1. Buy and Hold
Strategy number one: “Buy and Hold.”
This is one of the most popular ways to get into real estate investing and one of my all-time favorites. It’s very simple: you buy a rental property, rent it out to a tenant, and hold it for a long period of time, collecting cash flow, paying down the mortgage, and letting it appreciate in value.
This can be done with a variety of different types of properties: single family, multi-family, and commercial properties. There are numerous sub-strategies and tactics that fall under the buy-and-hold strategy, which I’m not going to get into in this post, but they include the house hacking strategy and the Buy Rehab Rent Refinance Repeat (the “BRRRR”) method.
Buy-and-hold is slow and dependable. If done correctly, it can be a pretty low risk investment. It can also be relatively passive, but not completely hands off as the rental property will require continuous management.
2. House Flipping
Strategy number two: “House Flipping.”
With this strategy, you have to buy a property, increase its value by fixing it up, and sell it as soon as possible to maximize your profit. This is usually done with single family properties, but it is possible to do it with raw land, as well as multi-family and commercial buildings, although the last two are pretty rare.
This strategy can yield a significant one-time profit, but it is a lot more active than the buy and hold strategy. Also, there is no residual income with this strategy. Although some real estate investors run an entire house flipping business, where they flip multiple properties per year and delegate most of the process, making it a semi-passive business.
If you’re interested in this strategy, check out my post on flipping houses for a more in depth look at whether flipping is worth it for beginners here
3. “Slow” Flipping
Strategy number three: “Slow Flipping.”
Some people might disagree with my definition, but what I consider slow flipping is buying a property, improving it in some way, raising rent, etc., holding it for at least a year as a rental, and then selling it for a profit.
This is a hybrid between the buy-and-hold and the flipping strategy and capitalizes on a little bit of both. I actually like this strategy quite a lot because you get to take advantage of some of the principles of buy and hold while also getting the main benefit of the flipping strategy — big one time profit when you sell.
By using the property as a rental first, you get to improve the tax treatment of the profit you make when you sell. When you sell a rental property within a year your profit will be subject to short term capital gains or worse, if you are considered a “dealer,” it will be treated as ordinary income and may be subject to self-employment tax in addition to regular income taxes. But, with the slow flip, you avoid that issue if you hold the property as a rental for over a year.
The other reason I like this strategy is that you give yourself another “exit,” meaning that, unlike house flipping, you don’t have to sell quickly. You can hold on to the property indefinitely (assuming you are at least breaking even with the rent that it is bringing in. So, if something happens in your local market, making it difficult to sell the property for a profit, you are not forced to take a loss and can simply wait it out for a few years before selling.
Slow flipping can be done with single family properties, but I think it works best with multi-family and commercial properties. I plan to make a video and write another post soon on how I slow flipped a 4-unit building for a $140,000 net profit after holding it and selling it after 3 years. I’ll link it up here once I post it.
Strategy number four: “Wholesaling.”
This is where you sell the right to purchase a property to another investor and collect a fee in the process. There are actually a few different definitions of wholesaling that people use, but my definition is that wholesaling is getting a property under contract for a certain price and then assigning your right to that contract to another buyer who pays the agreed-upon price to the seller and you get a fee from the buyer at closing for assigning them the contract.
This is different than flipping, because you never actually take title to the property. You simply sell to another investor your right to buy the property at the price you and the seller agreed on.
The idea is that the price for which you got the seller to agree to sell you the property is below market and the other investor is happy to pay you a fee for the right to buy the property at that price. Depending on the deal, fees can range from a few thousand to tens of thousands of dollars.
This strategy works best with single family homes, but can also work with other types of properties.
Although wholesaling seems simple and does not require much capital to get started, it is actually a lot harder than it looks. You need to know a lot about real estate (finding off market properties, marketing, rehab costs, etc.) in order to wholesale successfully.
This is definitely one of the more active strategies, because in order to make money you have to constantly look for deals and negotiate with sellers and buyers. There are also issues with the legalities involved with this strategy which vary from state to state.
I am going to do a more in depth video on this strategy in the near future, especially as it pertains to my home state of New York, and will link it here.
5. Real Estate Commissions
Strategy number five: collecting real estate commissions as a real estate agent or broker.
The big caveat with this one is that it actually requires getting a real estate license. To be honest, getting your real estate license is not that hard to do. I covered this topic in depth in another video I did with one of the agents in my brokerage. Check it out here
if you are interested.
Being a real estate agent can be a lucrative business and a good way to get your foot in the door in real estate investing because you get to work with other real estate investors and learn from them. There are agents who make significant amounts of money representing buyers and sellers as their primary career. But, you can do it part-time as a side hustle as well.
Making money as a real estate agent is definitely an active business and requires energy and time to be successful.
6. Short Term Rental Arbitrage
Strategy number six: “Short Term Rental Arbitrage.” Some people also call it “Air BnB Arbitrage.”
It is a fancy title, but the strategy is pretty simple. It involves leasing an apartment from the owner and then subleasing it to short term renters through sites like Air BnB and Home Away.
This strategy has gained a lot of popularity in recent years. The advantage is that you don’t need much money to get started and you don’t actually have to own any real estate.
Instead of buying real estate, you simply sign a lease with the owner of a property and you then re-rent the same property to short term tenants for much higher rent than you agreed to pay to the owner and you get to keep the difference. There are investors out there who do this with dozens, and even hundreds of apartments, and they are able to make substantial returns as a result.
Some of the major drawbacks to this strategy, however, are that you don’t get to build equity and that you need a solid team of people to make sure that every part of the process runs smoothly. With rental arbitrage, you are in the hospitality business. You usually have to furnish the properties and provide a cleaning and maid service on a daily basis. This is definitely an active business.
7. Real Estate Syndication
Strategy number seven: “Real Estate Syndication.”
This is another fancy title and it is a little bit more complicated. This strategy involves pooling of funds from a number of different investors and using those funds to buy a large piece of property, typically a large apartment complex of 100 or more units.
The syndication deal is put together by a “Sponsor” who finds and manages the deal. The investors, who usually provide a substantial portion of the funding, typically don’t have any say in how the property is managed. They simply collect interest on their money and get to partake in any profits upon the eventual sale of the apartment complex.
The legal structure is usually set up as a limited liability company in which the individual investors own membership interests, while the Sponsor acts as the LLC’s manager. Alternatively, it can be setup as a Limited Partnership, where the Sponsor is a General Partner, while the investors are Limited Partners.
In either case, the Sponsor is a person or a group of people, with substantial experience in real estate, specifically, apartment buildings. The investors, on the other hand, are people with substantial financial means. They are required to be “accredited” or “sophisticated” investors, as those terms are defined by the federal tax law and regulations.
The Sponsor typically collect management fees of a few percentage points of the deal’s profits. Investors on the other hand get a preferred interest return anywhere between 5% and 10%. Once the preferred return is attained, any remaining profits are typically split 70/30 – 70% to investors and 30% to the Sponsor.
If you acquire enough knowledge and real estate connections, you may be able to become a Sponsor and profit from this strategy that way. Alternatively, if you don’t have the time and the desire to acquire the particular knowledge needed to become a Sponsor, but you can quality as an accredited or a sophisticated investor, you may be able to get involved in a syndication deal by investing your money with a Sponsor.
As a sponsor, this is a pretty active form of investing, at least initially. As an investor, it is pretty much 100% passive.
Today, it is pretty easy to become an investor in a syndication deal through platforms like Realty Shares, Peer Street, and others, even if you don’t have a ton of money or knowledge of real estate. But, you should always do your own research and due diligence before investing your money with any platform or syndicator.
8. Private Lending
Strategy number eight: Private Lending.
This is another very passive way of investing where you lend money directly to another investor for use on their real estate deals. Unlike syndication, however, you typically do not obtain any ownership interest in the property or the entity that owns it. Rather, you simply act as the bank for that investor and earn interest on your money.
The interest rates you earn are set by agreement between you and the borrower. But, it is not unusual for the interest rates to be 8% or higher.
If you have funds to invest, this could be a good way to earn a high and stable return. The downside is that you really need to know and trust the borrower and the borrower’s abilities to wisely and responsibly use the money you are lending them. The risk is that if they default, you may lose some or all of the money you lent them.
To hedge against this possibility, you want to ensure that you obtain adequate security for your loan. This usually means getting a lien in the property, personal guarantee from the borrower, and an assignment of all of the property’s leases in the event of default.
9. Note Investing
Strategy number nine: “Note Investing.”
This strategy involves purchasing real estate promissory notes at a discount to the remaining value of the loan principal. To put it simply, with this strategy you buy the contract that represents the real estate loan, called the promissory note from the original lender. You step into the shoes of the lender and, from that point on, the borrower pays the monthly mortgage payments to you.
When you buy the loan from the original lender, you usually pay that lender less than the remaining principle balance of the loan. So, you can actually make money in two ways. One, by collecting interest during the life of the loan and Two, by receiving the full remaining balance when the loan is paid off. The reason you profit from the sale is because you paid less for the loan to the original lender than what the borrower ends up paying you when the borrower pays off the loan.
Because you also get the security interest — the mortgage on the property — when you buy the promissory note, if the borrower defaults, you can foreclose on the property and either take over the operation of the property (if it is a rental) or sell it and recoup the remaining principal.
This is a fairly passive strategy that does not require very much involvement on the part of the investor, as long as the borrower continues to pay. However, it can become a lot more involved and risky in the event of a default.
There are a lot of investors out there who specialize in this type of investing and make a substantial profit from it.
10. Real Estate Development
Finally, the last strategy: “Real Estate Development.”
This is where you buy a piece of raw land and improve it, either by building on it or building the infrastructure, such as roads and sewer and water connections and then sell it.
You could say that this strategy can fall under the flipping strategy. But, in my mind, it is quite a bit different. When you are flipping, you are usually taking an existing structure and making relatively minor improvements to it to increase its value. When you develop raw land, you have to build a structure from the ground up.
There is a lot more involved in developing real estate than flipping houses from the construction aspect, which is why it is typically done by builders who own their own construction companies. The profit margins per house for builders are much more substantial than they are for flippers. However, real estate development requires a lot of business infrastructure and know-how.
If you’ve never invested or done anything with real estate, I don’t think that real estate development is something you want to jump into right away. But, you could potentially partner with a real estate builder to develop a property if a deal makes sense. Obviously, if you are going to partner with a builder, you would need to bring something different to the table that the builder does not already have. Otherwise, they wouldn’t really need you to do the deal.