Real estate investing is an I.D.E.A.L. investment. But the umbrella of real estate investing contains many different ways to make money (i.e. strategies).As a new investor, these numerous choices can be overwhelming.
So in the rest of this article, I will explain what I think are the 15 best real estate investing strategies. These strategies will give you a better idea of how to make money in real estate investing.
And hopefully, one or more strategies will be a good fit for you. If so, this article can provide the perfect starting point for your own real estate investing journey.
Let’s get started by learning the difference between goals,strategies,andtactics.
Real Estate Goals vs Strategies vs Tactics
You could look at real estate investing and wealth building as climbing a mountain. And of course, you are the courageous mountain climber!
The peak of the mountain is like your financial and life goals. And there are numerous milestones (or sub-goals) along the way.
Strategies are like plans for how to climb up the mountain in the first place. They are the routes that will take you towards the peak in the fastest AND safest manner.
And tactics are like the climbing tools (ropes, ladders, binoculars, etc) that help you actually climb up those routes.
I have many articles on real estate investing tactics, including analyzing your market, finding good deals, running the numbers, seller financing, negotiation techniques, and more.
But too many real estate investors get caught up in tactics without clarity on why they are using the tactics in the first place. Getting good at tactics without a strategy can simply make you better at hiking right off financial cliffs!
So I first recommend getting clear on basic real estate investing goals, like financial independenceor a certain number of free and clear rental properties. Then get clear on one or two strategies that you like. After that, all of the tactics you learn will become much more useful.
Now let’s take a look at the real estate investing strategies themselves.
The Best Real Estate Investing Strategies
In my opinion, the following are the 15 best real estate investing strategies.
To make them easier to understand, I’ve divided each of these strategies into groups based on how they’re used. These groups include:
- Business strategies
- Starter strategies
- Wealth building strategies
- Debt strategies
- Passive strategies
I’ll now unpack and briefly explain each of these 15 strategies. When possible, I’ll provide links to other articles and resources to help you use each of these strategies if you’re interested.
Business Strategies
More businesses than investments, these strategies can generate income and replace your job. But you must be prepared to invest the upfront time and effort of a business start-up in order to make them work.
1. Fix-and-Flip
The Fix-and-Flip strategy is the business of finding properties that need work, doing the repairs, and reselling them at top price for a profit. If you’ve ever watched the flipping shows on HGTV, this is what they do!
I used this model for much of my early years in real estate in order to pay the bills and generate cash savings for future investments. It was not always easy, but the beautifully finished houses and the sometimes large chunks of cash were rewarding.
My favorite resources on this strategy areThe Book on Flipping Housesand The Book on Estimating Rehab Costs by my friend J Scott.
2. Wholesaling
Wholesaling is the business of finding good deals on investment properties and then reselling them quickly for a small mark up. The crux of this business is being good at marketing and negotiating to find those good deals.
If you’re good at sales, you’ll like wholesaling. But if the idea of sales makes you cringe, I’d look for a different strategy.
I also began my real estate career doing a variation of this strategy called “bird-dogging.” I essentially hunted down deals for other more experienced investors. I then got paid whenever they bought a deal that I found.
My friend Brandon Turner published the free, Ultimate Beginner’s Guide to Real Estate Wholesaling.
Starter Strategies
These are my favorite, safest ways to get started in real estate investing. And in some cases with a little hard work, you can even get started with a small amount of cash.
3. House Hacking
House Hackingmeans living in a home that also produces income, like in a duplex, triplex, fourplex, or house with extra rentable space like a basem*nt, guest house, or spare bedrooms. By renting out part of your residence, you can reduce your total housing costs.
House hacking is also an amazing strategy because you learn the landlord business while living at your rental. And once you are done living there, you can move out and transition the property to a long-term rental.
Check out why I love this strategy in The House Hacking Guide, which has step by step instructions and a case study of my first house hack.
4. Live-In-Then-Rent
Live-In-Then-Rent is simply living in a house that will eventually become a rental. This means the house must work as your home AND as an investment later on. But unlike house hacking, you don’t rent the property while you live there.
Doing this strategy a few times is a great way to build a small portfolio. And you don’t have to live next to your tenants like house hacking.
If you’d like to learn more, you can use my first live-in-then-rent as a case study.
5. Live-In-Flip
The Live-In Flip is a strategy where you buy and move into a home, fix it up, and wait two years or more to resell it for a profit. If you follow the IRS rules, you pay NO tax on the profit up to $250,000 for an individual or $500,000 for a couple filing jointly.
My friends Carl and Mindy Jenson from the blog 1500days.com used a few Live-In-Flips to amass savings of several hundred thousand dollars early in their careers! You can read their story in Getting Rich With the Live-In Flip.
6. BRRRR Investing
BRRRR stands for Buy-Remodel-Rent-Refinance-Repeat. When done carefully, it’s an excellent way to build a rental portfolio without running out of cash early in your investing career.
Essentially you look for fixer-upper properties that you can buy below their full value. You use short-term cash or financing to buy the property, and then after it’s fixed and stabilized, you refinance with a long-term mortgage. If done well, you can pull most or all of your original capital back out for the next deal.
My friends at Bigger Pockets have a lot of great information on BRRRR investing.
While I like this strategy, I think it’s best when used early on to first build your portfolio. Eventually, it’s smart to transition to lower leverage and lower risk approaches instead of constantly leveraging as much as possible. An example of an ideal transition strategy is the Rental Debt Snowball below.
Wealth Building Strategies
The focus of these core wealth building strategies is turning a small nest egg into a large amount of wealth. Real estate investing has long been an ideal vehicle for this purpose.
7. Short-Term Buy and Hold Rentals
This strategy involves buying and holding rental properties for relatively short periods of time – perhaps 1 to 5 years. Often the purpose of this strategy is to force property appreciation (aka add value) by remodeling, raising the rent, decreasing expenses, or all of those.
The short-term buy and hold strategy works very well for multi-unitapartment turn-around projects. It also works well for rentals in high priced, appreciating markets that don’t cash flow as well.
I share an example of one particular application of the Short-Term Buy and Hold Rental strategy in the Buy 3-Sell 2-Keep 1 Plan.
8. Long-Term Buy and Hold Rentals
This isthe strategy of owning real estate with the intention of keeping it for the long haul. The benefits of this slow and steady (and very successful) strategy include rental income, tax shelter from depreciation expenses, amortization of loans, and price appreciation.
I continue to use this strategy, especially on my properties in the best locations. I like to keep these properties because they attract the best tenants, are the least hassle to manage, and tend to appreciate the most over time.
My friend Brandon Turner from Bigger Pockets has a great book called The Book on Rental Property Investing if you want to go deep on this subject. You can also read my article Landlording 101 to see how I manage my portfolio of buy and hold properties (even while traveling abroad!).
9. The Rental Debt Snowball Plan
The Rental Debt Snowball Plan is one of my favorite strategies to predictably build wealth, reduce risk, and eventually create an ongoing income stream from rental properties. It basically involves gathering all of the cash flow from your current rentals and any other sources, and then concentrating that cash flow to pay off one mortgage debt at a time.
The magic of this strategy is the speed that debt payoffs start to snowball (i.e. accelerate) over time.If you’d like to retire within 10-12 years or less, check out this Rental Debt Snowball case study.
10. The All-Cash Rental Plan
The All-Cash Rental Planis similar to the Rental Debt Snowball Plan because it snowballs rental income for growth. But instead of using mortgages, you just save up cash and buy a rental property without any debt.
Some financial teachers like Dave Ramsey advocate this type of investing. It would be tough to get started with all cash investing in a high priced market, but in many areas, it’s still a great plan.
In the article Real Estate Investing While Overseas in the Military, my friend Rich Carey explained how he built a portfolio of 20+ rentals in Alabama without any debt.
11. The Trade-Up Plan
The Rental Trade-Up Plan is perfect for entrepreneurial investors willing to juggle a lot of moving parts.This strategy is a way toquickly build real estate wealth and income by moving from smaller to larger properties, typically using a technique called a 1031 tax-free exchange.
See this case study for an example of how the trade-up plan works.
Debt Strategies
These debt strategies put you into the profitable (and often passive) role of lender instead of an owner of real estate.
12. Hard Money Lending
Hard money lending is the strategy of making short-term loans to real estate investors who buy rentals or fix-and-flip properties. Usually, the loans involve high-interest rates, points (i.e. upfront fees), and lower loan to value ratios.
While the strategy can be very profitable, it also has large risks. If you have to take the properties back at foreclosure, you need to make sure you’re protected.
I recommend educating yourself well before doing hard money lending, beginning with Ian Ippolito’s free Hard Money Lending Guide. And if you’re very serious, you should consider paid education with my go-to teacher on the subject, Dyches Boddiford’s Hard Money Lending class.
13. Discounted Note Investing
Discounted note investing means creating or buying notes (i.e. real estate debt) at a discount to the note’s full value. Because of this margin of safety, you can create large returns and reduce your risk.
One form of Discounted Note Investing involves buying notes (typically those that are delinquent) from other owner financing sellers or from banks. This is a much more advanced strategy, so I recommend studying it carefully before jumping in. You can begin with note investor Dave Van Horn’s bookNote Investing.
My experience with Discounted Note Investing came from creating my own notes. I sold some of my rental properties to my tenants using seller financing.
For example, I had approximately $70,000 invested in a property. I then sold the property to my tenant for the full value of $100,000. But instead of my tenant getting a loan at a bank, I became the bank. The buyer paid me $10,000, and I financed the $90,000 balance (i.e. received monthly payments of interest and principal).
While this is a profitable strategy, federal and state regulations like the Dodd-Frank Act have made it much more difficult for small investors to navigate. While there are a few exceptions, small investors must follow many of the same, expensive rules as large lenders. So, get help from your local attorney before beginning this strategy.
Passive Strategies
Although some of the passive strategies below still involve important upfront investment decisions, they require less day-to-day hassles than some of the prior strategies.
14. Syndications & Crowdfunding
Syndication is essentially pooling your money with other investors to buy real estate or make loans. It’s a way to invest in any of the other strategies mentioned above without having to put the deals together yourself. You invest your money with syndicators or general partners who find and manage deals for you (and they receive a fee).
Crowdfunding is a relatively new form of syndication investing where deal opportunities are marketed through online platforms like Peer Street(this is an affiliate link). Most require you to be an accredited investor, but you can sometimes begin investing with as little as $1,000 to $5,000 per investment.
I am beginning to explore some of these syndication deals myself, and one of my favorite sources of information is Ian Ippolito at theRealEstateCrowdFundingReview.com.
Although I put Syndication/Crowdfunding as a passive real estate investing strategy, this is bit misleading. Investing in syndications and crowdfunding CAN be very easy and passive, but successful investors with this strategy are still active.
These successful investors actively screen the sponsors, general partners, and deal opportunities before making an investment. In other words, they say “no” a lot more than they say “yes.” And that’s very different from passive index investing or even REIT investing where you make very few active decisions.
15. Real Estate Investing Trusts (REITs)
Real estate investment trusts (i.e. REITs) are very similar to a mutual fund. But instead of allowing you to own a piece of many stocks or bonds, these REITs allow you to own a piece of many commercial, income-producing properties.
And unlike most of the other investment strategies above, this strategy truly is passive once you buy it.
REITs are not my specialty, and they are not something I have invested in. But you can get a good introduction to REITs in Where Do REITs Fit in a Portfolio andWhen Is the Right Time to REIT?
Conclusion
You’ve now read through the 15 best real estate investing strategies. These are the different routes up the financial mountain using real estate. Each has its own pluses and minuses.
Keep in mind that most investors combine different strategies at different times. For example, you may begin with House Hacking, thentransition to Long-Term Buy & Hold Rentals, and finally, do a few Fix-and-Flip deals on the side.
And also don’t worry if you try one strategy and realize it doesn’t work for you. Real estate investing is an entrepreneurial venture. Sometimes you have to experiment and try things that don’t work before you find your sweet spot.
Best of luck with your own real estate investing strategies!
Which of these real estate investing strategies resonates most with you? Are there any of these strategies that you’ve tried that haven’t worked for you? I’d love to hear from you in the comments below.
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