The Top 11 Real Estate Investment Strategies
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There are many ways to earn passive income through real estate investing. Since you are reading this, I am sure that you are trying to learn what are the best options for passive income.
In this article, I have provided a brief explanation of what I believe are the top 11 best strategies for investing in real estate. So, read below and select the strategy or strategies that best suit you, your strengths, and your goals. Understand that you don’t have to stick with only one strategy. Many people start out with one and either move into another or use multiple strategies to achieve their goals.
I hope that this article provides a great launching pad for your real estate investing adventure.
Single Family Residences
Single family rental properties are by far the easiest to get started with. All you have to do is to find a market to buy properties in and start searching the local multi-listing service for a property that meets your requirements. Buy it, find and hire a property management company to manage it, and sit back and collect the rents each month! While at a high level, this is true, there is a bit more to the financial analysis that you must go through to make sure that your investment will make money for you. You can get started by downloading my free SFR Underwriting Template (coming soon).
Multifamily properties include duplexes, triplexes, 4-plexes and larger. Properties with 2 to 4 units are considered residential and can be purchased similarly as single-family residences. Properties with 5 or more units are considered commercial properties; thus, these are a bit more difficult to find and purchase since they require commercial loans for financing. The underwriting is also more involved and includes many other details which we won’t go into here.
In the context of real estate investing, “House Hacking” means that you purchase a property in which you live in while you also rent out part of the property. The most common types of properties used for house hacking are duplexes, triplexes and 4-plexes! However, it is possible to house hack a single-family residence by renting out individual bedrooms. You can learn more by reading my article titled: The Official House Hacking Guide – How to “Hack” Your House (Live for Free) and Start Investing in Real Estate.
Syndication is a way to facilitate real estate investments in large multi-family and commercial properties. Essentially, several investors pool their money in to a company to buy real estate; each investor owns an equity share in the company based on the amount of their investment. A syndication is usually led by one or more sponsors, who will manage the purchase transaction, and oversee the daily operations and distribute profits to investors on a quarterly scheduled proportionate to their investment or ownership in the company. For finding and orchestrating the deal, the sponsor will usually retain an equity share in the company even though he/she may not invest any of his own money. This is only one of the many ways that a sponsor makes money from a syndication. This can be another effective strategy to invest in large real estate properties using other peoples’ money. However, as with all types of investments, there are risks to syndication. Please consult with a competent SEC attorney before venturing down this path.
Passive investing occurs when you are the investor in a syndication deal and someone else is the sponsor. Since you are a passive investor, you will not have any control over the daily operations of the property as well as major decisions taken by the sponsor(s). This can be another effective strategy to invest in real estate without owning or managing any properties. However, as with all types of investments, there are risks to investing in syndications. Please make sure that you carefully research the sponsor and his background before investing.
Private lending also known as hard money lending can be another lucrative investment strategy. A private lender is
defined as a person or a company (not a financial institution or a bank) that loans money to individuals or other companies for the purpose of purchasing investment real estate. Like traditional mortgages, these private loans are also secured by a promissory note (see investing in notes below) and a mortgage agreement or a deed of trust. However, private lending usually starts with borrowing from or lending to family and friends.
Flipping and Wholesaling
Flipping is the term used to buy properties for lower than their market value and resell at a higher price, usually to someone who wants to live in it. These properties are usually in good condition and can be sold with little or no repairs needed. You have the potential to make a lot of money on each deal.
Similarly, wholesaling also involves buying properties at a discount. However, the difference here is that you are selling to other investors who will most likely repair and rent or resell the property. These properties usually require some form of repairs. In this case, you will make less money on each deal, but have the potential to move properties faster thus making more money over time.
The trick to both flipping and wholesaling is finding properties to purchase below current market value using various methods such as probate lists, tax delinquent lists, driving for dollars, and out of state owners.
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. The goal here is to find a property that needs repairs which you can buy for less than the full value. You obtain a short-term loan to purchase and repair it. Once it is fixed up and rented, you can refinance into a permanent or a long-term loan, which should allow you to get back most or all your initial cash. If you buy at the right price, you can repeat this over and over, almost infinitely. This strategy is most commonly used with single-family, duplex, triplex and 4-plex properties. To learn more, I recommend reading: Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple.
Investing in Notes
Notes are simply the promise to pay. When a mortgage or a loan is obtained to purchase a property, the borrower must sign a promissory note, which defines the terms of the loan, including the loan amount, percentage rate, payment amount, the number, frequency, and timing of payments, late payment penalties, etc. A note is usually secured by a mortgage agreement which protects the lender by providing a lien on the property used as collateral for the note. If the borrower fails to pay the note according to the terms, the lender may foreclose on the property to recover the funds according to the terms in the mortgage agreement.
There are two major types of notes. Performing notes and non-performing notes. Performing notes are those on which the borrower is making regular payments according to the agreements. Investors will purchase these to receive a monthly payment and earn money via the interest paid each month.
Other the other hand, non-performing notes are notes in which the borrower has stopped making payments; hence, the term non-performing. These are usually owned by banks that have chosen to sell them to investors instead of incurring the expense of foreclosure. Because these notes are non-performing, they can be bought at a steep discount to principal balance. Investors will usually have several strategies to recover or exit from these notes with a profit. We won’t get into these here, but you can learn more by reading my article on non-performing note exit strategies (coming soon).
Note investing is like purchasing a rental property but without the headaches of tenants and property repairs. However, this type of investment strategy comes with its own set of risks. Therefore, you should learn as much as you can before investing in notes.
A student housing property is like a multifamily property. However, there are a few differences. First, the property must be located near to a major university. Second, it must be built with the intention to rent by-the-bedroom to students. This usually means that each bedroom will have its own bathroom attached to it. Third, most cities have specific permitting procedures before you can rent by-the-bedroom. Fourth, you will have to provide basic furniture in each unit. Finally, since your tenants are students, you can expect to have high turnover each year as well as increased maintenance costs. However, if done well and managed properly, this can be a very profitable strategy.
The acronym “REIT” stands for real estate investment trust and is sometimes called “real estate stock.” In summary, a REIT is a company that invests in a real estate. REITs can own and manage several types of real estate. Some focus on single-family houses, while others focus on large apartments buildings or student housing or shopping centers and shopping malls. Many REITs publicly traded companies. However, there are also private REITs. REITs make money from the properties they buy and rent or lease or by selling them at a profit. 90 percent of the taxable income generated by REITs must be distributed to the shareholders on a regular basis. As an investor, you can earn returns from real estate without dealing with any of the headaches of rental properties. Also, if you invest in publicly traded REITs, you can cash out at any time by simply selling your shares on the stock market. This is attractive as your investment is much more liquid than investing directly in rental properties. However, as with all types of investments, there are risks to REIT investing since you do not have no control in which type or properties or where the REIT invests. Bad investments can lead to losses which can reduce share prices of publicly traded REITs and REIT bankruptcy.
Having read through the top 11 real estate investing strategies, leaves you with a lot of options. These are the different options to get to your goal of passive income using real estate. Keep in mind that you do not have to limit yourself to any single strategy. Many investors will use more than one of these to achieve their passive income goals. Each of these comes with its own set of unique risks and rewards. Not all of these are suitable for everyone so think about your passive income goals and select the strategy that best suits you.
While these are the top 11 in my opinion, there are many more strategies to using real estate for passive income, some of which are variations of this list. See my helpful resources page for more reading material. This will increase your chances of success and achieving financial freedom.
I wish you the best of luck with your own real estate investing adventures regardless of which strategy you select!