family homes are probably the most well-known type of real estate investment and most widely acquired by first-time investors. In fact, one-third of all real estate investments are single-family homes. They are arguably the most accessible piece of real estate to finance, rent, and sell.

Single-family homes can also appreciate in value very quickly, which gives you the ability to take your equity and put it into the acquisition of another property, helping you build a real estate empire!

On the downside, single-family homes can come with unreliable tenants who are protected by the land-lord tenant act.  It can be a difficult process to evict a tenant or recoup money for damages incurred while they were living on the property.  It is also risky because many tenants prefer to sign year long leases which means every twelve months you will be on the hunt for a new tenant. Having an empty property means you are not bringing in any money. 

Apartments and Other Multi-Family Units

There is a bit more risk involved in purchasing a multi-family unit, but with greater risk comes greater reward. There are many options when it comes to multi-family units. You can buy small with a duplex or triplex or go big with an entire apartment complex.  

One great thing to consider about a small multi-family property is that most lenders will identify this as a single-family home when obtaining financing, which makes the process much easier. A small multi-family property is classified as a property with five or fewer units. They can also be priced similarly to single-family homes, but can potentially bring in more rental income since there are more units. 

Apartment buildings require a lot more money and time and are a big investment. The costs of owning an apartment building include the initial capital requirement and managing an apartment building requires more involvement and management, You will be dealing with tenant turnover, leasing paperwork, and addressing maintenance issues on a much larger scale than you would with a single-family home or small multi-family unit. 

Calculating your return on multi-family units can be difficult since there is more room for tenant turnover and maintenance issues. Depending on the number of units, having a property manager will be essential unless you plan on making this your full-time job. Managing multi-family property also makes it unlikely that you will have a month with no cash flow like you could in the case of a single-family property. When a single family home sits vacant, the owner must absorb all related costs without any income until the property is filled. When it comes to an apartment complex, the chances of every single unit being vacant is extremely unlikely.  So while you may not always be operating at maximum capacity, you should at least have enough revenue coming in to cover expenses. 

Real Estate Investment Trusts (REIT)

Investing in a REIT is different from the other options but could still prove lucrative. 

A REIT is where a group of people pool their money to invest in real estate projects. These projects are usually massive undertakings like substantial commercial buildings like hotels. REITs could even fund a major home developer who will be developing a new subdivision. REITs own and manage income-producing commercial real estate, whether it’s the properties themselves or the mortgages on those properties. The three-year average for returns on REITs between November 2017 and November 2020, 11.25% which is much higher than most other stocks or funds a person can invest in. You can invest in the companies individually through an exchange-traded fund or a mutual fund.

As with any investment, there is risk involved. Some REITs are better than others, so it is important to look at what projects your desired REIT is working on and how much debt they have acquired. Since the world is shifting and commercial spaces are not as prevalent and successful as they used to be, investing in commercial projects is also risky. With an unknown future, some are shying away from REITs and commercial investments if they are retail spaces. 

So, while investing in a REIT does not actually make you a property owner, it could still yield high returns and is a great idea for someone who may not want to tackle other real estate investments’ responsibilities. 

Raw Land

Raw land is another form of real estate you can invest in. You could use some of the strategies listed above to maximize your investment. You do have to do a lot of research when purchasing raw land, especially if you intend to develop that land. In most cases, raw land is already zoned for a specific use, and to change that use could take years and a lot of headaches. In most cases, you will have to pay for the land in cash since it is extremely difficult to finance land.

That being said, there are so many pros to investing in raw land.  Bill Gates invests in raw land, so why shouldn’t you? His intentions may be different from yours, as is the amount of money he can risk, but still investing in raw land can turn some huge profits. You could subdivide the land to build homes or even hold on to it with hopes to eventually sell it to the state to build something like a highway expansion. Again, you have to be very strategic and look at the areas’ long-term development plans and zoning laws before making such an investment. Still, the good news is raw land usually sits on the market for long periods of time, so you have plenty of time to decide if the plot of land you are considering would be a good investment.

Manufactured Homes

Yes, you can invest in manufactured homes and receive a pretty solid return while doing so. A few reasons you may consider investing in them are:

• Less competition than single-family homes
• Lower taxes
• Lower initial investment
• Always in demand

There are few different options when considering a manufactured home like the size, single or double, and the way you take ownership. You have the possibility to own the land the manufactured home sits on instead of the house itself, which tends to bring in more cash each month with less risk. This is an easy way to invest since you are not responsible for anything inside the house, like utilities or maintenance. You could decide you want to own all of it, the land and the home, which is much more expensive but also creates more cash flow for you.

There are some legal regulations on how manufactured homes can be bought and sold as well as the land they sit on.  It is important to do your due diligence before purchasing anything in order to avoid unexpected costs. 

Whether you are interested in investing in either the manufactured home, the land it sits on, or both, you could use the buy and hold, flip, or wholesale investment strategies on this type of investment. 

Tax Liens

Buying tax liens are another risky area to invest in and require quite a bit of expertise. Each city and state has different rules on how to purchase tax liens, so be sure to check out what to do in your specific state. 

For example, in Arizona, which has some of the most tax lien sales in the country, the county government is able to place a lien on a property after three years of not paying property taxes. These liens get auctioned off each February, but to become eligible to place a bid, the potential investor has to register and put down a deposit beforehand. The bidding process is kind of funny; they start high, and the lowest bidder wins. Actually taking ownership of the property takes time and may not even happen. The property owner can pay you back their delinquent taxes plus fees and reclaim ownership of the property. If the lien remains unpaid for three years from the date of the sale, you can foreclose the lien in a judicial sale. 

You may require an attorney’s assistance to formally file a foreclosure in court. You can also recover your attorney’s fees and costs associated with the foreclosure in certain circumstances. However, don’t delay. The tax lien expires after ten years from the date of sale.

It’s Up To You Now

Hopefully you now understand what types of properties are available to invest in and what strategy you would like to partake in. Real estate investment can yield some huge returns, but you need to have a good idea of how the processes work before entering into an agreement. You will have to put in work by way of research, money, and dealing with tenants if you choose to go that route. Savvy real estate investments can lead to a life of financial freedom and pass wealth on for generations to come!