Whether you’re new to real estate investment strategies or are simply looking for ways to improve your game, the market is constantly changing. Keeping a solid grasp on where you stand in the real estate market in terms of value and competitiveness helps make you a better property manager, landlord, and investor. But often, investing in one solitary outlet can lead to hard lessons–which is why so many fiscal experts recommend investing in a diversification of assets. In this article, we will touch on some of the most popular real estate investment strategies of 2023 so you can diversify your portfolio and start generating income while you sleep–with minimal risk!
12 Real Estate Investment Strategies for Beginners and Pros
- Reinvest Rental Income:In 2023, real estate investors continue to leverage the power of reinvesting rental income as a fundamental strategy. By setting aside a portion of the monthly rental earnings, investors can build up a reserve for property maintenance, repairs, and future property acquisitions. Additionally, reinvesting rental income can help accelerate the growth of a real estate portfolio and increase overall cash flow.
- Investing in Secondary Cities:As major metropolitan areas become increasingly expensive and competitive, investors are turning their attention to secondary cities in 2023. These cities offer attractive investment opportunities due to lower property prices, potential for higher rental yields, and the possibility of significant economic growth. With improving infrastructure and amenities, secondary cities have become a viable option for both beginners and experienced investors.
- House Hacking:House hacking is a strategy that involves living in one part of a multi-unit property (such as apartment buildings) while renting out the other units. This approach enables investors to reduce or eliminate their own housing expenses while building equity and generating rental income. In 2023, house hacking remains a popular choice for beginners who want to start investing with minimal financial burden (via FortuneBuilders).
- House Flipping:The art of buying distressed properties, renovating them, and selling them at a profit has been a staple in real estate investing for years. In 2023, technology-driven tools and data analytics have made house flipping more efficient and accessible. Experienced investors continue to capitalize on market trends and demand for upgraded properties, maximizing profits through strategic renovations and timely sales.
- Buy and Hold Rental Property:Buying and holding rental properties for the long term remains a dependable investment strategy in 2023. Savvy investors look for stable rental markets and properties with potential for appreciation over time. This approach provides a steady stream of passive income and allows investors to build wealth through equity accumulation.
- Wealth Building Strategies:Real estate investment is not solely about short-term gains; it can be a powerful tool for long-term wealth building. In 2023, both beginners and seasoned investors prioritize strategies that align with their financial goals. These may include diversifying a portfolio with different property types, locations, and risk profiles, while also considering tax advantages and estate planning.
- Real Estate Wholesaling:Real estate wholesaling involves identifying off-market properties at a discount and then assigning the contract to another buyer for a fee. This strategy requires strong negotiation skills, market knowledge, and a wide network of potential buyers. In 2023, tech-savvy investors leverage online platforms and social media to find wholesale deals efficiently.
- Live-In-Then-Rent:Another innovative approach to real estate investing in 2023 involves buying a property as a primary residence, living in it for a period to take advantage of owner-occupied financing and tax benefits, and then converting it into a rental property when moving out. This strategy allows investors to secure favorable financing terms and potentially achieve higher cash flow when renting the property.
- Buy and Rent:The buy-and-rent strategy focuses on purchasing properties in high-demand rental markets with strong potential for rental income. Investors aim to hold onto the property for the long term, benefiting from appreciation while generating consistent cash flow from rent payments. In 2023, sophisticated real estate market analysis tools assist investors in identifying profitable buy-and-rent opportunities.
- Wholesaling:In addition to real estate wholesaling, which involves assigning contracts, investors may also explore virtual wholesaling strategies in 2023. This approach utilizes technology and remote collaboration to find and close deals in different geographic markets, expanding the scope of potential investment opportunities.
- Fix-and-Flip:Also called the “live in flip,” fix-and-flip investors continue to find opportunities in 2023 to buy distressed properties, renovate them quickly and efficiently, and sell for a profit. By incorporating advanced project management software and predictive analytics, investors can optimize the renovation process and improve returns.
- Private Lending:Real estate investors who prefer a more passive role may opt for private lending in 2023. By acting as a lender for other investors’ projects, individuals can earn interest on their loans, benefiting from the real estate market’s returns without the responsibilities of property ownership.
In conclusion, real estate investment strategies in 2023 cater to a wide range of investors with varying experience levels and financial goals. From traditional buy-and-hold approaches to innovative and tech-driven methods, investors have ample opportunities to thrive in the dynamic real estate market of the future.
REITs: Real Estate In The Stock Market
Likely, if you’ve begun thinking about real estate investing, you may be interested in stock market trading or even real estate investment trusts. This is one form of real estate investment strategy that investors can capitalize on whether they own commercial, retail, or residential real estate. In this portion, we will walk through everything you need to know about REITs, including what they are, how to create positive cash flow, and different Real Estate Investment Trust strategies.
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate assets. These assets can include commercial properties such as office buildings, shopping centers, hotels, and industrial facilities, as well as residential properties such as apartments and single-family homes. Real Estate Investment Trusts offer investors an opportunity to participate in the real estate market without directly owning physical properties. They are traded on major stock exchanges, making them a convenient and liquid investment option (via Investopedia).
How do REITs Make Money?
REITs generate income through rent collected from their properties, which is then distributed to shareholders as dividends. The law requires REITs to distribute a significant portion of their taxable income to shareholders, resulting in potentially high dividend yields. Additionally, some REITs may engage in property development and capital appreciation strategies to enhance their earnings.
Long-Term Buy and Hold Rentals:
Investors looking for stable and consistent cash flow often opt for long-term buy and hold rentals. This strategy involves acquiring properties with strong rental demand and holding onto them for an extended period, typically years or even decades. As the property appreciates over time, investors benefit from both passive income in the form of rental payments and potential equity growth.
The Rental Debt Snowball Plan:
The rental debt snowball plan is a proactive approach to accelerate debt repayment for real estate investors with multiple rental properties. Investors identify one property and focus on paying off its mortgage while making minimum payments on other properties. Once the first property’s debt is cleared, the cash flow from that property is directed towards paying off the debt of the next property, creating a snowball effect and rapidly reducing overall debt.
Mortgage Real Estate Investment Trusts (or Mortgage REITs):
REITs offer an attractive option for passive investors looking to diversify their portfolio with real estate assets. Mortgage REITS are a specialized type of REIT, but more on that in the following section.
Passive vs Active Real Estate Investment:
Passive and active real estate investments cater to different investor preferences and involvement levels. Passive strategies, like investing in REITs or crowdfunding platforms, require minimal hands-on management, making them ideal for investors seeking a more hands-off approach. On the other hand, active strategies, such as direct property ownership or house flipping, demand more time, effort, and expertise but offer potentially higher returns and greater control over the investment.
The Trade-Up Plan:
Experienced investors may adopt the trade-up plan to enhance their real estate portfolio. This strategy involves selling a property that has appreciated significantly and using the profits to acquire a larger or more valuable property. By trading up, investors can access better opportunities, increase cash flow, and expand their investment holdings.
Debt can be both a tool and a risk in real estate investing. Savvy investors use strategic debt management to leverage their capital and maximize returns. This can involve refinancing properties to lower interest rates, utilizing 1031 exchanges to defer taxes when selling and buying properties, or structuring debt in a way that aligns with long-term investment goals.
Discounted Note Investing:
Investors looking for unique opportunities in the real estate market may explore discounted note investing. This involves purchasing distressed mortgage notes at a discount, often from banks or financial institutions. Investors then work with the borrowers to find mutually beneficial solutions, such as loan modifications or facilitating a property sale. Discounted note investing can offer attractive returns while assisting homeowners in challenging financial situations.
Passive real estate investment strategies, such as REITs, crowdfunding, or private real estate funds, appeal to investors who prefer a hands-off approach. These strategies allow individuals to invest in real estate without the responsibilities of direct property management. Passive investors can benefit from professional expertise and diversified portfolios, potentially reducing risk and providing a stable income stream.
More on Mortgage REITS…
A Mortgage Real Estate Investment Trust (or mREIT) is a type of real estate investment trust that primarily invests in mortgage-backed securities (MBS) and other real estate-related debt instruments. Unlike traditional equity REITs that own physical properties, mREITs focus on the debt side of real estate financing. Their main objective is to generate income from the interest earned on the mortgage loans they hold or the MBS they invest in.
Here’s how an mREIT works:
- Portfolio Composition: So-called mREITs typically build a diversified portfolio of mortgage-related assets. These assets can include residential and commercial mortgage loans, residential MBS, commercial mortgage-backed securities (CMBS), and other debt instruments collateralized by real estate.
- Borrowing and Leverage: To finance their investments, mREITs often rely on both equity capital from shareholders and substantial amounts of borrowing or leverage. They borrow money at relatively low short-term interest rates (through repurchase agreements and other financial instruments) and invest in higher-yielding longer-term mortgage assets, thus creating a spread or difference between the interest earned and interest paid.
- Interest Income: The primary source of income for mREITs comes from the interest payments they receive from the mortgage loans and MBS in their portfolio. The interest payments made by homeowners or commercial property owners on the underlying mortgages pass through to the REIT’s investors as dividends.
- Hedging Risks: Since mREITs are highly sensitive to changes in interest rates, they may use various financial instruments to hedge against interest rate risks. Hedging helps protect the REIT’s net asset value (NAV) and income stream from potential fluctuations in interest rates.
- Income Distribution: Mortgage REITs are required by law to distribute a significant portion of their income to shareholders to maintain their tax-advantaged status. As a result, they often have high dividend yields, which can make them attractive to income-seeking investors.
- Regulatory Requirements: Mortgage REITs must adhere to certain regulatory rules, such as distributing at least 90% of their taxable income to shareholders, maintaining certain levels of diversification in their investment portfolios, and meeting leverage and asset coverage ratios.
- Risks and Volatility: Mortgage REITs can be more sensitive to interest rate movements and market volatility compared to traditional equity REITs. When interest rates rise, the value of the mortgage-backed securities in their portfolio may decline, affecting the REIT’s net asset value and potential dividends.
- Market Conditions: The performance of mREITs is influenced by overall market conditions, credit quality of the underlying mortgage assets, and economic factors affecting the real estate and mortgage markets.
Unique Real Estate Investment Strategies: Diversify Your Portfolio
When it comes to securing income producing real estate, investors have no shortage of options. From physical real estate to digital investment property, commercial real estate or residential, real estate investors can easily select from an array of different real estate investing strategies, making for safer investing, both long-term and short-term.
Obviously, you benefit if you are able to obtain more income producing properties than investment properties that drain your bank account. What we’re looking for here is positive cash flow, not negative. So while the person owning real estate clearly benefits if they are obtaining monthly rental income which more than covers the cost of mortgage payments, you are not the only person impacted by your decision to invest in the real estate industry.
Property owners who sell to you, your tenants, and your real estate agent are all influenced by your decision, and all have a financial interest in your success. Even if the tenant doesn’t know it, your financial well being is directly tied to theirs–and the more fiscally stable you can be, the better their experience will be as your tenant (from Forbes).
Your financial success in owning real estate and eliminating real estate debt will ripple out into the local community, boosting the economy and attracting more public and private investors, professionals, young families, and more.
How to Choose the Best Real Estate Investments
With over 12 different real estate investing strategies to choose from, it can seem daunting to settle on your first positive step towards owning a share of the stock market or taking on a mortgage. What makes a good investment? How much is enough risk tolerance, and when should you run for the hills? What type of investment style suits your budget and lifestyle? How much risk are you willing to take on?
These questions and more are important to ask yourself when posed with any kind of purchase, let alone a real estate investment. It’s important to consider capital gains, property taxes, and the market value of the entire property–including who your target demographic is when it comes time to rent to and manage tenants.
For example, one strategy might be to go with undervalued properties or undeveloped land that have not been appraised to hold much value. While this does require a little bit of creative thinking on the part of the real estate investors, this type of undervalued property–whether it costs less due to a small lot size or its location in an underdeveloped neighborhood–may in fact appreciate in value in years to come as the area continues to attract jobs, people, and wealth. A good investment for most investors, indeed!
Reading the actual value of real estate investments can be as simple as adjusting your timeline for expected ROI. In terms of the example above, this means transitioning our desire for a short-term rental to a property with the possibility of long-term appreciation–perhaps more valuable in the long run, as there is always the possibility of a short-term rental offering a “boom and bust” type dynamic, especially if the local economy is not built on a solid foundation.
Pros and Cons of Diversifying Real Estate Investing Strategies
- improved risk tolerance–not all your “eggs” are “in one basket”
- ability to “feel out” what’s most intuitive and lucrative for you
- increased agility in a constantly changing market
- learn new skills
- takes time and energy to learn about and manage different real estate investing strategies
- may need more investment capital for an array of diverse approaches
- may grow complex if you don’t keep up with market changes
What Other Real Estate Investment Strategy Tactics Warrant Investigating?
Diversifying your real estate investment portfolio is essential to manage risk effectively and capitalize on various market opportunities. Each of the following strategies offers unique benefits and can play a crucial role in diversifying your real estate investments:
- Hard Money Lending:Hard money lending involves providing short-term loans, typically to real estate developers or flippers, secured by the property being purchased. As a lender, you act as a private investor and earn interest on the loan. Diversifying into hard money lending can be advantageous for the following reasons:
a. Reduced Property Ownership Risk: Unlike direct property ownership, hard money lending allows you to participate in the real estate market without dealing with property management responsibilities, maintenance costs, or market fluctuations.
b. Consistent Returns: With proper due diligence and loan structuring, hard money lending can offer predictable and consistent returns, typically higher than traditional investment options like bonds or savings accounts.
c. Shorter Investment Duration: Hard money loans are usually short-term, ranging from a few months to a couple of years. This shorter investment horizon can provide liquidity and flexibility in reallocating your capital for other opportunities.
- Crowdfunding and Syndications:Real estate crowdfunding platforms and syndications allow investors to pool their funds to invest in larger and more complex real estate projects. This diversification strategy offers the following advantages:
a. Access to Institutional Deals: Through crowdfunding and syndications, individual investors gain access to institutional-grade real estate projects, such as large-scale developments or commercial properties, that would be challenging to invest in on their own.
b. Risk Sharing: By pooling funds with other investors, you can spread risk across multiple properties and markets, reducing the impact of any single investment’s performance on your overall portfolio.
c. Passive Investment: Crowdfunding and syndications provide passive investment opportunities, where professional real estate operators handle property management and operations. This allows investors to focus on their core expertise or other investments.
- Property Tax Lien Investing:Property tax lien investing involves purchasing tax liens on properties where the owners have failed to pay property taxes. As a tax lien investor, you pay the delinquent taxes on behalf of the distressed property owner and, in return, receive the right to collect the owed amount plus interest. Diversifying your portfolio with tax lien investing offers the following benefits:
a. Lower Entry Barrier: Property tax lien investing can be accessible to investors with a relatively small capital base, making it a viable option for new homeowners to start investing and diversifying, even with limited funds.
b. Secured Investment: Tax liens are typically backed by the underlying property, providing a level of security for your investment. In the event of non-payment, you may have the opportunity to foreclose on the property.
c. Higher Interest Rates: Tax liens often come with higher interest rates than traditional fixed-income investments, potentially offering attractive returns on investment.
What Is the 5% Rule in Real Estate Investing?
When it comes to real estate investment strategy, real estate investors should always be aware of their “5% Rule” on all their properties. Designed to help determine when it makes most sense to purchase a property and when it makes more sense to stick to renting, the 5% Rule comes from taking 5% of your property value, multiplying it by the appraised value of the house, then dividing that by 12. According to Making of a Millionaire, that supplies you with your “breakeven” point, at which you can either decide to continue renting (i.e. the property value is such that you will not see a ROI if you buy now) or whether or not to buy a property (i.e. when you can get some positive equity out of the transaction).
So, why does this matter?
In short, the 5% Rule is supposed to more accurately represent all of the costs that are associated with both renting and buying a property–beyond just monthly rent or mortgage payments. For example, real estate investors will also have to think about property taxes, the cost of capital, and maintenance costs as well. When you think of it this way, it’s no wonder some properties can go from a good cash flow property to a huge wallet drain if not properly maintained or accounted for–whether it’s commercial real estate or rental properties. In other words, the 5% rule helps to determine if you can employ a passive investment strategy on a property–or if your investment property efforts in this area are better focused elsewhere.
Real Estate Investing Strategies: Key Takeaways
Real Estate Investment Strategies to Maximize ROI with Ark7
But wait! You might be thinking. What about the thirteenth possibility for real estate investing, which is particularly prudent for a beginner real estate investor? And you would be quite right to think such a way. In this case, the special thirteenth real estate investment strategy is to invest in a real estate investment group–also known as as REIG. But what is a REIG and how do they work? Read on for more info!
Real Estate Investment Group (REIGs) are an organization or entity formed by multiple individuals who pool their financial resources to collectively invest in real estate properties. Real estate investment groups provide an opportunity for investors to participate in real estate ventures without the need to manage properties actively. They are a popular option for individuals who want to benefit from real estate’s potential returns without the challenges of direct property ownership and management.
Here’s how Real Estate Investment Groups typically work:
- Formation: According to Investopedia, a REIG is created by a group of investors who come together with a common interest in real estate investment. They may organize themselves as a formal legal entity, such as a limited liability company (LLC) or partnership, to govern the operations and responsibilities of the group.
- Contribution: Each member of the REIG contributes a specific amount of capital to the group, which is then used to purchase real estate properties. The contributions may vary based on each member’s financial capacity and investment goals.
- Property Selection: The REIG identifies and evaluates potential investment properties. This process may involve conducting market research, performing due diligence, and analyzing the property’s potential for rental income or appreciation.
- Property Purchase: Once the group decides on a suitable investment property, they collectively pool their funds to purchase it. The property is owned by the REIG as a whole, and each member holds a proportional ownership stake based on their initial contribution.
- Property Management: One of the primary benefits of a REIG is that it typically hires a professional property management company to handle day-to-day property management tasks. This includes tenant screening, rent collection, property maintenance, and addressing tenant issues. By outsourcing property management, investors can have a more passive role in the investment.
- Income Distribution: Rental income generated by the investment property is distributed among the REIG members based on their ownership stakes. Each member receives a share of the rental income proportionate to their initial investment contribution.
- Decision Making: Major decisions regarding the property, such as renovations, refinancing, or selling, are typically made collectively by the REIG members. Depending on the structure and agreements within the REIG, decisions may be made through voting or through the guidance of a designated manager or leader.
- Exit Strategy: At some point, the REIG may decide to sell the investment property and distribute the proceeds among the members based on their ownership percentages. Alternatively, some REIGs may choose to refinance the property or engage in other strategies to maximize returns.
REIGs offer several advantages for investors, including:
- Diversification: By pooling funds, investors can collectively invest in multiple properties, reducing risk through diversification.
- Professional Management: REIGs benefit from professional property management, allowing investors to enjoy passive income without direct involvement in day-to-day operations.
- Access to Larger Investments: REIGs provide individual investors with the ability to participate in larger real estate deals that might not be feasible on their own.
- Shared Expertise: REIG members can bring various skills and knowledge to the group, enhancing the overall investment decision-making process.
- Reduced Risk: Sharing financial responsibility with other investors can mitigate individual risk associated with owning and managing real estate.
However, it’s essential to carefully research and understand the REIG’s structure, management, and investment goals before joining, as the success of the investment depends on the collective decisions and actions of the group.