In today’s finance-savvy society, it seems there are endless forms of investment: stocks, bonds, annuities, 401ks, and even digital cryptocurrencies. Where there’s the potential to earn a return on money, there are eager investors.
But long before any of these complex products existed, investors found a way to grow their money in something much more simple: real estate. Real estate is not only the largest asset that most people will ever own, but it consistently appreciates (increases) in value.
If real estate investments interest you, there are a multitude of property investment strategies to consider. The best choice for you will depend on the cash you want to spend upfront, how quickly you want or need the cash back, and how willing you are to deal with other people (like rental tenants.)
Below, we discuss several property investment strategies so you can choose the best one for you.
Strategy #1: Traditional Buy and Hold
Alright, let’s start with the basics. The “traditional buy and hold” is very likely what you’re doing already, without even realizing it. In short, this means that you purchased a house with intent to stay put for awhile.
With this strategy, most investors use the home as their own living property. This means the investment met all three criteria that homebuyers should consider: lot, location, and layout.
These three “L-words” are the non-negotiables on a property meant to “buy and hold.” It’s impossible to change lot and location, and layout changes can be very expensive.
Why buy and hold? Because in general, property values increase over time. The question is how much they increase, and how fast. Some cities have experienced huge increases recently. Buy a house, live in it for a while (“hold”) and then sell the home down the road, likely for an increase.
Of the various property investment strategies to consider, this one has a big perk: as a homeowner/investor builds equity in the house, they can use it as down payment on the next property. Do this a few times, and suddenly your initial investment has ballooned into something much larger.
Strategy #2: Flip the House
During the housing market crash of 2008-2009, this was the hottest trend around. This strategy can be summed up in four words: Buy low, sell high.
Okay, let’s add a fifth word: quick. Buy low, sell high, but quick.
If you can see past things like yellowing wallpaper, retro appliances, and popcorn ceilings, listen up: this strategy may be the one for you.
Most buyers can’t look past these things. They want new appliances, wood-like flooring, and granite counters. They’re also willing to pay tens of thousands of dollars for it, even though it only costs a fraction of that to install.
This is where you come in: by investing the time and cash into such improvements, you can earn a return that was much higher than what you spent.
So what’s the catch? Well, most “flippers” pay upfront cash – meaning that until you sell the property, you’re out a hundred thousand bucks (or two.)
Also, the energy, time, and expense can be taxing. We’re talking hours upon hours of time spent scrubbing, fixing, and hammering. You may encounter things like termites, anthrax, or mold.
And that’s not all: you may face higher taxes on the profit of the house if it’s sold within 2 years of purchase. Take that into account when running your estimated profit, so you can ensure this is one of the smarter property investment strategies for you.
Strategy #3: Rent the House
Let’s switch gears for a minute. This strategy is similar to #1, the Traditional Buy & Hold, but you’re not living there – someone else is.
The primary benefit to this strategy is long-term, passive income. “Passive” means that you’re not doing much, but you’re still getting a monthly check for a thousand or so bucks.
Maybe you’re renting the house you used to live in, or this is a new purchase that you bought with the intent to rent out.
Regardless, chances are this property will require fewer upfront repairs than a flipped house. Another unexpected bonus? If the property is mortgaged, you can deduct the mortgage interest on your tax returns.
But it’s not all fun and games, folks. Renting out your property can mean you’ll spend a long while making back your money. It also means you’re dealing with tenants.
Tenants can make or break the rental gig. If you do choose to rent out your property, ensure you have a signed contract and that you do the occasional walk-through of the property.
You could also consider hiring a property manager (especially if you live in another city) to handle the unpleasant tenant-related tasks, like fixing an air conditioner at 3 am.
Strategy #4: Pooled Rental Arrangements or REITs
Alright, so we’ve covered three popular property investment strategies. #4 gets a bit technical. Listen up, finance gurus.
If you don’t want to actually deal with the property yourself, there are still plenty of property investment strategies to consider. Let’s start with a pooled rental arrangement.
In this instance, an individual sets up an LLC. The LLC company then purchases properties and hires a property manager to deal with tenants, rental applications, etc. So where do you come in? You’re essentially an investor in the LLC. The amount of cash you contribute to the LLC drives your return (profits.)
These arrangements can be a bit difficult to track down. Often former realtors will start these kinds of LLCs, or individuals with an interest in property investments. Just be sure that you know what you’re agreeing to before you fork over any cash.
If you’re not loving the LLC idea, consider a lower-risk REIT through a brokerage company (or mutual funds on a stock exchange.) “REIT” stands for Real Estate Investment Trust. It’s another form of pooled investment, meaning you’re going in on the REIT with other investors.
REITs may invest in certain types of properties, like commercial development, or focus in certain areas (like central Florida.) It’s a great way to get exposure to the real estate market without actually needing the keys to the front door.
Strategy #5: Short Term “Vacation” Rentals
Of the various property investment strategies available to you, this one may be the most fun. Especially if you live in a desirable or popular area (think downtown in a big city, or beachfront.)
If you don’t live in a popular area, you can still bring in big bucks during popular sporting events or concerts. During the Superbowl, for example, rentals can go for thousands of dollars per night.
Common short-term vacation rental websites include VRBO and Airbnb. It’s easy to add your house on the listing, and you can open up only the dates that work for you (i.e. if you’ll be out of town.) Depending on your location and the size/features of your house, such listings can quickly rack in big cash.
The downside? Well, let’s be frank: these are strangers sleeping in your bed, eating off of your dishes, and sitting on your toilet. You’re expected to clean after each guest, too. If that doesn’t appeal to you, then short-term rentals probably aren’t for you.
Do Your Homework on Property Investment Strategies
Now that we’ve covered five property investment strategies, you may be feeling a bit overwhelmed. Where to begin?
Start with the short-term (flip or rental) vs. long-term (buy and hold) decision. From there, review house listings on real estate websites so you know what you’ll spend on a house, and what you could sell it for if you do opt to flip it within a couple months.
You should also check out listings for rentals so you know roughly what rates are looking like in your city. Be sure you look at listings with the same number of beds and baths.
If you’re planning on making repairs (small or large,) contact a handful of contractors to get a feel for repair and material prices. Also, understand local inspection rules which can get expensive if you’re not well-prepared.
For example, wind mitigation is required in hurricane-prone states like Florida. If you’re planning to add on a deck to increase the value of the property before selling it, you’re required to use certain types of wood and brackets in order to meet code. These can be expensive, so study up before taking this route.
Consider joining real estate investment clubs, where you’ll meet loads of other people as obsessed with property investment strategies as you.
And lastly, study the local job market and economy: is it a growing city with rising rent rates? Are any big employers moving into the area? Or is this a deadpan town with no real future growth prospects?
No Investment is Perfect
Like any investment, there are a number of pros and cons to any of these property investment strategies. What’s important is that you understand your risk profile, your timeframe, and the market you’re researching.
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