Real estate investing is one of the popular ways of accumulating wealth—and it should be a long-term strategy. As an investor, you need to have a plan: set short- and long-term goals, pick your strategy and niche, brace yourself, prepare for the best and worst by having an exit strategy, and be a lifelong learner. If you are just starting out on this journey, here’re some important things you need to know.
How You Intend to Invest
As said above, your business plan should include how you intend to participate—do you want to be a full-time investor, or you just want to make it a side gig? This question should be on your priority list: Knowing your intention of investing guides, you on other things like what investment strategy to choose, how to invest, what your exit strategy should be etcetera.
Types of Real Estate Investment Strategies
Without further ado, these are the commonly used investment strategies in real estate.
The fix-and-flip also known as house flipping is a strategy whereby you buy an undervalued or distressed property, repair it and sell it at the normal market rate within a short period. This strategy is considered as the fastest way to accumulate wealth in a short time.
Generally, it’s commonly said in investing that “the higher the return on investment (ROI), the more the risk involved and vice versa,” this also apply to the fix-and-flip strategy. It involves a lot of risk and takes careful planning and execution to be successful. However, if you want to increase your chances of success, you should work with an experienced flipper and a certified contractor.
The Rental Strategy
The rental strategy is another entry point for starters. It involves buying a property, repairing and renting it out to people or firms for a certain period—either short- or long-term. It is also referred to as the buy-and-hold strategy. As a rental property investor, there are different ways you can make money with this strategy—either the short-term rental and the long-term rental strategy. These strategies are explained below.
The Short-term rental strategy involves renting your property out for a short period—from a night to a period of six months. It offers flexibility on how you use your property and doesn’t always require you to sign a contractual agreement with your client. The drawbacks to this sub-strategy are: it is location-bound and seasonal. Also, you need to always be on the lookout for changing laws—because rules guiding this strategy changes often. Example includes AirBNBing.
The Long-term Rental Strategy: allows an investor to rent out their property for a longer period—typically one year and above. Unlike the short-term rental strategy that is seasonal, the long-term strategy is all year round and it’s not location bound (unless in special cases). Conversely, as a long-term rental investor, you need to sign a contractual agreement with your tenant and decide the method of receiving payment—either monthly or yearly. The only con to this strategy is property management and risk of delinquent tenant.
Real Estate Investment Trusts (REITs)
Unlike stocks, real estate investment is illiquid—which makes it very risky. These frighten most investors and prevent them from investing in real estate—yet their love for it won’t let go. However, if you share something in common with these people, here’s good news: you can invest in Real Estate Investment Trusts (REITs).
Real Estate Investment Trusts (REITs) are companies that owns and manage income-producing properties. Investing in REITs is similar to buying stocks—it’s liquid and can generate a steady income stream. As a novice investor, REITs can be a safe haven to make money while you acquire knowledge on how to invest in physical real estate. If you plan to use this as your entry point, you have to know that REITs are classified into different categories. But here we plan to discuss the most important ones—the Equity REITs and the Mortgage REITs.
Equity REITs: like it name implies, these companies buys, manage and hold equity (real estate properties). it’s actually the most common type of REITs. They generate most of their revenue from renting out properties—not selling them.
Mortgage REITs (mREITs): focuses on lending money to investors or mortgage firms. They invest in mortgage-backed securities (MBS) either directly or indirectly. Unlike the equity REITs, these REITs firms generate their income from net interest margins. However, because mREITs focus on mortgage lending, the fate of these firms is tied to the rates.
These are just some of the important things to know when starting out. Real estate is wide and there’re so many things to know—which you would learn as you grow. Knowing your purpose of investing and your investment strategy differentiate between a successful investor and otherwise. You don’t want to blow off your hard-earned money, it is important to assess yourself bef