Deciding whether or not investing in real estate is a good decision for you is more than just watching HGTV and thinking “Hey I could totally do that!”. Having an interest is a great place to start but delving into the different types of investing and what suits your personal situation best is even better. In this article, we will discuss the many different types of real estate investing and see which may be best for you.
Time and Money
The first question you need to ask yourself is what kind of time are you actually able to put into this investment? For example, if you only have a couple spare hours a week then buying a fixer upper that you intend to do all yourself probably isn’t the most financially wise decision since it’ll take some serious hours to get the place into renting or reselling shape.
Next question you should ask yourself is what kind of monetary investment you would like to start out with. Do you have $10k to invest or $100k you would like to invest? Each of the different strategies requires varying amounts of capital so really consider the amount you can afford before pursuing.
Then you need to look at real estate investing at the macro level. What kind of real estate do you want to invest in?
- Commercial (renters are businesses needing office space)
- Residential (renters are individuals)
- Retail (renters are retail stores, you might invest in a mall/shopping center)
- Industrial (renters are businesses needing warehouses, distribution centers or manufacturing plants)
- Mixed use (a combination of two or more of these types)
- Land (soil – literally the land that someone might want to rent or purchase in the future)
- REITs (Real Estate Investment Trusts – an asset class to be bought within your investment portfolio)
This matters because each one comes with different rules, regulations and tenants. Out of that list, which interests you the most? Which do you think you want to pursue? Do your own due diligence within your top couple to come to an answer. Then, dive into the next step.
Once you have taken a peak at the macro view, you need narrow in on your top couple real estate investment strategies that seem to draw you in the most and think about the following questions.
Do you want to be investing in long-term or short-term property?
- Long-term for residential real estate is commonly referred to as “buy and hold” and means buying homes (multi-family or single family) and renting them out to tenants. Long-term means you want your tenants to sign a lease for an extended period of time (usually a year). Your monthly cash flow is the life and blood of the business so it is vital to make sure you are investing in something that is green consistently.
- On the other hand, short-term for residential real estate could also be referred to as vacation rentals. This means your tenants are going to be staying for far less amounts of time, maybe weeks or a few months. This comes with a completely different business model and different costs. Cash is always king so you want to be cash flowing but where the above business model has a steady month-to-month cash flow, short-term vacation rentals don’t have any cash flow locked in stone since there are no leases to be signed. One month you may be completely rented out and the next you might have no renters, so this is something to consider prior to entering the business.
Do you want to completely remodel a property or buy it ready to rent?
- With all the aforementioned types of real estate, you can buy a property that is in shambles or you can buy something that could be rented the next day. It just depends on you.
- Buying something that needs renovations usually means the price tag will be much lower. However, you will have to invest in a contractor, plumber, electrition, etc. to get the place in renting shape. The plus of doing it this way is that sometimes you can save some money and also you get to renovate it to make it the exact design you want. Also, keep in mind that you are not able to rent/resell this place until the renovations are done so you are losing monthly cash flow.
- Buying something that is ready to rent usually costs a bit more but where you are saving money is being able to rent it our right away. This means that you will be able to start accruing cash right away. If you are not interested in hiring out a team and managing multiple renovation projects then this strategy is probably better for you.
Do you want to be a passive investor and not really be involved in the day-to-day decision making? Or do you want to be heavily involved?
- If you want to be heavily involved in the decision making and managing projects, almost all of the above real estate strategies would be a good fit for you except for REITs.
- If you already have a lot going on in your life and you’re not looking for another project, AKA you want to be a passive investor in real estate then REITs or syndications would probably be the best way for you to go. Both of these strategies allow you to decide whether or not the expected returns are good for you and your portfolio but then let you be as heavily or lightly involved as you would like.
- For example, say you own your own business already and are crazy busy but you don’t want to miss out on the opportunity of investing in real estate. Well, buying a REIT or finding a syndication to invest in would literally allow you to evaluate it as an investment and then not have to think about it at all. You could get returns on a monthly, quarterly or annual basis (your preference) and take a look at the investment when you want to.
- Side Note: Another great passive way to invest is to partner up with someone who is in the weeds of the real estate business. Say a friend of yours owns a couple mutlt-family homes and does really great with them. Tell that friend that you have some capital you would like to invest for X return and that you want to be hands-off. Sometimes, people even split the profits of the business 50/50 or 40/60. Of course, getting some sort of legal document (partnership agreement, llc, etc.) would be very important for this type of strategy.
Regardless of the type of real estate you invest in, it has been proven time and again to be an incredibly profitable investment when bought smartly. Just be careful not to enter into real estate because “Chip and Joanna make it look easy”. Do it for the right reasons of earning capital and diversifying your portfolio and you will likely succeed.
Do you invest in real estate? If so, let us know what type of real estate you are invested in!!
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