Whenever someone is considering a career in real estate investing, they likely start out thinking about the future. What will success look like? What is a good 10-year-plan? What do I need to do to see a positive return? This is all really important, but in my experience, people often forget to look at what comes before the future—the present.
Before investing in real estate, you have to look at it as a series of decisions, steps, and actions to take in order to answer those initial questions. There are a few different ways you can choose to invest in real estate, but the best way to start investing in real estate is by choosing a strategy that fits your lifestyle.
That means understanding what you can do, what the smartest move is for you at the moment, and how you can build towards that planned-upon future. Each decision you make today influences tomorrow. Your job, when starting out, is to match your commitment, your abilities, and your goals.
I always urge people who are starting out to do what I did: investigate all the different options, look at what you have in front of you and figure out which path (or paths) is right for you. That’s the best way to make sure that you are on the path toward the future in real estate investing that you’ve dreamed about.
Developing Your Real Estate Investing Strategy
If you’re asking yourself if investing in real estate is worth it, you should think deeply about what you value. This is a business that involves investment, potential risks, and one that requires a lot of effort.
So when you’re starting out, you want to take inventory of your assets, both literal and intangible. Here are a few things to consider.
- Capital: No matter how you choose to invest in real estate, you’re going to need capital. You’ll likely have to use some of your own money. But, there are loans that you may be able to qualify for to assist in purchasing your real estate investment. Many loans require you have a certain percentage of cash to put up in order to be approved. This may be especially true if you’re just starting out.
- Credit: Many avenues of real estate investing are credit-heavy businesses. You have to buy material, pay contractors, pay bills, and of course buy the property. Your credit can also determine the rates you get on loans (though, if you have been in the industry a while, a good track record can override poor credit). Having bad credit doesn’t preclude getting into this business by any stretch, but it might influence your choice of investment strategy.
- Time: Is this going to be a full-time business for you? Is it part-time? Are you exploring real estate investing as part of your retirement strategy? There are different types of investments that require various amounts of time and effort. You have to be honest with yourself about your ability to commit time.
- Connections: Real estate investing is a people-oriented business. Depending on what kind of investment you take on, you may need to know the right investing groups, the best contractors, or a network of people looking to buy. Having the right connections could be critical to your business.
- Knowledge: Like everything else, real estate investing requires knowledge to do right. Is this a good fund? Is this an up-and-coming neighborhood? Is this a fair price? How do I make sure my spending is on track? Some of this comes with experience, some of it comes with training. Do you have the space to learn? Do you have a way of receiving training? What is your learning curve
- Goals: Simply put, what are you trying to do? Are you trying to supplement your income? Start a new career? Be your own boss? You don’t have to have a perfectly detailed 10-yr-plan, but it is good to know what you hope to accomplish by investing in real estate—both professionally and personally.
There are no right or wrong answers to these questions. It’s a way to take stock of how comfortable you feel beginning a career in real estate investing. The different types of real estate investment strategies have different requirements and objectives. How you take inventory can and should influence your decisions moving forward.
3 Types of Real Estate Investment Strategies to Explore
There are many avenues when it comes to investing in real estate. And, you don’t have to choose one way over another. But, you must find the real estate investment strategy that is aligned with the goals you hope to achieve.
As a real estate investor for more than 20 years, I’ve come across many avenues to invest in real estate—some worked out and some didn’t. Here, I’ve compiled a list of commitments and possible outcomes of three popular real estate investment strategies that I’ve come across in my experience.
1. Rental Properties
Rental properties are a great source of passive income. In this, you buy a house or a multi-family unit, and rent it out. The theory behind this strategy is that what you charge for rent is enough to pay the mortgage, taxes, and all other upkeep costs, with enough left over to actually generate income.
Renting out a property is also a good way to enact a “buy-and-hold” strategy. In this, you hold a property for a few years before selling it. You might do this because you bought a house in an up-and-coming neighborhood that hasn’t quite reached its peak yet, or because you bought at the nadir of a market and are waiting for it to rebound. Using the house as a rental is a good way to generate income while waiting for your long-term plan to play out.
To understand the commitments and possible outcomes of rental properties, let’s look at the two main types of management—active and passive.
Active Rental Management
Are you the type of person who loves fixing things? Are you someone who wants to get down-and-dirty with repairs? If so, being an active landlord can be worth it for you, and be a fun and exciting challenge.
- Time: You have to be there to do repairs and solve problems right away. Not only is that your regulatory duty, but your rental success depends on your reputation.
- Skill: Some people can see a broken furnace and fix it, and others need to call a specialist for assistance. If you’re the latter, do you have the income to pay someone to fix the issue? If you can do it yourself, how does that impact your time commitment?
- Proximity: It goes without saying that if you are going to be an active landlord you have to be close enough to the property to manage it. That doesn’t have to be a problem, but it also can be limiting to your overall investment strategy.
- Steady income
- Better relationships with renters (potentially leading to long-term rentals)
- Knowledge and experience. The more hands-on you are, the better you become, giving you more flexibility as you move forward in your career.
Passive Rental Management
This is where you hire someone to manage your property, do repairs and upkeeps, and handle most (if not all) of the logistical/personal interactions with renters, including marketing, leases, and other legal issues. This is a common path if investing is not your full-time job.
- Cost: Depending on how many properties you own, this may or may not be a full-time position. You may need to hire someone who is on-call or someone who is always working—that can add a lot of costs (and a lot of paperwork).
- More time to spend on other ventures (or your full-time job)
- Less experience and education in the industry
No matter what, you have to know how to evaluate property, establish rent, and pay enough attention to your property and/or your property manager to retain your reputation and avoid legal snafus.
Residential income property is a great strategy for people who are getting started, have other time commitments, and are ready to learn. This can turn into an incredible career in rental property investing and provide you with a steady source of income.
2. Real Estate Investment Trusts (REITs)
REITs are a fairly new investment product that, at their best, democratizes the sometimes-lofty world of high-end real estate investing. Essentially, you buy stock from a company that buys, builds, develops, or manages real estate on a large scale. If that project is successful, you benefit. In many ways, it is exactly like buying stock in any other industry.
The exciting thing about REITs is that they give you an entry point into projects that you might not be able to be involved in, otherwise. I don’t know about you, but I’m not looking at huge former industrial parks and turning them into mixed-use developments. That’s a bit outside my residential property inventory. But I don’t mind investing in a massive municipal project.
Now, in this situation, you aren’t required to make a large investment. There are large REITs, small REITs, and public and private REITs. There are also targeted ones that look at community reinvestment and through which you can direct your investments.
- Liquidity: Obviously, to invest, you need to buy. You don’t set the share price, and you can’t really negotiate. If a share is $50, you need $50 for one share. It’s usually a lot more complicated than that, of course. Different higher-end firms have much higher minimum buy-ins. So you need to have enough liquid capital to meet the buy-in.
- Insight: Not all REITs are created equal. You don’t want to just give money to anyone. Because you can lose this just as easily, it is incumbent upon you to learn how it works, research the market, study their investments, their history, and their terms. Otherwise, you’re just writing a check and crossing your fingers.
- Trust: This may be tricky because you’re hoping the investment pays off. This is no different than any other kind of stock-buying of course, and all investing has risks. But you have to trust that you are buying the right stocks.
- Control: You don’t have any. You might not even get to pick which properties you’re investing in. If that doesn’t bother you, great!
- Passive Income: In theory, if it works, you’ll have dividends coming in. Depending on how much you’ve invested, these could be sizeable. But as long as your investment isn’t losing money, it is essentially no harm, no foul. (That’s an “if”, of course.)
- Time: Ideally, you’re going to need time to conduct research, but otherwise, this is about as passive as it gets.
- Taxes: REITs are not “qualified dividends” which means you’ll be taxed on them as you would any normal income. This might not be a big deal, but you aren’t getting some kind of great inside deal by investing in REITs.
- Uncertainty: The market is volatile. The REIT could be part of a huge investment firm and your deal could be impacted by a million things out of your control. It’s not a sure thing. Granted, nothing is, but you have to be prepared for that.
Investing in REITs is a good way to learn about how real estate works. It’s very hands-off and very impersonal, but if you have almost no time, and want to test the waters, it may be an option to consider.
3. Actively Buying and Selling Houses
There are two primary ways to buy and sell houses as a real estate investment strategy:
- Wholesale: Where you buy a house and immediately sell it to another investor
- Fix-and-Flip: Where you do work on the house in order to sell it for significantly more than you paid
I’m going to focus on the second way, although wholesaling houses involves a lot of these same principles.
Fix-and-flipping is probably the best-known idea of real estate investing. It’s when you buy a property, repair it, and then sell it at a higher margin. To be clear, this is almost never a “get rich quick” approach like it is on TV. It’s about building up your business, making smart investments, and being consistent in changing markets.
- Time: Time is going to be a huge commitment. You have to find the houses, buy them, fix them (though a lot of the time you’ll be paying contractors), and sell them. If this is your full-time job, you’ll likely always be looking for leads, and in theory, you’ll have several projects in various stages of the pipeline at any time.
- Capital: This is another cash-friendly business. If you find a good deal, you want to able to get it, quickly. That means finding the right lender who can work with you.
- Knowledge and Experience: What makes a good market? What is the ARV going to be? Is this neighborhood about to become popular? What kind of work do I need to put into this? Who are the right people to call? Most importantly, what is my exit plan to make a sale? These answers come with experience, but being able to get training and guidance is immeasurably helpful.
- Income: If done right, this strategy can be very beneficial.
- Control: You pick the houses, you decide how much work you’re doing, and you set your price. You make all the decisions in this business. It’s exciting and liberating. There isn’t some distant VP in some corporate hierarchy to tell you not to make a move.
- Security: There are no sure things in life or in business. But there is almost always a demand for rehabbed homes. And since you get to decide on your own exit strategy, you are not as much at the whims of other market forces or decisions made outside your control.
Is flipping houses easy? No. Is there one big trick like it’s portrayed to be on TV? Absolutely not. It’s hard, steady, work. But if you are like me and value control, excitement, variety, and possibility, then flipping houses for a living could be your best career move.
You just have to do it the right way.
The Best Way to Start Investing in Real Estate
Maybe REITs appeal the most to you. That’s great; just make sure you are educating yourself on the steps involved. But for some people, just buying stocks isn’t enough. Some people want to get their hands dirty, sometimes literally. I know I do, and for others like me, I tell them to look into becoming an independently owned and operated HomeVestors® franchise.
HomeVestors® is a nationally-known company with a nationally-known marketing slogan, “We Buy Ugly Houses®”. People who need to sell fast remember that national brand and can call me. It takes the tracking down leads part off of my plate.
And, when you become a franchisee, they have comprehensive training and lifelong mentorship programs. You can learn while getting experience, and have a great network of experts to talk to (and who might want to buy your properties). They also have proprietary tools to help you evaluate properties, figure out the ARV, and get connected with hard money lenders to find the best rate.
The moves you make now determine your future. As you begin to look at the best way to start investing in real estate, find out how you can remove obstacles. If you have support in terms of time, capital, and education, you can do more. If you want to do more, request information about becoming a franchisee today. It’s a way to open doors to a new career.
Each franchise office is independently owned and operated.