Choosing your real estate strategy will help you decide what type of property to buy. In this post we examine different types of strategies and what makes them unique.
Introduction
As an agent, the question I receive most often from new investors is “what type of property should I buy as my first investment?”. The quick answer is “it depends in what real estate strategy you are pursuing”. With that being said, there is no one-size-fits-all strategy, but there are a couple of factors we can use to determine the ideal strategy for an investor.
- Budget – how much money are you planning to invest?
- Return objective – are you looking for steady passive income or creating “sweat” equity?
- Risk tolerance – could you afford to lose money on an investment?
- Time – How much time are you willing to commit?
As a new real estate investor, the first deal will be toughest one mentally. Before I closed on my first property, I read 5 books and I still felt like I knew almost nothing! With that being said, I was sure that I was pursuing the right strategy given my budget, risk tolerance, and goals. For that reason, I’ve put together the following summary of some of the most popular real estate strategies.
3 Major Types of Real Estate Strategies
There are multiple real estate strategies, but we can group them into three large groups:
- Long-term rental strategies
- Short-term rental strategies
- Other real estate strategies
Long-term real estate strategies
Long-term real estate strategies are designed to buy a property, rent it to a tenant for the long-term, and generate cash flow and equity. Given their simplicity, they are the most common type of real estate strategies
Buy and Hold
- Summary: most common type of strategy. It consists of buying a property (single-family, condo, apartment, etc.), finding a long-term tenant (typically defined by a 1-yr lease contract), and collecting rent payments every month.
- Pros: easy strategy to implement, low initial budget, low risk relative to other strategies, potential for steady cash flows and property appreciation.
- Cons: low potential return compared to other strategies.
Buy, Rehab, Rent, Refinance, Repeat (BRRRR)
- Summary: as the name implies, the strategy consists of buying a property in need of repairs, rehabbing it, renting it out to a long-term tenant, refinancing the property to take out the initial investment, and repeating. When done successfully, the investor is able to take out his/her initial cash investment and use it for another deal. This would allow you to keep generating rental income without any of your cash in the property!
- Pros: allows the investor to take invested money out once refinanced and buy more properties to grow.
- Cons: could take a long time to execute (depending on how fast you can rehab and refinance the property), high time commitment.
House Hacking
- Summary: the house hacking strategy consists of buying a residential multifamily (2-4 units), living in one unit and renting the other ones. The idea is to use the rental income to offset the mortgage payments, allowing the investor to “live for free”.
- Pros: low initial investment (property is typically financed with an FHA loan).
- Cons: living right next to your tenants.
Turnkey
- Summary: move-in ready property sold typically by a real estate company. The company/operator takes care of finding the tenants and the day-to-day management, while the investor receives the net cash flow.
- Pros: little to no work done besides finding a good turnkey operator.
- Cons: low potential return.
Short-term real estate strategies
These strategies consist mainly of vacation rentals (although many other strategies exist in this group). Very similar to a long-term rental strategy, but they tend to have higher operating expenses, higher guests turnover but also can generate a higher cash flow.
Vacation Rentals
- Overview: similar to a buy and hold strategy, the investor buys a property (could be a single-family home or an apartment in a vacation rental building) and rents it out through a short-term rental platform (Airbnb). Technically, vacation rental activities fall outside the real estate industry as they are in the lodging/vacation industry, but they are still popular with real estate investors.
- Pros: high cashflow potential.
- Cons: high time commitment, high operating expenses, seasonal business.
Other Strategies
Fix and Flip
- Summary: a popular strategy to potentially generate high cash returns from sales. It consists of buying a property that requires considerable work (or is highly undervalued), rehabbing it to increase the value/equity of it, and selling it for a profit.
- Pros: high return potential.
- Cons: the purchase of these properties is usually done with a cash purchase (through hard money lenders), can be challenging to execute for a new or inexperienced investor.
Commercial Real Estate
- Summary: this is a whole industry by itself, but some commercial real estate strategies include buying malls, apartment buildings, warehouses, land, office buildings, senior housing, and others.
- Pros: very high return potential.
- Cons: most difficult strategies, requiring high capital investment.
What’s next?
No real estate strategy is perfect, and some strategies work better in some areas than in others, but having an understanding of what’s available can help you make the right decision. Hopefully this short walkthrough helped you have an idea of some of the more popular real estate strategies and focus on the ones that can help you grow your business. Looking for a great book to begin your real estate career? The following book is the first one I ever read and I would highly recommend it: The Book on Rental Property Investing: How to Create Wealth With Intelligent Buy and Hold Real Estate Investing (BiggerPockets Rental Kit)
