One of the most common questions asked by individuals looking to get into Real Estate is, “What is the best strategy that will provide the best returns?” The truth is that there is no one right answer. The strategy you choose will be based on both your understanding of real estate and the financial level you are currently at. We wrote an article on The 5 Levels of Financial Hierarchy. I highly recommend you read that before continuing this article as understanding those levels will help you select the strategy that is best for you.
Although there are many more niche strategies available in real estate, I’ve selected a good balance of strategies that apply to each level of the financial hierarchy.
Wholesaling
Level of Financial Hierarchy – Financial Survival & Financial Stability
Wholesaling in real estate is the process by which a person identifies and negotiates a contract with the seller of the property and assigns the terms of the contract to another real estate investor to make the purchase. Serving as the middleman for the deal, wholesalers earn revenue by helping real estate investors identify undervalued properties and close on those deals.
Wholesalers collect a wholesaling fee for finding and negotiating the deal with the seller. The fee is often a percentage of the purchase price of the property. The investors that wholesalers find deals for are typically real estate investors who would prefer to spend time and effort rehabbing the properties rather than spending time identifying or negotiating properties with the seller.
If you are someone who wants to make a career out of real estate and is short on capital, this is an awesome way to learn how to identify properties, analyze markets, and negotiate deals.
Although you may not have to invest much capital to be a wholesaler, in order to become successful, you will have to invest time into building your network, identifying properties and neighborhoods, and learning the art of negotiating deals.
Mastering wholesaling will give you a distinct advantage when you are ready to invest in your own property. This is a great place to start if you are in the Financial Survival or Stability stage of Financial Hierarchy. You will make connections, learn the game of real estate, and if you close on a few deals, you can make some money while you are at it. You are killing two birds with one stone; your income is leveling up while you are also enhancing your knowledge of real estate.
House Hacking
Level of Financial Hierarchy – Execution & Growth
House Hacking is becoming a popular strategy for those just starting their Real Estate Investing Journey. It is a strategy in which you buy a small multi-family property such as a duplex or four-plex and reside in one of the units. The other units will essentially be paying for a portion of your mortgage and if you find a great deal, you could receive solid positive cash flow.
An alternative version of house hacking for those who do not have the capital required to purchase a property is “rent hacking.” When you rent hack, you are essentially leasing a home and subleasing the extra rooms of the home at a rate that reduces your monthly payment. For example if you rent a 3 bedroom house for $3000 and split it evenly amongst friends you would be paying $1000 each. Now if you take control of the master lease, you can then sublease the other rooms for $1100. You are now only paying $800 for your room. That $200 a month saving could be put in a separate account for a future down payment!
Fix and Flip
Level of Financial Hierarchy – Execution & Growth
Fix-and-flip is the method of purchasing a home, remodeling/renovating it, then turning around and selling it for a profit.
It remains one of the most common and well known methods of investing in real estate today. And rightfully so as these projects offer handsome profits for real estate investors who have experience and knowledge. I wouldn’t recommend it to beginners as there are potentially a lot of pitfalls that may be encountered if you don’t know what you are looking for. Most investors assume that the significant aspect of fixing and flipping is the renovation, but as with any type of real estate investing, most of the money made is on the buy.
What does that mean?
A large part of the success of a real estate deal is the price you bought the property at. It is very important to try your best to negotiate the price of the property you are looking to buy. You will also want to factor in the costs required to do the renovations. Having a great inspector and contractor on your team will significantly increase your chance of success on Fix-and-Flip projects.
Syndications
Level of Financial Hierarchy – Growth & Financial Freedom
Have you ever lived in or driven by a large apartment complex and wondered, who can afford to buy one of these complexes. You may actually be closer to owning one than you think.
Many large buildings or skyscrapers are purchased through Real Estate Syndications.
Real estate syndication is the process by which investors pool their capital resources and expertise to invest in real estate projects that would be too capital intensive or complicated for an individual investor.
The reason investing in Real Estate Syndications falls into the last two levels of financial hierarchy is because in most cases you have to be an accredited investor. The requirements of becoming an accredited investor are having an income of $200k+ for the last two years or having a net worth of over $1 million dollars excluding your primary residence.
If you are entering these deals as a hands-off investor, there is not much you need to do except write a check for your investment. Depending on the structure of the deal, you may receive quarterly distributions/dividends for your investment and also a share of the returns once the General Partner sells or refinances the property.
Syndications are a great way to diversify your portfolio without having to be active in the deal and management of the property. It also propels you one step closer to creating a solid stream of passive income.
REITs
Level of Financial Hierarchy – Growth & Financial Freedom
Real estate investment trusts (“REITs”) are companies that own and operate income-producing real estate assets such as office buildings, apartment complexes, shopping malls, hotels, warehouses, self-storage facilities, and even mortgages or loans.
Although it may seem similar to investing in a syndicated real estate deal there is a slight difference. When investing in a REIT, you are actually buying shares of the company or fund that owns the various real estate assets. When you invest in a syndication, you are most often investing in only one single asset or property.
There are various types of REITs such as publicly traded REITs which are available on the stock market. The other types include Private REITs and Public Non-Listed REITs
As you can see, there are various ways in which you can invest in real estate and it is important to understand which strategy best fits your current financial situation. With proper education and due diligence, there is no reason why anyone cant carve their own path to financial freedom through real estate.
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