Are you a rookie real estate investor that’s looking to get started investing in real estate? We’ve put together this list of the best real estate investing strategies that will help pinpoint the best strategy for you.
This article covers flipping, house hacking, long-term buy and hold, nomad, and many other real estate investing strategies.
Why Invest In Real Estate?
There are multiple ways to make money and build wealth with real estate. You can quickly boost your net worth by selecting good rental properties in growth areas. Here’s a quick list that shows a few upsides to investing in real estate.
- Appreciation – You gain equity over time as you hold the property. Some markets and neighborhoods will appreciate much more rapidly than others.
- Principal Paydown – The tenants will cover the mortgage cost and thus pay down the principal on the loan.
- Cash Flow – Buying cash-flowing rentals allows you to save more money to purchase more properties.
Why Selecting The Best Real Estate Investing Strategies Matter
Selecting a real estate investing strategy is important to keep you focused in the beginning. It’s very easy to get shiny object syndrome and try to chase down deals that don’t fall within your strategy. You will want to be very focused on what areas and property types are a good fit for you.
Your strategy can change down the road when you’ve got some equity and experience. You might want to trade up from single-family homes and small multifamily to apartment buildings.
Real Estate Investing Strategies
Long-Term Buy And Hold
This is a great strategy if you want to build wealth over time. With this strategy, you will be building up a portfolio and holding on to those properties for long periods of time. There are a ton of tax advantages that you can leverage when you hold properties over long periods of time. You can use the trade-up strategy to keep growing your portfolio or the mortgage snowball method to pay off your properties to increase cash flow.
Decide if you will be going after single-family homes, small multifamily, condos/townhomes, or larger multifamily. Remember you can always start small and trade up to larger properties in the future.
Flipping can be one of the most highly rewarding real estate investing strategies. It’s also one of the riskiest and stressful. Doing a flip involves purchasing a distressed or outdated property and rehabbing it to bring it up to modern standards. You’ll have to hire out the rehab or do it yourself. If you already have remodeling experience, you might be able to generate larger profits by doing some or all of the work yourself.
I haven’t done a flip myself, but I’ve heard that many new flippers don’t make much on their first flip. That’s ok though! After doing one flip, you’ll have a better understanding of how to estimate costs and budget for your next flip.
Flipping can take quite a bit of time and effort but can be an excellent way to build up some quick capital. You can use all of your profits to continue to buy more homes to flip, to begin purchasing your own rental properties, or to generate more income.
Vacation rentals are awesome if you live in or near a travel destination. Some vacation rentals can more than double the cash flow versus renting the property to a full-time tenant.
To begin you will need to dedicate an entire property or some extra space in your home. The vacation rental needs to be furnished and should provide similar amenities to a nice hotel. The highest-rated vacation rentals have tons of charm and character. They also have amazing hosts! Strive for that Superhost status to run a highly profitable vacation rental.
Vacation rentals can also be quite a bit of work. You’ll have to decide if you will be managing and cleaning it yourself or outsourcing those tasks. Run the numbers on both scenarios to get an idea of which one works best for you. Consider running a medium-term vacation rental to avoid having to clean and turn the property over every few days.
House hacking is one of the best real estate investing strategies for a beginner investor! This involves renting out spare rooms or space in your existing home to help cover your mortgage.
The true power of housing hacking lies within the financing. You are able to put down as little as 3.5% with an FHA loan or 5% with a conventional loan to purchase a property. This allows you to purchase properties with a smaller down payment as your primary residence.
With the lower down payment, you will be able to keep more money in your pocket for purchasing other investment properties. You can repeat this process to get your rental portfolio started.
Renting by the room can become quite a bit of work. You might have trouble finding a property manager that will manage properties that are rented by the room. Always have a fallback option to turn the property into a full-time rental, vacation rental, or consider selling it later on.
Be sure to run the numbers and find out what you can charge for renting by the room. Some property types might work better in your location than others. Connect with other house hackers in your area to find out how they finding successful house hacks.
Here are a few examples of house hacking strategies.
- Purchase A Single-Family Home And Rent Extra Rooms – This technique can work well in an expensive market like mine in Denver, Colorado. Try to completely offset your personal housing costs by renting out multiple rooms.
- Small Multifamily (2-4 units) – Purchase a duplex, triplex, or quadruplex and live in one unit while renting the others. Repeat this process every few years to build up a portfolio of small multifamily properties. Make sure to have a plan to self-manage or hire a property manager. You can still get FHA or Conventional financing for anything with 4 units or smaller.
BRRRR – Buy, Rehab, Rent, Refinance, Repeat
The BRRRR strategy works well with scaling your rental portfolio quickly. The concept of BRRRR is to purchase a discounted property and rehab it to comparable homes within that specific rental market. Once the rehab is done, you rent the property and refinance to try and recoup all of the initial investment capital. This process is repeatable and you can use the same money over and over again.
There are a ton of moving parts to a BRRRR. You will need to do plenty of research before trying to pull one off for yourself.
Purchase Price + Rehab & Other Costs(closing costs, holding costs) = 75% of After Repair Value
After Repair Value is the value of the home after you finished the rehab. Find what comparable properties are selling for your targeted area to get a good idea of your expected ARV. Make sure that these properties are very similar in size, rooms, baths, neighborhood, and have the same type of renovation.
- Find A Discounted Property/Run The Numbers – Work with real estate agents, wholesalers, or do your own marketing to find a discounted property. For this example, we get a property sent to us from a wholesaler that’s asking $80,0000 for a single-family home. It needs a medium-level rehab. We do some quick research on the neighborhood and market to find that similar properties are selling for $150,000. We will use that $150,000 as our target ARV. After walking the property we determine that it needs $30,000 in rehab costs.
- Rehab The Property – You do some of the rehab work yourself and hiring out the rest. You end up nailing your $30000 renovation budget. It’s a good practice to have an extra 10% – 20% set aside in case you do blow up the renovation budget.
- Rent The Property – The newly updated property rents for $1500 a month.
- Refinance – Your appraisal comes in at the projected $150,000. Now you refinance the property for 75% of the current value. The new loan is for 120,000 after accounting for closing costs and fees. Your new payment would be around $600 – $650. This property will cash flow at least $200 a month after paying the mortgage, insurance, property taxes, saving for maintenance, property management, and capital expenditures.
- Repeat – You now have all of the money back in your pocket from the original purchase and the rehab. You now have a rental property that has $37500 in equity and cash flows nicely. Take that money from the cash-out refinance and repeat the process.
Even if you leave some of your own money in the deal a BRRRR can still be a success. Let’s say that you go $10,000 over your rehab budget. You’ve now left that money in the property and can’t refinance it out. That’s still an amazing deal with an ROI of 25%!
Work closely with the lender that will refinance the property. They may have certain rules and timelines around the refinance. You want to be fully prepared and have a complete plan from A to Z when attempting a BRRRR.
Nomad / Live-In Then Rent
An investor can use the nomad strategy to take advantage of lower down payments by purchasing a primary residence and then turning it into a rental property later when they purchase a new home.
The Nomad strategy is what my wife and I are using to purchase properties where we live. Single-family homes run $400k – $500k in Arvada, Colorado. So we’ve decided to utilize the 5% down conventional loans and purchase a new primary residence every few years. We then will turn our previous home into a full-time rental or vacation rental depending on the location.
This is another good strategy for getting started but isn’t very scalable. Unless you are younger, you’ll probably only do this with 3 or 4 properties.
Check out this article on how we used a HELOC to turn our first home into our first rental.
This tactic combines flipping while living in the home. You would want to live in the property for at least 2 years to take advantage of tax breaks on capital gains. You will also be able to utilize low down payments with FHA or Conventional loans with a live-in flip.
If you have construction or remodeling experience this can be a great option. The downside is that your home will always be a construction zone! You can build great wealth using this strategy though.
Turnkey providers offer updated investment properties with tenants and management already in place. This type of real estate investing is very passive. Turnkey investing may be good for you if the market you live in is super expensive. With turnkey, you can spend less money on purchasing real estate in other markets that still fit within your investing criteria.
Be sure to run your own numbers when considering investing in turnkey properties. Turnkey providers will give you their numbers but sometimes they don’t account for everything that you will when running your own numbers.
I’m considering purchasing some turnkey properties in markets outside of Denver, Colorado due to the high housing costs.
Do you already have marketing experience or are you good with sales? If so, wholesaling might be for you.
Wholesaling involves using different techniques to find distressed and motivated sellers. Every market has these types of homes that can’t sell on the MLS. Your job would be to find these properties and get them under contract to either purchase for yourself or sell to another investor.
This can be a great way to build up some cash to put towards purchasing your own rental properties. The hardest thing in real estate is finding great deals. This is exactly what a wholesaler does! You can always find a buyer if you have a great deal.
Here are a few examples of wholesaling marketing techniques:
- Direct Mail – You can send personalized mail/flyers to target areas or audiences to find potential sellers. Have you ever received a piece of mail with the text, “We buy ugly homes” or “We buy houses fast”? Those are likely from wholesalers.
- SMS Blasts – Send text messages to a specific list of homeowners that fit your criteria.
- Door Knocking – This is one of the oldest but most effective ways to find sellers. You will hear a ton of no’s but if you do find a prospective seller you have the advantage of building face-to-face rapport.
- Driving For Dollars – This is one of our favorite ways to find deals. All you need is a car, a tank of gas, and something to take notes with. You drive around in targeted neighborhoods and take down the addresses of homes that look neglected or distressed. You use the address to skip trace the owner and contact them to see if they are interested in selling.
A REIT is a real estate investment trust. These companies have shares that you can purchase just like other stocks. These companies typically have large portfolios spread across different types of real estate. Some REITs work directly with other large companies to rent those companies’ space.
This is another strong option if you want a more passive approach to real estate investing. However, you don’t get all of the benefits that come with owning your own property.
Real Estate Crowdfunding
Crowdfunding allows you to pool your money together with other investors to invest in real estate. This gives you more control of the type of investment property that you will invest in. It’s also very passive like REITs.
Just like with REIT investing, you don’t have to worry about tenants, property managers, or needing to come up with cash to fix maintenance issues.
Your money may need to be locked up for a long period of time to fully take advantage of this type of real estate investment.
Wrapping Up Real Estate Investing Strategies
There are numerous ways to build wealth and generate extra income within real estate investing. We hope that this article gives you a good view of the different types of real estate investing strategies that you could leverage.
There are some other strategies that we didn’t cover in this article. We left these off of our list because we wanted to target real estate investing strategies that are easy to get started with. Here are a few other real estate investing strategies, flipping land, commercial real estate investing, and mid/large multifamily.
Remember that there is no one-size-fits-all strategy for real estate investing. You can pick parts from certain strategies and create your own. Also, try to combine multiple strategies to fast-track your path to financial freedom.
What are the right real estate investing strategies for you?
Hi, I’m Richard. I’m passionate about figuring out how to make my money work for me and getting outdoors into mother nature.