Adding Real Estate Investing to your investment portfolio is a great way to diversify your income and potentially increase your returns. But like any investment, it requires careful research and due diligence before you actually make a purchase. Fortunately, there are many different real estate investing strategies you can choose from.
Real estate investments are a powerful wealth building strategy because of the ability to leverage your capital. Leverage allows you to buy a property with less money down, increasing your potential return on investment exponentially. But beware, if you are not prepared to work hard or you do not have the right team of go-to contractors and lenders, your real estate investments may not turn out as expected.
In addition to leveraging your capital, another benefit of real estate investing is that it tends to generate more cash flow than most other asset classes, including stocks and bonds. This additional income helps offset vacancies, operating expenses and other costs of owning a property. Plus, unlike stock dividends, rental income is often tax-deductible.
However, it is important to remember that real estate is a tangible asset that has intrinsic value. As such, well-chosen properties appreciate over time, typically at a rate that far exceeds annual inflation.
One of the most popular real estate investing strategies is flipping houses, where investors find distressed properties at a discount and then fix them up to increase their value and sell them for a profit. This is an active investment that involves a lot of hands-on involvement, from conducting due diligence to making repairs and finding tenants. It’s also important to have a plan for dealing with unforeseen problems and market downturns.
The other popular option is to purchase and hold long-term commercial or multifamily properties that generate steady cash flow. These types of investments are usually a lower-risk option that produces reliable and consistent returns, although they require more maintenance than some other real estate investments. There are several strategies available for purchasing these properties, such as using the BRRRR method of buy, rehab, rent, refinance, repeat, which is an upgraded version of the “flipping” process.
You can also get involved in real estate investing by buying and selling a stake in real estate funds or REITs, which are similar to mutual funds. This is a passive, low-maintenance investment that allows you to own a piece of numerous commercial and income-producing real estate properties without having to visit or manage the actual assets.
It is important to match your interest, desire for control and time with the requirements of a particular real estate investment strategy. A mismatch could lead to frustration, such as when you want a hands-off investment and end up getting 3am toilet calls. If you are a new investor, it’s a good idea to consider working with a partner to share the work load and minimize your risk of failure.