Real estate can be a great way to invest. Property investments have excellent return potential and diversify your portfolio to insulate you from recessions and other adverse economic conditions. But what’s the best way to invest in real estate?

There’s no single right answer. You have to look at the best options and decide which will work for you. There are several ways to invest in real estate, each with different capital requirements, risk levels, and investment dynamics.

But before we go into that, we will like to discus how to get started if your goal is to invest in the real estate market. More information will be provided below.

• How to Get Started With Real Estate Investment
• Best Ways to Invest in Real Estate

How to Get Started With Real Estate Investment

1. Identify Your Financial Stage

Real estate investing is simply a vehicle to improve your finances. So, before we get into the details of real estate, let’s think about your overall financial picture.

Most new investors eventually want to reach financial independence. You can think of this like the peak of the mountain where your living expenses are all covered by income from investments.

The fundamentals of climbing this mountain are the same whether you invest in real estate or anything else. To reach the peak of the mountain faster, you simply have to increase your savings rate.  You can then invest those savings into your chosen assets, like real estate.

We suggest a couple of specific real estate strategies that help with your saving rate in the next section. But for now, you need to identify where you are on the financial mountain. Are you at the very bottom? Half-way up? Or near the top?

You want to know your current stage because depending on where you are,  certain real estate strategies will make more sense than others. We will explain some of those strategies in the next step.

So, after thinking for a moment, decide which stage fits you best.

2. Choose a Specific Real Estate Investing Strategy

At this stage, you could create a 30-page business plan that even an MBA would be proud of. But remember, the goal is just to get started. So, let’s begin with something quicker.  You can create a big, detailed plan later if you want.

For now, just choose ONE real estate strategy that will help you move from your current financial stage to the next stage.

Read Also: How to Make a Lot of Money in Real Estate While Young

Starting with one specific strategy doesn’t mean you won’t have detours or even a complete change of direction later. Life happens, and you have to be flexible. But starting with just one will help you focus. And this will give you the confidence to get started.

Below are some suggested real estate strategies that you can choose from depending on your wealth stage:

Survival & Stability

Strategy Goal: Earn extra income, learn, and avoid losses

• Keep your day job & work to get a raise (not real estate, but probably the first strategy to explore)
• Instead of simply renting or stretching to buy a home, master lease a residence and rent out bedrooms or units to reduce your payment
• Bird dog for other real estate investors to “sniff out” good deals for them & learn the investment acquisition business in the process (this is how I got started)
• Become a buyer’s agent, help buyers find houses to purchase, & learn the retail housing market in the process
• Become a leasing agent, match tenants to properties for landlords or property managers, & learn the landlord business in the process
• Manage/supervise remodeling projects for other investors & learn the remodeling business in the process

Saver

Strategy Goal: Dramatically increase your savings rate by reducing expenses and/or increasing income

• Any of the options in stage #1
• Hack your housing in order to reduce or eliminate your housing payment
• Do a Live-In Flip (aka flip your residence) in order to build big, tax-free savings
• Do a Live-In-Then-Rent by living in an affordable house for 1-2 years and then keeping it as a rental
• Start wholesaling real estate for quicker, smaller chunks of cash (usually requires investments of time and money in marketing and strong sales skills)
• Start a non-real estate side-hustle that matches your skills and passions with a need in the marketplace

Growth

Strategy Goal: Grow your smaller net worth into a much bigger net worth

• Fix-and-Flip houses to generate big chunks of cash. Remember to save & reinvest your profits!
• Build & grow an income property portfolio using one of these plans:
  • The All-Cash Plan – no debt, pay 100% cash for each property
  • The Debt Snowball Plan – borrow on a small number of properties, then accelerate debt pay down one property at a time
  • The Buy 3-Sell 2-Keep 1 Plan – buy 3 rentals, hold, then sell 2 and pay off debt on the third
  • The Trade-Up Plan – use 1031 tax-free exchanges to build a portfolio with strong equity and income
  • Self-Directed Retirement Account Plan – use a self-directed IRA or 401k to invest tax-free in private loans (my favorite), rentals, or flips

Income

Strategy Goal: Turn existing equity into investments that produce maximum income with minimal hassle and risk

• With existing real estate portfolio:
  • Pay off debt to decrease overall debt levels (0% to 33% loan-to-value), reduce risk, and increase income
  • Sell low-quality properties and replace them with better ones (using 1031-exchanges, if needed)
  • Refinance any remaining debts that are not optimal with fixed, low-interest, long-term debts
• With no existing portfolio or with an insufficient number of properties:
  • Buy more passive assets like higher-quality residential rentals, net-lease commercial rentals, and/or shares in limited partnerships. Keep overall debt levels low (0 to 33% loan-to-value)
• Make loans to other investors with funds inside and/or outside of self-directed retirement accounts
• Diversify into other asset classes (at my age of 37, index funds are my diversification alternative of choice. An early retiree in his 50s named Darrow Kirkpatrick, on the other hand, also diversifies into other asset classes like bonds.

If you find yourself attracted to one of the strategies above but you’re intimidated by how to execute it, that’s ok.  You still have time to learn. Just make a note of it for now. This kind of focused decision-making process helps you identify knowledge gaps that you need to fill as you go.

For now, just choose one strategy that sounds most interesting and applicable to your situation. Then let’s move to the next step.

3. Pick a Target Market

With prices so high in many locations, people ask often whether they should invest close to home or choose a new market. It’s a good question because the market you choose could make a big difference in your final results.

You might prefer to invest close to home IF possible. Being local gives you the advantage of intimate knowledge of the market. And while managing real estate from a distance can be done, it’s still more efficient and effective to be local.

So, start evaluating markets close to home. If prices seem too high in your local neighborhoods, explore a few ideas locally first before looking at other locations. First, drive one hour away. Often the suburbs of major urban areas become much more affordable and reasonable for investments.

Second, look for smaller niches within your overall market. Within high-priced markets, niches like condos, mobile homes, tax liens, and note investing can sometimes still be profitable.

But whether you stay close to home or invest somewhere else, you should always do a market analysis first.

Here is a brief summary of the ideas you can implement :

1. Evaluate big picture location criteria
   • Jobs and economics
   • Population growth
   • Rent/price ratio
2. Evaluate small scale location criteria
   • Convenience
   • Romance
   • Walkability
   • Safety and Crime Rates
   • School Districts
   • Public Transportation
   • Neighborhood Covenants and HOAs
   • Local Laws, Finances, Taxes, & Infrastructure
   • Barriers to Supply

By combining all of these criteria, you can then choose a target investment market. Choosing your target market will probably begin with a metropolitan statistical area (MSA), which is a larger region. But we recommend narrowing it down even further to zip codes, school districts, or census blocks in order to make your property search easier.

If you need to take more time to evaluate and choose your market, that’s fine. But don’t get stuck too long. Make a choice as soon as possible and then keep moving forward to Step #4.  Much of entrepreneurship is trial and error. You’ll never be perfect. You can test your hypothesis and return to this step if it does not work.

4. Decide Your Investment Property Criteria

Your investment property criteria tell you and others what it means to have a good investment. We actually recommend creating a written investment profile that you can share with potential partners, investors, and sources of leads like real estate agents.

Your written investment profile should include descriptions of two major categories:

1. Target property
2. Target terms (aka the numbers)

Your target property will become clearer when you choose a niche within your overall market.  A niche means you focus on one smaller segment of the entire market.

When you’ve chosen a niche (or niches), your basic target property description may look something like this:

Single family houses with 3 bedrooms and 2 baths in the 30263, 30265, & 30277 zip codes. Target full market price range is between $120,000 to $199,000. Ideal properties are on quiet, safe streets convenient to schools and shopping. Ideal properties also include a garage or other storage and a useable yard.

The second category on your investment profile is the ideal terms (aka the numbers). This will show you how to quickly determine the most important investment numbers for you.

The ideal terms you choose will depend on the choices you’ve made up to this point, but they could look something like this:

Target purchase price (including upfront repairs) should at least meet the 1% rule. Net rental income after financing for multi-units should be at least $100/month per unit and for single family houses should be at least $200/month. Cash-cash-on cash return should be at least 10%, and the discount from full value of property should be at least 10%.

Your criteria may change over time. But choose some basic investment property criteria that you can live with for now. Then move forward to the next step. If you find later that you need to adjust your criteria, you can always come back.

5. Build Your Team

Real estate is a team sport, and you are the leader of your team. You don’t necessarily need employees, but you will need independent contractors and advisors who can help you in their areas of expertise. If the idea of running this team turns you off, then perhaps a different type of investing suits you better.

Below is a list of some of the important team members you’ll need.

• “Inner Circle” – your personal, closest team members
  • Spouse
  • Business partner
  • Mentors/personal advisers
• “Support Circle” – your fiduciary or critical relationships who help you with important, ongoing tasks
  • Property manager (if applicable)
  • Attorney specializing in real estate and/or business
  • Certified Public Accountant (CPA)
  • Lender(s)
    • Mortgage lender – for long-term financing
    • Hard money lender – for short-term financing
    • Private money lender – for flexible, short or long-term financing
• “Service Circle” – functional relationships for tasks you’ll need for your investments
  • Closing agent/title company
  • Home inspector
  • Electrician
  • Plumber
  • HVAC technician
  • Handyman
  • Painter
  • Yard service
  • Pest & Moisture control
  • General contractor (for bigger remodels and pulling permits)

You will have the best chance of finding your key team members by networking with other like-minded real estate investors.

6. Line Up Financing

Unlike other forms of investing, it’s fairly normal to use financing to help you with a real estate purchase. And there are many options to choose from.

If you are a non-US investor, some of these specific sources will vary. But you’ll find at least some of them will be applicable. The seven financing sources include:

1. FHA (Federal Housing Administration) Loans – Insured by the Federal government and easier to qualify for than most programs. Terms include a small down payment, a fixed interest rate, and a long-term (length) loan
2. VA (Veterans Administration) Loans – You must be a veteran to qualify. Terms include a 0% down payment, a fixed interest rate, and a long-term loan.
3. Conforming Loans – Loans conform to guidelines of mortgage giants Fannie Mae and Freddie Mac. Terms may include a 5% – 20% down payment, a fixed interest rate, and a long-term loan.
4. Portfolio Loans – These are kept by banks or lending institutions instead of being sold off on the mortgage market. Terms vary, but they usually have a shorter term (5-10 years) and interest rates are competitive.
5. Hard Money Loans – These lenders are most interested in the collateral (i.e. a hard asset) instead of the detailed lending regulations of other sources. The loan costs are much higher, so these are often used for short-term remodeling projects.
6. Private Lenders – The type of private lender varies widely, from self-directed IRAs & 401ks to wealthy individuals. The flexibility and the long-term relationship you get from these lenders make them extremely valuable. I also include money partners in this category.
7. Seller Financing  – This is my favorite type of financing. A seller with equity can allow you to pay the purchase price over time with installments or by using more creative contracts like leases and options. It’s not as easy to find seller financing as walking into a bank, but the flexibility of terms make seller financing worth the effort.

The type of financing you choose will depend upon your financial situations (Step #1), your strategy (Step #2), and your personal preference. You will want to rely heavily on your mentors and your lending team members (Step #5) to help you line up the best fit for you.

Once you have a solid plan for financing, you can proceed to Step #7 to raise cash for your down payment & reserves.

7. Raise Cash For Your Down Payment & Reserves

Real estate investing is a business that allows you to use other people’s money to help you move forward. But you shouldn’t count on building your entire business with no money down.  Even if you use the highest leverage scenarios, like 0% down VA (Veterans Administration) loans, you will still want to save cash for reserves.

So, how much cash will you need? And how do you raise it?

The amount of cash needed will depend upon your strategy, the prices in your target market, and your property criteria.  You can also ask your lending team member how much down payment you’ll need for certain loan programs.

For example, let’s say your financial priority is increasing your savings rate. You decide to use the house hacking strategy to purchase a duplex for $150,000. You may be able to find an FHA loan with a 3.5% down payment.

So, you’ll need $5,250 (3% of $150,000) for your down payment and perhaps another $3,000 for your closing costs.  But you may also need more cash for property improvements and reserves for a rainy day. So, let’s say you need another $10,000 for that.

Your total cash in this VERY low down payment scenario would still be $18,250 ($5,250 + $3,000 + $10,000).  How do you find that money? Here are a few ideas:

• Save – I know this is obvious. But sometimes you just need to make investing important, work for extra income, cut other expenses out of your life, and be patient until you have saved the money. No short cut here, but it works.
• Sell – Can you sell your car and buy a less expensive one? Do you have expensive toys that you can sell until later in life when you’re financially better off? What about selling a big home with a lot of equity if you’re willing to downsize? Do you have collections of junk in your attic/basement/garage that needs to go away? Selling is one of the safest and most logical ways to raise funds.
• Borrow – This one you need to be careful with. You can personally be comfortable borrowing safely against long-term assets like rental properties. But personal loans, credit cards, or lines of credit used for down payments can be dangerous if things go badly. The problem is the discipline of cash flow. If you borrow $10,000 to invest, will the investment produce enough to pay the interest? If not, you’ll need to come out of pocket. Just make sure you can handle that extra loan payment in a worst case scenario.
• Partner – Partnering is like sharing a delicious cake. What if someone offered me a rich, chocolate cake (my favorite!) for 50% off? But what if I I didn’t have the money to buy it? Wouldn’t it make sense to find a friend who DOES have that money and split the cake with them? Now we both win.  That is partnering in a nutshell. It has worked very well for me over the last 15 years. Just make sure to communicate clearly up front (in writing), and only work with people you like and trust.

Now that you have your cash and financing lined up, let’s move to Step #8 where we find good deals!

8. Create a Plan to Find Deals

Good deals don’t just land in your lap. Finding good deals is more like a treasure hunt.  You have to turn over dozens and dozens of stones before you find a hidden gem.

Periods like 2008 – 2011 during the Great Recession are the exception to this rule. The treasure hunt for real estate deals was much easier then. Warren Buffett in his 2016 letter to Berkshire Hathaway shareholders described this period nicely:

Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.

We should always have our washtubs ready for periods when “it rains gold.” But what about the rest of the time? During normal economic times, you have to work hard and create a plan to bring good deals to you. And you have to stay disciplined with your investment criteria so that you don’t succumb to the fever of a hot market.

My recommended plan to find real estate deals includes two sub-steps:

1. A budget for marketing
2. Marketing campaigns to bring prospective deals to you

Marketing Budget

If you have a $0.00 budget for marketing, you will have to get creative and plan to spend more personal time instead.  It’s more challenging this way, but it’s not impossible. With approximately $500 per month, you probably have enough to create workable marketing campaigns. And for $1,000 per month or more, you can really set yourself apart within your market.

Investments in marketing have always been one of my best returns on investment as an entrepreneur. But you have to choose those dollars carefully with the right marketing campaigns.

Marketing Campaigns

There are many possible marketing campaigns to choose from. And because marketing is an inexact science, the campaigns that are effective change like the wind. So, we recommend carefully testing different campaigns, and then stick with what works.

Here is a list of some of the most effective campaigns with a brief explanation. They are organized by cost:

Free & Low Cost:

• MLS Campaign – Find a buyer’s agent who will send you leads based upon your criteria. Using the MLS (multiple listing service), these agents can set up automatic emails that will reach your inbox any time a new or reduced property hits the market. Warning – move fast on these deals (like this minute, not hours or days)! Everyone else is doing this campaign, too.
• Referral & Networking Campaign – Tell everyone you know to send you leads on prospective properties. Talk to friends and family, but also reach out to professional contacts like your CPA, attorney, financial advisers, real estate agents, property managers, etc. Attend networking meetings at landlord associations, REIAs (Real Estate Investment Associations), and other real estate and business-related meetups. Get business cards and print flyers with your investment criteria so that people remember you.
• Drive (or Walk) For Dollars – Regularly walk or drive your target neighborhoods. Look for FSBO (For Sale By Owner) signs, For Rent signs, vacant or run down properties listed with agents, and vacant properties with no signs. Call numbers on signs to talk to owners or agents when possible. For vacant properties, talk to the neighbors when possible to try to get in touch with the owner. Also, write down the vacant house address, and later look up the owner contact information. You can find the mailing address using your local online tax assessor records, and you can sometimes find phone numbers using whitepages.com or similar online phone listings. You can either call or send them a letter in the mail to ask about buying their house.
• Find Wholesalers & “Bird Dogs” – Some people are in the business of finding deals for other investors. Wholesalers typically buy (or control) deals, and then quickly sell them for a small markup to other investors like you. Talk to these wholesalers, get on their mailing lists, and be proactive with them. A bird dog is similar, but he or she simply sends you leads.  You then get to follow-up to turn the lead into a deal. The bird dog will likely need to have a real estate license in order for you to legally pay them a finders fee.
• Cold Calls – For those who can handle 50 rejections for every 1 promising phone call, this could be an effective method. You can search the online classifieds or local paper to find for sale by owner and for rent by owner listings. Then just call listings one by one and ask questions. Few people will do this, so you may find some gems that others pass up.
• Classified Ads – You can advertise your service (buying real estate) through free or low costs classified ads online or in local print publications. Not every avenue will work, but if they’re low cost or free, try as many as possible and get your information out there.

Intermediate & High Cost:

• Direct Mail – You can send letters or postcards to various lists of property owners.  Finding these lists is sometimes as easy as paying a list company list company or local service.  Other times it’s a wild goose chase. Don’t be discouraged if it’s hard. That’s actually a good thing because fewer investors will choose to follow up and you will (right?!). Some lists that have worked well for me in the past are:
  • Non-owner occupied houses (aka absentee owners)
  • Owner-occupied houses with equity (long-time homeowners)
  • Multiunit property owners
  • Eviction landlords (landlords who have recently filed or evicted a tenant)
  • Expired listings (owners whose real estate listing recently expired)
  • Owners with delinquent property taxes
  • Estates and probate properties
  • Preforeclosure properties
• Website & Social Media– A website & social media channels (Facebook, Twitter, Linked-In, etc) are like an online business card that tells about your real estate investing business. Be sure to tell people who you are, what you’re looking for, and how you can help. Most importantly make it easy for people to contact you.
• Car Signs – This means using magnetic or vinyl lettering on your car that says “I Buy Houses” or some other message with your phone number.  This approach may be beyond your comfort zone, but it’s relatively inexpensive.
• Yard Signs – When you are selling or renting a house, why not put an “I Buy Houses” sign next to your for sale or for rent sign if your local municipal laws allow it? Signs are an inexpensive and effective way to generate leads.
• Advertising – Use online ads like Google Adwords, traditional advertising like newspapers, magazines, and community bulletins, and even radio advertising (talk radio is best).  The cost for this type of marketing can get out of hand fast, but if you’re careful about testing, it can be a great return on investment.

So, decide a rough marketing budget and choose one or two marketing campaigns you will start with. Then move on to the next step to schedule and prioritize your next actions.

9. Schedule Your Time & Prioritize Next Actions

Schedule Your Time

You know your life and your schedule better than we do. But we assume like most people you’re busy. So, here is an important question for you:

How much time can you and/or your spouse or business partner carve out each week to work on your real estate investing business?

Be realistic. But if getting started with real estate investing is important to you, also be ruthless with your priorities. This isn’t a forever project. You’ll spend more time for the next few months to a year, but later as you gain momentum, buy properties, and build systems it will consume much less time.

So, how much time can you carve out? Based on my prior experience helping other investors one-on-one, you need at least 10 hours per week in order to give yourself a minimal chance of success. But the more time you can commit, like 20-30 hours, the more you will increase your chances.

Now look at your calendar and block out specific times to work on real estate each week. For example, if you plan to do real estate before your job each day and on Saturday mornings, schedule it so that nothing else gets in the way. This is like a work or doctor appointment. It must be scheduled in order to be a priority.

Once you have the time blocked, you can focus on the actions you’ll take during that time.

Prioritize Next Actions

The awesome book Getting Things Done by David Allen mentions that getting projects done isn’t really time management. Once you’ve scheduled blocks of time like we suggested above, it’s now about ACTION management. This means you need to spend your time only doing the actions that will move you forward towards your goals.

But for now, here some suggestions:

1. Identify Next Projects: Write down the one or two projects that must happen NEXT to start investing in real estate. Projects are anything that requires more than one step to accomplish. You’ll notice that this article was organized step-by-step for a reason. If you’re not sure about your next project, just go back to Step #1 and make that your project.
2. Identify Next Actions: Write down the next two or three actions that you must do in order to move forward on the projects you just wrote down. For example, your actions may be “read Chad’s articles on real estate strategies” and “write down the best strategy for me.” You can do those things in your next block of time dedicated to real estate investing.
3. Do Your Next Actions: Nice and simple, right? Just do what you wrote down during your next time block (or even better do it right now!).
4. Identify Next Actions (Again): This process just keeps going and going. You continue finding more next actions until a project is done. Then you move to the next project, and the next, and the next.

What happens when you finish your all your projects? You accomplish your goals, of course! And what next? You guessed it – you move on to the next goals:) It’s a fun game to play.

Best Ways to Invest in Real Estate

Here’s a rundown of nine of the best ways to invest in real estate.

1. Buy a rental property

The most obvious way to become a real estate investor is to buy an investment property (or several). When I use the term “investment property,” I’m referring to a residential or commercial property that you plan to rent out to tenants — not a fix-and-flip, which we’ll cover later.

Owning rental properties is an excellent way to invest in real estate while building wealth and generating income. The return potential is strong thanks to a combination of income, equity appreciation, and the easy use of leverage when buying real estate.

However, owning rental properties isn’t right for everyone, so consider these drawbacks before you start looking:

• Cost barriers: It can be very expensive to buy your first rental property. Most lenders want at least 25% down for an investment property loan and it’s smart to keep several months’ worth of expenses in reserves.
• Uncertainty: When it comes to rental properties, vacancies happen and things break. While the overall return potential can be great, rental properties have considerable short-term risk.
• Time commitment: Even if you hire a property management company, owning a rental can be a time-consuming form of real estate investing.

2. Invest in a REIT or other real estate stock

Real estate investment trusts, or REITs, can be an excellent way to invest in real estate.

REITs are specialized companies that own, operate, manage, or otherwise derive their income from real estate assets. Many REITs trade on stock exchanges, so you can buy them with the click of a mouse and very little capital.

We also put real estate mutual funds and real estate ETFs in this category. If you don’t want to choose just one REIT, you can invest in a ready-made portfolio of them. The Vanguard Real Estate ETF (NYSEMKT: VNQ) is one excellent example of a real estate ETF that can help you get real estate exposure.

It’s also important to mention that some real estate stocks aren’t classified as REITs. Land developers and homebuilders are two other ways to invest in real estate through the stock market.

3. Participate in a real estate crowdfunding opportunity

Crowdfunding is a relatively new way to invest in real estate, and it’s growing rapidly.

Here’s the basic idea. An experienced real estate developer identifies an investment opportunity. Typically, these involve one commercial real estate asset and a value-adding modification. This could be as simple as restructuring the property’s debt or as complex as a complete renovation.

There’s usually a target end date when the developer plans to sell or refinance the property. Instead of funding the entire project with their own money and bank financing, the developer raises some of the necessary capital from investors like you in exchange for an equity interest in the project.

You can find crowdfunded real estate investment opportunities on CrowdStreet, Realty Mogul, and other platforms. These platforms act as intermediaries between investors and real estate developers (known as the deal “sponsors”). The platform makes sure the investments it lists are legitimate and meet a quality standard. They also collect money from investors on behalf of the sponsors.

There are some major advantages to crowdfunded real estate investing. First and foremost, the return potential can be huge. It’s not uncommon for a crowdfunded real estate project to target an internal rate of return (IRR) of 15% or more — and early results indicate that these results are achievable.

These projects often produce income as well as a lump-sum return when the property is sold. They can also diversify your investment strategy and let you piggyback on the experience of the developer (as opposed to attempting such a project on your own).

On the other hand, there are some major drawbacks to consider. With increased reward potential comes increased risk. Unlike buy-and-hold real estate strategies, the value-add nature of crowdfunding adds an element of execution risk. Liquidity is another major concern.

Unlike most other types of real estate investing, it’s difficult or impossible to get out of a crowdfunded real estate investment before it’s complete (meaning the property has sold). If you invest in a crowdfunded real estate deal with a target hold of five years, you should anticipate that your money will be tied up for at least that length of time.

In a nutshell, crowdfunded real estate can be a great fit for many investors, but there’s a lot to know before you get started.

4. Buy a vacation rental

A vacation rental is different than a long-term rental property in a few key ways.

On the positive side, you may be able to use the home when it isn’t occupied. It can also be significantly easier to finance a vacation rental, especially if it meets your lender’s definition of a second home and you don’t use the rental income to qualify. Finally, a vacation rental tends to bring in more income per rented day than a comparable long-term rental property.

However, there are some potential drawbacks to owning a vacation rental. Marketing and managing a vacation rental is more involved than a long-term rental.

As such, property management is far more expensive — expect to pay a property manager about 25% of rent on a vacation rental. That’s more than double the 10% industry standard for properties with long-term tenants.

Furthermore, you might not be allowed to rent out properties in your preferred locations — or you might need a special license, which can be very expensive. And it can be easier to get second home financing, but you’ll need to qualify for it based on your existing income, not your anticipated rental revenue.

5. House hack your way to a real estate portfolio

House hacking is essentially a hybrid of buying a home to use as a primary residence and buying a rental property. In general, the term refers to buying a residential property with two to four units and living in one of the units while renting the others out. But it can apply to buying a single-family home and renting one or more of the rooms.

Let’s say you find a quadruplex (four units) for $200,000. Including taxes and insurance, we’ll say your mortgage payment is $1,500 per month. After you buy the property, you rent out three of the units for $600 each and live in the fourth.

Not only do you live for free (the rent covers your entire mortgage payment), but you’re generating positive cash flow of $300 per month and are building equity in a more valuable property than if you had bought one unit to live in.

House hacking can be an excellent low-cost way to start building a portfolio of rental properties. Because you live in the property, even a multi-unit residential property can qualify for primary residence financing, which comes with lower interest rates and lower down payment requirements than investment property loans.

You’re typically required to live in the property for a certain amount of time after you buy it, but once that period expires (usually a year or two), you’re free to repeat the process with another multi-unit property.

The obvious downside is privacy. There’s value in having your own yard, and it can create some awkward situations when you live in the same building as your tenants. Even so, if you’re a new real estate investor and don’t really need your own house, you may want to consider house hacking.

6. Rent out all or part of your own home

This isn’t as much of an investment strategy as it is a side hustle, but it’s still worth mentioning here. With the emergence of platforms like Airbnb, it’s easier than ever to rent out your home when you aren’t around or to rent out a spare room in your home for a few days here and there.

One interesting aspect of this strategy is that if you rent out your home for fewer than 14 days in a year, you don’t pay tax on the money you collect. If you go out of town for the holidays or take a summer vacation, using your home as an occasional short-term rental can offset your travel expenses with tax-free income.

7. Fix and flip a house

The terms “flipping houses” and “fix-and-flip” refer to buying a home for the sole purpose of making repairs and quickly selling it for a profit.

Thanks to several TV shows on the subject, house flipping has become popular in the past few years. And to be fair, there’s a ton of money to be made if a flip is done properly and goes according to plan.

Read Also: How Can One Raise Money For Real Estate Investments

However, flipping houses is a job, so if you’re a passive investor it’s probably not right for you. And there’s quite a bit of risk involved with flipping houses, even for the most experienced professionals.

If you give flipping houses a try, here are a couple things to keep in mind:

• You make your money when you buy, not when you sell: Use the 70% rule when shopping for a property — your acquisition costs, repair expenses, and holding costs shouldn’t exceed 70% of what you expect to sell the property for. This gives you a nice cushion to deal with the uncertainty of flipping houses without major risk of losing money. If you can’t get the property while sticking to the 70% rule, don’t hesitate to walk away.
• Time is money when it comes to flipping houses: You can destroy your profit margins by taking your time on repairs and dragging your feet when it comes time to sell. Aim to have renovations scheduled before you close on the home and set a realistic sale price for the finished product.

There’s quite a bit that can go wrong when flipping a house, so do your homework and have a plan before jumping into your first flip.

8. Build a new home on spec

This is like fixing and flipping houses in terms of investment dynamics, but with the obvious additional step of building a house from scratch. Building a spec home can be an especially lucrative investment strategy in markets with a limited supply of new homes to choose from.

In several ways, building a spec home can actually be less risky than fixing and flipping an existing house. You generally know what a new construction is going to cost — you don’t have as much potential to run into unexpected repairs as you would with fixing and flipping.

On the downside, spec houses are more time-consuming. It generally takes a couple of months to fix up an existing home, but it can take a year or more to build a house from scratch. Be sure your returns justify the increased time commitment, as you can potentially complete several fix-and-flip projects in the time it takes to build one house from the ground up.

The longer timeframe also creates the additional risk factor of market fluctuations. Your real estate market might be hot right now, things can change quite a bit in the year it takes you to build a house.

9. Be a lender

One type of real estate investment that doesn’t get too much attention is debt. You don’t need to start a mortgage company or directly lend money to anyone — there are other ways to add real estate debt investments to your portfolio.

Many of the same crowdfunding platforms discussed earlier also list debt investments. In other words, instead of being a stakeholder in the project, you’re one of its financiers.

There are also some platforms, such as Groundfloor, that let you choose individual real estate loans to invest in (think of this as a Lending-Club-type platform for real estate).

There are several reasons that a debt investment might be smart for you. For one thing, you can typically get more income from a debt investment than you can from an equity investment.

Instead of an investor making interest payments to a bank, they make payments to you and other debt investors. It’s not uncommon for crowdfunded debt investments to generate cash-on-cash yields in the 8% ballpark for investors.

Debt investors also have a senior claim to the assets of an investment project. If a crowdfunded investment goes sour, debt investors get their money back before equity investors do. While there’s a broad spectrum of risk here, debt investments are typically lower-risk in nature than equity investments.

On the downside, debt investments as a whole have less total return potential than equity. When you invest in real estate debt, your return is the income payments you receive — that’s it.

If the project makes a ton of money, debt investors won’t see an extra dime. When you invest in real estate debt, you give up some potential upside in exchange for steady income and lower risk.

Conclusion

There’s no perfect real estate investment — by diversifying your capital amongst a few of these, you can get the best aspects of each one. The best course of action is to figure out what’s most important to you and decide the best way to invest accordingly.

The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.

If you, too, want to invest like the wealthiest in the world, follow the tips and strategies in this article and put in the work needed.