When most people think of real estate investing the first thing that comes to mind is HGTV and flipping houses. The truth is that this is only one small niche within the real estate investing industry. There are numerous ways to invest in real estate and you can pick whichever one fits you best. Real estate has something for everyone who wants to get involved. For example if you don't want to deal with asset management then you can become a passive investor or equity partner in someone’s deal. This would mean that you’d get a preferred return and a slice of the equity. If you don't mind taking on risk and responsibility then you can become a buy and hold investor with your own a portfolio of rental properties that produce monthly cashflow. If buy and hold isn’t your thing then you can also flip houses for a profit. Here are some of the most common ways people invest in real estate.
Wholesaling
How would you like to make $3,000 - $10,000 or more without ever having to even own a piece of real estate. This is exactly what you can do if you start wholesaling real estate. Wholesaling is the practice of flipping paper or contracts. When you wholesale a piece of real estate you are effectively selling the right to buy a specific property at a certain price. If you can convince someone to sell their property to you for a low enough price then you can “assign” the contract to another investor for a higher price and pocket the difference.
Many people who are just getting into real estate start off by wholesaling properties. It requires no money up front and it will allow you to learn the business and make important contacts as you go. Though wholesaling is simple on paper most people aren’t very successful at it. To be a good wholesaler you need access to good deals with enough margin for you and your buyer to make a good profit. Good wholesalers are not afraid of hard work and must put in a lot of hours at first. A good wholesaler will think about the investor they are assigning the contract to. They put their buyers first and look to make them money first. If they can make their buyers good money then they will also make good money in the process. If you are interested in becoming a wholesaler then I suggest getting a good mentor and reading several books on the topic.
Fix and Flip
Fix and Flips are what most people think of when they hear real estate investing. Fix and Flipping houses is exactly what it sounds like. You are buying a property at a price below market value and then rehabbing it to then sell later for a large profit. Professional flippers can turn a $30,000 to $50,000 profit or more on each house that they flip. Though you can make more money flipping houses it does come with more risk to the investor. When you flip houses you are actually buying the property on speculation that you will be able to sell it for a premium once you rehab it. Most fix and flip investors use other people’s money to acquire their properties with the anticipation of selling just a few months later. The leveraged capital usually comes in the form of “hard money” which has high interest rates that are not sustainable for long periods of time.
If flipping houses sounds interesting to you understand that it is not something that you should quickly jump into. Flipping houses is much more complex than wholesaling and involves a in depth knowledge topics such as rehab costs, market trends, interest rates and financial analysis.
Single Family Rentals
Though it may be satisfying to get a quick lump sum of cash through wholesaling or flipping properties there is a downside. Finding deals and necessary capital may prove to be harder than you anticipated. The truth is most wholesalers and house flippers have to work very hard just to get a few deals done. After marketing efforts, contacting sellers, negotiating terms you can run yourself into the ground and you haven’t even done a deal yet. In addition to the constant effort in maintaining deal flow you also have to pay a large short term capital gains tax on all the profits you make. For some the combination of these factors proves to not be worth the effort. If you are more interested in passive income than single family rentals may be the perfect investment for you.
Investing in single family rentals is a buy and hold investment strategy where you simply buy a property and rent it out to a tenant. This strategy allows you to pay down the mortgage with the rent payments and collect any additional cashflow left over. When renting properties you can choose to manage them yourself and be the landlord or outsource this service to a property management company. Over time you can build up a large portfolio of rental properties that produces steady cashflow every month. In addition to the monthly cashflow you also reap the rewards of appreciation and tax deduction benefits. Investing in rental properties is a long term strategy and is one of the best ways to create lasting wealth and financial independence. If residential real estate investing doesn’t appeal to you then you may be interested one of the various commercial property classes found below.
Multifamily
Commercial real estate is considered any property with 5 or more units. Multifamily real estate is commonly identified as Garden, Mid Rise or High Rise styles. There are apartment complexes, condominiums, townhomes and cooperatives or co-op. With more and more people renting instead of owning along with rising rents multifamily investments are one of the best asset classes to invest in right now. You can choose to buy small properties with 10 - 50 units, 50 - 100 units or 100 plus units. Acquiring multifamily assets is a buy and hold strategy that can generate huge sums of cashflow and tax benefits if you do it right. Most people want to get into multifamily investing but don't because of a lack of capital. Multifamily assets can be several hundred thousand dollars or they can be tens of millions of dollars or more. Now before you give up on the idea of investing in multifamily real estate let me point out a few things. Though it certainly won't hurt to have your own capital you don't necessarily have to use your own. When conducting an acquisition of multifamily real estate you will be using leverage from a commercial lending institution. Depending on the terms of the loan this means that you will need to only come up with a 25 - 35% down payment of the total loan amount. So if your property is $1,000,000 you need to find a way to come up with around $300,000. One of the most common ways people raise the money is through what’s called a syndication. A syndication is when an investor brings on equity partners who provide the necessary capital to fund the deal but also take an equity position in the deal. These types of scenarios usually provide the equity partner with a preferred return on their capital investment as well as a distribution of the cashflow based on their equity position. Sound complicated but in reality it’s not that hard to do. The hard part will be finding investors who are willing to part with their money to fund your deal. This is going to be a sales job and will take some work but once you develop a strong relationship with your investors you will be able to partner with them again and again.
In addition to traditional methods of funding a deal there are numerous methods of using creative financing to fund your deals such as owner financing, master lease agreements and crowd funding. Raising money for your first deal may be extremely hard but if you can just get it done once then it will become easier because you will have a track record. If multifamily isn’t getting you excited then maybe some of the other avenues of real estate found below will.
Mobile Home Parks
Yes, one of the most misunderstood asset types, you may hear them more commonly referred to as trailer parks or nowadays, manufactured home parks! With the incredible affordable housing crisis spanning not only here in the United States but all over the world, many experts are considering mobile homes to be the perfect solution.
Less investors go after mobile home parks due to the stereotype they have had for years. With the media casting "Trailer Park Boys" to the unforgettable mobile home park scenes in Eminem's movie, 8 Mile, most people would never consider putting their time or capital into such an undesirable investment. Little do they know, they have been, and continue to be, one of the only asset types that provide investors double digit returns and CAP rates.
Most of the mobile home park residents own their own unit and love their sense of ownership. They would rather own a perfect-sized home for their family, especially when compared to an apartment unit which will cost more in rent per month (roughly $1000/moth avg. in the US vs. mobile home lot rent being $285/month) and they don’t have to share all their walls, walk up and down many flights of stairs, making the landlord rich, etc.
Let’s face it… people are getting smarter! Especially when you factor in the millions of baby boomers who would love a nice, quiet place to retire, or these crazy millennials who are no longer going after the bizarre “American Dream,” and living in smaller and smaller units.
The key to success in mobile home park investing is management. Because so many tired “Mom and Pop” owners are showing less and less interest, resulting in deferred maintenance, under market rents, lax rent collections, etc., this create tremendous opportunities for new investors who can recognize these aforementioned opportunities as “cha-ching!”
Raw Land
Raw land is exactly what it sounds like. The key to understand when it comes to land is what use is it zoned and what potential does it have for future use. Raw land is truly a “hands off” investment if you do it right. There are no tenants, toilets or termites to deal with. Most of the time you don't need to do anything to the land but simply acquire it. When you own land you don't have to worry about mortgage payments, utility bills, maintenance and the taxes are pretty low. You don't have to worry about depreciation, functional obsolescence or repairs.'
Land is truly one of the best investments you can make and they're not making any more of it! There are numerous opportunities to make money investing in land without the headaches of rental properties. You can sell advertisement space to companies for a monthly fee. You lease the use of the land to a business that wants to build a store on your plot of land. You can sell to buyers using owner financing to create a source of passive income. Or you can just sell the land at a premium at a later date. Investing in land can be very rewarding but with any investment make sure you know what you’re doing and what you’re buying first.
Office
Office space just like housing is always going to be a necessity for businesses all around the world. Instead of going to work in an office imagine if you owned the building and leased it to companies that needed the space. Renting office space can be very lucrative for an investor for multiple reasons. When dealing with commercial real estate such as office you will be dealing in a business to business environment. When dealing with commercial real estate vs housing you do not have as many restrictions such as the fair housing laws. You can also demand much higher rates for month rent to your business tenants as well as longer lease agreements and more favorable terms.
Retail
Retail properties make up a large portion of the commercial real estate market in the United States. Retail properties are commonly recognized as shopping centers, restaurants, grocery stores and department stores. Most of what you see when you drive around a city will be retail properties. Most of these retail properties are not owned by the business that operates within them but rather an investor behind the scenes. If you can acquire a strip center for example with a strong anchored tenant in a high traffic area you can produce some very favorable returns. When investing in retail there are multiple advantages to the investor such as triple net leases, net percentage sales agreements and long leases based with an escalating rent structure.'
Storage Facilities
The self storage industry is one of the most resilient asset classes within the real estate investing community. Whether we are in a recession or period of growth there always seems to be a demand for people to store “stuff”. Investing in storage facilities may not have the same appeal as buying a fancy shopping center or luxury apartment complex but that doesn’t mean they don't make good investments. These recession resistant investments can make steady returns and offer plenty of resale opportunities.
These are the most common types of real estate investments that you may be interested in pursuing. However there are several other ways to invest in real estate such as industrial, mixed use properties, real estate investment trusts, assisted living facilities and notes. Do your own research and get a good understanding of which type of real estate you prefer. Then go speak with other investors who have done what you want to do. They will give you a better idea of what the industry is like and you can decide whether you want to pursue it or not.
Whichever asset class you choose to invest in understand that they are all very different. This means that each asset class has it’s own trends, submarkets, booms and busts. Whichever type of real estate you choose to invest in you should understand the in's and out's of that particular industry as well as the real estate market as a whole. For your chosen industry you should be aware of and understand things such as growth factors, demand factors, build rates, current supply, absorption rates, vacancy rates and other trends associated with your market.
Best,
Jason Mileshko
