Real estate can be an excellent investment strategy, whether you’re looking to sell or rent. The market is cool in many areas right now, but the market is seeing recovery post-pandemic. A lot of investors are making moves to build their portfolios, taking advantage of the current low prices and average rent to start building passive income or investing in renovations and raising property values.
Now is the perfect time for new real estate investors to enter the market. To help you get started, we’ve gathered the most popular approaches to real estate as of 2023.
House hacking is popular among new real estate investors because you get to live in the property. The idea is you purchase a home and rent out a portion. This lets you generate rental income to help with the mortgage and potentially start building profit. Another bonus is that you start building equity and reducing your expenses.
Over time, you will gain enough bonus income to reinvest in new properties. You will also be able to invest with a history of successful property management, as you have a tenant.
House flipping is a more active and higher-risk strategy. However, it can be highly rewarding if everything goes well. With this strategy, you purchase a house that is selling below market value— it can be a foreclosure, an as-is or short sale, or something similar. You then invest in renovations for the home, increasing its value so you can sell it at a higher price.
The key to this strategy is finding a property with good potential, effectively managing the renovations and your budget, and having a good idea of the current market.
The BRRRR Method
Similar to house flipping, the BRRRR Method involves Buying, Rehabbing, Renting, Refinancing, and Repeating. The idea is to build a portfolio of rental properties. Like flipping, you purchase a home beneath market value and fix it up. However, instead of selling, you rent the property. Once it has performed for a while, you pull out the initial capital by refinancing to a better loan. As you build income, you reinvest your profit into the next property.
Veteran investors can tell you that a DSCR loan program is a great approach to financing your BRRRR properties. Lenders will use your property’s potential and the success of any previous properties to determine the risk of investment. They are less hassle and easier to obtain than conventional loans, and they can be used for both financing and refinancing rental properties.
Buy And Hold
Buy and Hold involves open-ended renting. You purchase the property and keep it in your possession as long as you please. Most investors rent the property out while they invest the rental income in improvements and let the value appreciate over time. Then, when the market is right, you can sell at a higher price.
Some investors enter a property with the intent to sell but find that the rental income from their tenants is worth keeping the property instead. Other times, the tenants ask to purchase the property at a special price, which a real estate agent can help you negotiate.
Real Estate Investment Trusts
A Real Estate Investment Trust, or REIT, is a company that owns and operates income-generating properties. They work like mutual funds, pooling funds from investors to manage and finance real estate assets.
If you’re looking for a more passive investment strategy, you may be interested in REITs. You invest in a company that manages properties, gaining access to their diversified portfolio indirectly rather than owning the property. You can purchase and sell REITs on the stock market fairly easily.
If you don’t have the finances for a large down payment, a lease option may be the best option. With lease-to-own, buyers lease a property for a contracted amount of time. You have the option during that time to purchase the property at a predetermined price. Lease options can be a win-win for buyers and sellers.
Choosing the Right Strategy
Everyone’s starting financial situation is different, so you need to decide what strategy works best for you. If you aren’t certain, start building rapport in investment communities and find a veteran investor who is willing to mentor you. You can also ask a financial advisor, though you will likely have to pay a fee.
Real estate investing, like any form of investment strategy, comes with risks and considerations. There can be a bit of a learning curve based on your approach, but it is one of the easier investment markets to get into and profit from. Mainly remember to watch the market and do your due diligence to calculate potential income and to choose a reliable lender to help finance your properties.