There are many ways to invest in real estate. This guide will run through residential properties and real estate investment trusts. It won’t be suitable if you’re interested in commercial property investment, such as retail outlets, hotels, offices, warehouses, and factories.
Below are different categories of real estate investments.
- Flipping homes
- Buy, Rehab, Rent, Refinance, Repeat (BRRRR method)
- Investment property
- Vacation homes
- Multifamily homes
- REITs
1. Flipping Homes
Flipping homes involves finding suitable rundown properties that you can renovate and sell at a profit. Though this may seem like a simple way to earn a profit, it has its drawbacks.
You may end up with a house with severe structural problems you weren’t aware of before buying. If you’re not skilled in foreseeing such issues, you can consider working with others with the relevant skills to minimize such risks.
You will need a different type of mortgage if you’re planning on flipping homes since standard mortgages won’t be suitable. Instead, you could consider paying for the home using savings or the equity in your existing house. Experienced flippers know the relevant real estate agents and contractors to help them estimate their costs.
Or, you can ask a friend, family member, or business partner to join you. Both of you can fund the project and share the profits.
2. Buy, Rehab, Rent, Refinance, Repeat (The BRRRR method)
This type of investment is a bit like house flipping. But once it’s fully refurbished, you rent out the house instead of selling it.
When you’re ready to buy the next home to renovate, you can refinance the last house and fund the next home with cash. For some people, this is very profitable. You can continue doing that to build your rental property portfolio.
But to succeed with the BRRRR method, you must have the skills needed to flip a house and the necessary skills to be a landlord. It’s a challenging and hands-on real estate investment, so do all your research and speak to experts before getting into it. You will also likely need to outsource some tasks since it requires a lot of work.
3. Buy Investment Property
An investment property is when you rent a home full-time and don’t live in it yourself. It can be a single-family or multifamily home. This investment strategy can create a great cash flow, particularly if you have multiple properties.
At first, it won’t be easy due to the high mortgage and maintenance costs. Or you can do some of the repairs yourself.
Alternatively, consider hiring a property manager to help you with maintenance issues and find tenants.
You should also be prepared for any vacant period since finding new tenants might take some time. So, you need to be prepared to cover mortgage payments during vacancies.
To be approved for a mortgage can also be a bit difficult compared to when you apply to buy your primary home. There may be higher requirements when taking out a mortgage for investment property. Lenders may want higher credit ratings, deposits, and cash flow.
You can also use the predicted rental income to qualify for the mortgage. Some lenders may use 75% of expected rents to be sufficient to qualify for a mortgage. Of course, you will need to be able to afford upfront costs.
Overall, investment properties can be a great way to create a long-term and possibly steady income.
4. Buy a Vacation Home
Consider vacation rentals if you’re looking for an investment strategy with multiple purposes. You can use the property as accommodation when you’re on vacation and rent it out at other times.
You can use the rental income to pay off your mortgage and cover maintenance, taxes, and insurance expenses.
To finance the mortgage for your vacation home, you can take out a second home mortgage. You just need to prove you’ll be staying at the property for a part of the year.
You need to be aware of the costs involved with vacation businesses and consider them when deciding if this investment suits you. If you want to make this a passive income, consider hiring someone to manage it. They would sort out cleaning, any issues, collect payments, and marketing.
5. Buy a Multifamily Home
When you buy a house with many units, it’s a multifamily home. It’s an attractive investment since you’ll live there while also renting out the other units.
Rents could also cover your mortgage, even at the beginning. Within time, rents may rise, and you could earn a decent income from this investment strategy.
You can use one of the mainstream mortgage options to finance multifamily homes. You can choose from a:
- Conventional loan – 3-20% down payment
- FHA loan – 3.5% down payment
- VA loan – 0% down payment
Like the other investment methods, it can take time to manage the property. You’ll need to find the right tenants, sort out any repair issues, maintain the property, and ensure tenants keep up with rent payments.
You can always hire a manager to do the work. This can also be an option further down the line when you have multiple units.
6. Buy REITs (real estate investment trusts)
If you want to invest in real estate but don’t want to deal with the responsibilities of being a landlord, you can choose REITs. It allows you to invest in real estate without dealing with physical real estate. Companies own office buildings, retail buildings, apartments, and hotels, allowing investors to buy into them. REITs are available on stock exchanges.
The benefit of REITs is that they pay high dividends. So, it’s commonly used in retirement. If you don’t need regular dividend payments, you can automatically reinvest them to grow your REITs portfolio.
Ultimately, there are multiple ways to start investing in real estate. You can flip a home or use the BRRRR method if you’re into a more hands-on approach. You can also hire a property manager to do all the work to earn passive income. In addition, if you don’t want to deal with any physical properties, you can choose to invest in REITs and benefit from dividend payments. It’s essential to consider your options and decide what is most suitable for you.
Asma is a freelance writer specialising in finance and business niche topics. Her experiences include working at one of the world’s oldest and largest asset management firms.
Apart from writing, Asma also enjoys reading about finance, business, and entrepreneurship.
