11 Real estate investment strategies you need to know in 2021
Investing in the real estate market is an excellent alternative to other forms of investment.
To begin with, real estate has a low correlation with the stock market, which means it suffers less from volatility. You also enjoy more tax breaks that other types of investments simply lack.
Finally, if you build a portfolio of geographically diverse assets, you can become a more resilient investor capable of weathering various storms. Let’s take a look at the many different investment strategies available to you.
1. Invest in rental properties
So long as you have good tenants, you should enjoy stable passive income. For this reason, screening to ensure successful residents for your rental property is an essential skill in the real estate industry. It goes part and parcel with performing gestures to show tenant appreciation and knowing how to write a great rental listing. This way, you can start with tenants who are more likely to stick around and can make them feel adequately valued so they’re more likely to stay in your investment property year after year.
To ensure that your real estate business remains a passive investment opportunity, you can use a property management company. For 6 to 12% of the collected rental income, a property management company will handle everything from tenant screening and security deposits to maintenance between tenants and even evictions. When conducting your due diligence, make sure to get a breakdown of every fee the property management company may charge as well as all the costs associated with your property.
Knowing which amenities to offer tenants and how to correctly price rent relative to the market is also essential. Too few amenities and rent that’s too high, and you’ll end up with vacancies.
2. Buying and holding properties
Buying and holding is also known as rehabbing. To make this strategy work, you want to perform just enough rehab to rent your property and no more.
The underlying idea is that properties will always appreciate over time. And, as a result, you get to enjoy the benefits of a steady income flow as well as your property going up in price. Excessive rehab only eats into your profits!
In addition to a regular income flow and appreciation, the more of your real estate you own, the greater leeway you get if you want to take out a low-equity line of credit. And when the time to sell comes, you can avoid paying capital gains taxes by doing a 1031 exchange, which entails using the profits of selling your property to purchase one or more investment properties of equal or greater value.
Buying and holding can be applied to any type of asset class, from single-family homes to apartment complexes. The key to finding a suitable property to hold onto is research. You need to know the ins and outs of your target market, what appeals to renters in the area, and how to increase your property’s value over time.
It’s useful to know how to get a fair cash-on-cash return, which is the measure of how much money each of your investment dollars gets you, and how to calculate the cap rate, which is the measure of how long it will take for you to recoup your investment and start making a profit. Using figures such as these will help you find the best property to invest in.
3. Flipping properties
The difference between rehabbing for a rental versus a flip is that flipping entails rehabbing and then selling instead of rehabbing and holding. You still want to do just enough renovations to sell the place for the maximum amount and no more so that you make as much of a profit as possible.
On its surface, flipping may seem like more of a get-rich-quick scheme than a real estate investing strategy. You find below-market-rate real estate deals, fix the places up, and sell them ASAP. But there are much easier ways to make money than flipping houses! That’s because everything has to be executed just right since the longer you hold the property, the greater the risk of losing money.
Successful investors have a whole house flipping process in place that the property can seamlessly fit into. This would include everything from being able to purchase materials at an affordable rate, a crew who can provide high-quality work at a fair price, and a real estate agent who specializes in flipping (or you have the skills to sell the property yourself). If done right, flipping should only take a few months.
Flipping houses is not a passive investment.
4. Live-in flip
A live-in flip marries aspects of flipping and rehabbing. Basically, you live in the real estate property while it’s rehabbed. You can even make your changes with easy rental turnover management and attracting high-quality tenants top of mind! But there’s more to the strategy than just saving money by living in the property while it’s being improved.
A live-in flip is an opportunity to pay zero capital gains taxes on a property that earns upwards of $250,000 for single filers and $500,000 for a married couple filing jointly. That’s all thanks to the Section 121 exclusion. The main qualifications are.
- Living in the property: the asset must be your primary residence.
- Owning the property: the asset must be your primary residence for two out of the five years that precede the sale.
There is the risk that, in the midst of your live-in flip, something comes up that makes you move before the property has been your primary residence for two years. In that case, you can still be eligible for a partial Section 121 exclusion depending on why you have to move.
- Job relocation
- Change in Health
- Military deployment
- Unforeseen circumstances
Check with a tax professional if you find yourself having to move early.
Wholesaling, like house flipping, is also not a passive form of investment. Known as selling by assignment of contract, wholesaling is one of the investment strategies you can do with no or bad credit. Wholesaling is not one of the investment strategies you can do with little to no time!
Wholesaling requires every skill that one could imaginably make use of in real estate investment. That’s because you put together the plan that guides a property from purchase to sale and guides that property from a seller to a buyer with the intention of collecting an assignment fee.
The steps of wholesaling are as follows.
- Find a property, arrange the price and conditions that work, and assemble a purchase agreement.
- Find someone who will buy your property, like someone hoping to flip or buy and hold.
- The buyer buys the property per the terms of the agreement you’ve arranged.
- The buyer is now the homeowner, the seller gets paid, and you collect your finder’s or assignment fee.
As you can tell, wholesaling is not for beginners! But, if done correctly, it can be a satisfying and rewarding process.
6. Real Estate Investment Trust (REIT)
A Real Estate Investment Trusts (REITs) invest in or provide the operating costs for real estate assets. REITs invest in various real estate assets, from data centers and apartments to office buildings and single-family homes.
Many REITs are traded on popular stock exchanges just like stocks, making them an accessible and highly liquid way to invest in real estate. REITs are required to pay out 90% of their profits to investors in the form of dividends, which means they’re a great source of reliable income.
7. Real Estate Investment Group (REIG)
Real Estate Investment Groups (REIGs) are groups of private investors who pool their finances and know-how to invest in real estate using various strategies, including those described in this article. REIGs have the flexibility of various structures, membership fees (if any), and degrees of participation.
A REIG, unlike a REIT, is not a taxable corporation with a board of directors governed by strict rules and criteria. REITs, for example, must have at least 100 investors by the completion of their first year and five or fewer individuals cannot own at least 50% of the REIT. REIGs, meanwhile, are governed by private agreements rather than government rules and regulations.
A REIG is a good investment choice if you want to own a stake in physical real estate, as opposed to a REIT, which grants you access to dividends that come from investment in physical real estate. A REIG, potentially, can also be a good way to learn how to invest in physical real estate from other members.
8. Property tax lien investing
Property tax lien investing is pretty straightforward. Someone covers the cost of outstanding taxes out on a tax lien as well as any interest and fees. When the property’s owner makes their property tax payments, you collect the principal and interest from the state or municipality.
You can invest in property tax liens either by buying the property tax liens yourself at an auction, or by investing into special property tax lien investment funds managed by investment companies. One of the challenges of investing in property tax liens outside of a property tax lien investment fund is that when you go to the auctions, which aren’t available in all states, you may end up getting out competed by representatives of the taxfund.
Otherwise, if you buy the tax lien at an auction, there’s not too much risk because owners usually make up their back payments in six months to three years. It is possible that the property owner will fail to make their payments, which allows the investor to put the property into foreclosure, but this is uncommon.
9. BRRR Investing method: Buy, Rehab, Rent, Refinance, Repeat
Buy, Rehab, Rent, Refinance, Repeat (BRRR) is a popular long-term property investment strategy. Initially, the strategy entails performing the steps that constitute the acronym BRRR: buying a property at below market value, rehabbing it, finding tenants, refinancing, and then using the funds saved from renting and a potential cash-out refinance to repeat the process.
Eventually, however, BRRR allows you to repeat the process using economies of scale, which means that the project’s cost is more manageable because the amount of capital invested into the project allows you to negotiate better deals on labor and materials.
As a result, the greater the scope of your investment portfolio, the more resources you have to invest in it, letting you purchase more lucrative properties and enjoy larger returns. Using BRRR, a successful real estate investor can truly build a real estate empire!
10. Rental debt snowball and all cash rental plans
Rental debt snowball and all cash rental plans are two strategies that use the same principle: snowballing all of your money to accomplish a goal. Rental debt snowballing entails utilizing the positive cash flow from all your various revenue streams to pay off your mortgages one by one until you’re debt-free.
All cash rental plans, similarly, involve snowballing all of your income to purchase property debt-free. Doing so minimizes your risk and helps you build wealth!
11. BURL: Buy Utility, Rent Luxury
The theory behind BURL is that, basically, you buy properties that have a higher cap rate that are able to recoup their investment and start generating a profit quickly so that you can afford to rent out luxury real estate with a low cap rate that would recoup their initial investment and start generating a profit more slowly. The idea is that the appreciation of a luxury property in an area like New York City or San Francisco will make the investment worthwhile. In some cases, investors practicing BURL will even buy properties outright if the deal is good enough.
Bottom line on real estate investing strategies
With so many investment strategies out there, there’s a real estate investment strategy out there that will suit your cash reserves, risk tolerance, time, and how involved in your investment you want to be.
A seasoned investor also knows how to choose the right legal entity for your real estate investment so that they can benefit from various tax incentives and reduce their liability.
It takes self-knowledge to know which strategy works best for you and a willingness to experiment. Luckily, as a real estate investor, you aren't limited to just one approach since many of the skills are translatable. That’s the beauty of real estate investing: there’s something for everyone!
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In the meantime, learn more about ways to start with a smaller downpayment here.