I love real estate investments as a source of income. Whether you’re looking to earn a quick return through wholesaling or flipping, or earn ongoing passive income from rental properties, there are dozens of real estate investing strategies.
Most real estate assets fall into one of three classes:
- Residential: Properties with 1-4 units. This type of real estate investment is most regulated and the most popular among mom-and-pop investors.
- Commercial: This wide umbrella includes multifamily (5+ units) apartment buildings, office space, retail, industrial, and other types of commercial real estate.
- Land: From completely raw land to semi-developed land to working farms, land can make an extremely profitable investment, but it comes with its own quirks and niche knowledge required.
Real estate investments make a particularly effective source of income for financial independence and/or retiring early (FIRE). If, that is, you know what you’re doing. And if you diversify your investment portfolio to include a wide range of stocks, real estate, and other asset classes.
Types of Real Estate Investments
As you expand and diversify your real estate portfolio, consider the following types of real estate investments.
More diversity means less risk, and less exposure to shocks in any one real estate market!
1. Buy-and-Hold: Long-Term Leasing
Deni and I have over 50 years of long-term landlord experience between us. And that says nothing of our other team members, most of whom own rentals in their own right.
Long-term leasing represents the most common buy-and-hold real estate strategy, where you sign a lease agreement for a tenant who plans to stay for at least a year. Because most of the costs and headaches of owning rentals hit during turnovers, the most successful landlords aim to place excellent tenants and then keep them as long as possible.
Buy-and-hold landlords benefit from a wide range of rental property tax deductions, too. From mortgage interest to maintenance, property management fees to insurance and property taxes, every cost is deductible. Landlords can even deduct for paper expenses like depreciation!
Investors can buy turnkey properties ready to rent, or buy fixer-uppers using the BRRRR method and re-borrow most of their down payment when they refinance with an investment property loan. And in today’s world, real estate investors have more financing options than ever before. From conventional mortgage lenders to portfolio lenders, from HELOCs to unsecured business lines of credit, investors can compare all investment property loan options before choosing one. In fact, many portfolio lenders allow the down payment to be borrowed, unlike conventional mortgage lenders.
Of course, new investors need to be careful not to overleverage and find themselves with negative cash flow. But one enormous advantage to rental properties as an investment is the predictability of returns: investors can forecast their average monthly cash flow with a rental income calculator.
When you know how to accurately calculate a long-term rental property’s cash flow, you can avoid ever making a bad investment again.
2. Buy-and-Hold: Short-Term Vacation Rentals
With the explosion in popularity of Airbnb and similar vacation-rental-by-owner websites, more landlords than ever before have started trying their hand at the hospitality industry.
Which comes with its own pros and cons, like all real estate investing strategies. Landlords in some markets can earn higher profits, but at the cost of dramatically higher labor. Units must be cleaned between each guest’s stay, and landlords must provide furniture, decorations, and utilities including electric, gas, water, and internet.
As with long-term rental properties, landlords should run the numbers carefully before committing to furnishing a unit and launching their own micro-hospitality business. Pay particular attention to vacancy rates, getting accurate figures for every single month of the year. Remember, many vacation rental markets are seasonal.
Property owners can outsource labor to a property management company, just like long-term landlords. Make sure you budget for property management fees alongside other expenses like maintenance costs and vacancy rate!
Like every type of real estate investing, vacation rentals require their own unique skill set. If you’re new to the industry, read up on these 12 Secrets to Success for New Airbnb Landlords.
3. House Hacking
Who wouldn’t want to score free housing? At its core, house hacking means finding a way to have someone else pay your housing expenses.
The classic house hacking model involves buying a small multifamily property, moving into one unit, and renting out the other(s). Ideally, the rent from your neighbor(s) covers your own mortgage and other property-related expenses. (Read this duplex house hacking case study for a detailed example.)
But that’s far from the only option to house hack. I’ve rented to housemates, who paid the majority of my mortgage. Deni has brought in a foreign exchange student, whose stipend covers her mortgage. My friend Renee rents out her spare bedroom on Airbnb.
The list of ideas goes on. We’ve hosted webinars with families who reached financial independence in under five years through serial house hacking, moving into one multifamily property after another.
Regardless of how you do it, you can finance the property with an owner-occupied mortgage. That means lower interest rates, lower down payments, and lower fees than investment property loans. Compare today’s interest rates and fees on Credible.
Play around with our free house hacking calculator to get a sense for how much of your housing expenses you can cover with different house hacking scenarios. As your largest personal expense, cutting your housing costs offers the greatest opportunity for savings.
If you’ve ever wondered how to invest in real estate when first getting started, house hacking makes a great first strategy for real estate investing.
Land comes with a slew of surprising benefits as an asset class.
First, land owners don’t have to worry about the same legal requirements and regulation headaches as residential landlords. No rent control, no lengthy eviction process taking months, no right of first refusal.
And let’s face it, there’s only so much damage a renter can do to raw land. But I’ve had tenants do $30,000 in damage to my rental properties before.
Because you can buy raw land inexpensively, it reduces the minimum cash requirement. That in turn makes it easier for investors to diversify, spreading money among many parcels if they wish.
To this day, few investors venture into land, leaving the competition relatively low. I’ve interviewed land investors who replaced their day job income in under 18 months with land.
Still, land investing requires a unique set of skills. New land investors can fall for scams easily, without a solid foundation in land investing. Before investing money, make sure you learn the ropes carefully (I recommend REtipster’s land investing course) to learn exactly how to do it properly, so you make money rather than lose it.
(article continues below)
Free Masterclass: How to Reach Financial Independence in Under 5 Years
5. Flipping Houses
Flipping houses became a wildly popular type of real estate investing in the housing bubble of the noughties, then quieted quickly when the bubble burst. Given the explosive growth in housing post-recovery, flipping regained its popularity over the last 7-8 years.
Done right, buying fixer-uppers can lead to predictable fast returns. Done wrong, it can lead to disastrously expensive mistakes.
Where many new flippers run into trouble is underestimating expenses and overestimating the after-repair value (ARV). They take contractors at their word for quotes, not accounting for the all-too-frequent “surprise” expenses midway through renovation projects. They underestimate soft costs such as carrying costs and marketing costs.
If you’re interested in flipping single-family homes, focus on two skill sets first: finding good deals on properties, and hiring, managing, and negotiating with contractors. And always, always budget a buffer for the renovation costing more and taking longer than quoted.
One area that doesn’t prove a challenge? Financing. You can get short-term fix-and-flip loans from lenders like Kiavi, LendingOne, and Patch Lending – see our full comparison chart on our investment property loans page.
6. Live-In Flips
Another way to house hack includes doing a live-in flip, where you move into a fixer-upper, update it over the course of a year or two, and then sell it for a (hopefully large) profit.
On the plus side, you can take the repairs at your own pace, knocking them out as you have time. If you’re handy, you can do some or all of the work yourself and same money.
You can also avoid short-term capital gains tax, and perhaps all capital gains taxes. If you own an asset for more than a year, you pay the lower long-term capital gains rate on profits. And if you live in a property for at least two out of the last five years, your first $250,000 in gains ($500,000 if you’re married) are tax-free.
Or, of course, you keep it as a rental. Think of it as a live-in BRRRR property.
As a downside, you also have to live in a semi-permanent state of construction and renovation. I can see your spouse scowling already at the thought.
If you love home improvement projects and you’re looking for how to invest in real estate as a beginner, live-in flips offer a fun, hands-on real estate investing strategy.
When new investors first learn about real estate wholesaling, many think it sounds too good to be true.
That’s because they don’t realize how much work it is to find great deals on properties.
Still, as types of real estate investing go, it makes a great model. Wholesalers find a good deal on a property, put it under contract, then sell the rights to that contract to a real estate investor. The wholesaler never actually takes title to the property themselves.
That means they don’t need to worry about financing or investment property loans, don’t need to hassle with screening tenants or property damage, or fielding 3 AM phone calls about roof leaks. They don’t pay any closing costs, and they don’t take on any headaches of property ownership.
Real estate wholesalers need to do two things well: find excellent deals, and build a network of investors to buy those deals. A sample wholesaling deal might look like this – the wholesaler finds a fixer-upper worth $100,000 as-is, and they put it under contract for $80,000. They send an email blast to their list of investors, offering the property for $90,000. Several investors express interest, and they end up selling the contract for $87,000, earning a $7,000 spread over their own contract price.
Not a bad business model, eh?
8. Stocks, Mutual Funds, & ETFs Related to Real Estate
Not all types of real estate investments involve contracts or settlements or direct ownership of property.
Large segments of the economy thrive in strong real estate markets. That means you can easily invest money indirectly in real estate by investing in companies or funds that do well when real estate markets do likewise.
Real estate developers offer a simple example, as do home improvement retail chains. Lumber companies boom in hot housing markets that drive more homebuilding. Nationwide real estate brokerages make for another obvious example. Less obviously, hotel chains own a massive amount of real estate.
You can buy shares in these companies or exchange-traded funds (ETFs) through your brokerage, which means you can invest with very little cash. These investments also come with instant liquidity: you can buy and sell instantly.
But these real estate-related companies aren’t the only way to invest in real estate on public stock exchanges.
9. Publicly Traded REITs
Through your regular brokerage account or even your tax-sheltered retirement accounts, you can buy shares in public real estate investment trusts (REITs). It makes for a fast, easy way to diversify into real estate.
Like stocks and other publicly traded investments, REITs offer excellent liquidity. You can buy and sell instantly, with no commissions on many brokerage accounts (I personally use Charles Schwab, which doesn’t charge commissions).
REITs tend to pay extremely high dividend yields, because by law, they must pay out at least 90% of profits to shareholders in the form of dividends. That makes it difficult for REIT managers to buy new properties however, so REITs don’t tend to grow and appreciate in value as fast as traditional stocks or funds. And the downside of that instant liquidity is volatility: they can plummet in value quickly, just like stocks.
Because they trade on stock exchanges, REITs tend to move more in line with stock markets than other types of real estate investments. So while you can add diversification to your portfolio by buying them, you don’t escape the correlation with stock market movements.
(article continues below)
10. Private REITs
A more recent type of real estate investment, privately traded REITs largely grew out of the real estate crowdfunding industry over the last decade. These REITs don’t trade on public stock exchanges; you buy them directly from the crowdfunding company.
Many buy and manage large apartment buildings, retail space, office buildings, or other commercial property types. Some also invest in real estate-secured debt, to add more income potential for shareholders. But none are very liquid — it’s not quick or easy to sell shares, and some lock investors in for periods of five years or longer.
That lack of liquidity forms a double-edged sword. It makes these real estate funds long-term investments, hard to sell quickly. But it also reduces volatility.
I personally invest in a few private REITs to further diversify my portfolio. I invest with Streitwise and Fundrise, and have been happy with the results so far. But be careful to do your homework carefully on real estate crowdfunding platforms, and note that many only allow participation by accredited investors (wealthy investors with over $1,000,000 in investable net worth or $200,000/year income).
Private REITs offer a great way for individual investors to spread their money across many real estate projects. You can diversify beyond residential property to include commercial real estate. Just don’t expect to sell shares at a moment’s notice.
11. Crowdfunded Real Estate Loans
Not all real estate crowdfunding websites follow the private REIT model. Others make loans to real estate investors, funded by individual investors like you.
It works like this. A real estate investor needs a purchase-rehab loan to flip a house or renovate a BRRRR property. They apply with the crowdfunding lender, who approves and funds their loan. The crowdfunding lender then raises money from the public to reimburse their coffers.
In some cases, you simply invest in a pooled fund that owns many loans. Concreit follows this model, paying a fixed 5.5% dividend yield (paid weekly). Best of all, they let you pull out your money at any time, with no penalty fee on your principal.
Other crowdfunding platforms let you pick and choose individual loans to fund. I invest in Groundfloor loans, for example, where I earn annual returns on investment from 7-12%. Groundfloor grades each loan on risk, paying higher interest for higher-risk loans.
Another advantage? These crowdfunded loans don’t require much initial investment. Concreit lets you invest with as little as $1, while you can invest as little as $10 toward any given loan on Groundfloor.
Each loan is secured with a lien against the physical property. If the borrower defaults, the lender forecloses to get your money back. Since these are hard money loans, they typically have an LTV between 60-80%, leaving plenty of equity for the lender to recover the full loan amount.
I particularly love that these loans all have short terms, typically 6-12 months. That makes for a much shorter commitment than the five-plus years required by many private REITs.
12. Private Notes
Alternatively, you can lend money directly to real estate investors who you know and trust, in the form of private notes.
“Know and trust” are the key words there. You have few protections, as a private note lender, unless you go through the trouble of recording a lien against the property. Which often proves impractical in the case of private notes.
I’ve lent money to a couple I know with a strong track record of real estate investing. They’ve always paid my interest on time and in full, so I’ve lent them increasing amounts over the years.
With a private note, you get to negotiate your own terms. For example, I don’t care about locking in the borrowers for a minimum time period, so I offered them extremely flexible loan terms in exchange for a high interest rate.
Only offer a private note to investors you know well, who have demonstrated a long track record of success. But when you find good borrowers, you can earn excellent returns on a truly passive investment.
13. Real Estate Syndications, Private Equity Funds, and Beyond
When you reach accredited investor status, the doors open to a wide range of additional investment options.
You can invest in real estate syndications, for example. These tend to be large commercial real estate projects, where you invest money to become a fractional owner. The syndicator (the primary investor) oversees buying and managing the property, and you earn money passively as a partial owner of the property.
Alternatively, you can invest in private equity funds, hedge funds, opportunity funds, and other privately managed funds. Many invest in real estate in one way or another, and most cater specifically to accredited investors.
Why only accredited investors? Because they don’t get the same protections and oversight from the SEC. That’s the price of protection for lower- and middle-class investors: if you want aggressive regulation and consumer protections, it means you forego the opportunity to invest in higher-risk, lower-oversight investments.
The types of real estate investments that the rich opt into, because they can opt out of protectionist regulation.
New investors wondering how to invest in real estate underestimate the full range of options available.
Ultimately, the best way to invest in real estate depends on your long-term goals, risk tolerance, and willingness to learn how to invest in real estate directly. For those not interested in learning the ropes, they can still diversify into real estate through REITs, crowdfunded real estate loans, and perhaps even real estate syndications or private notes.
But anyone willing to master direct real estate investing can benefit from tax advantages, predictable returns, and a slew of other benefits to real estate vs. stocks for early retirement and financial independence.
Choose carefully, as you review the various types of real estate investments. Remember, you aren’t locked into one investment type only; I invest in many of the real estate investing strategies above, to diversify my assets and passive income sources.
And to ultimately cover my living expenses and reach financial independence.♦
How do you invest in real estate? What’s your real estate investing strategy of choice, and why? Share your thoughts below!
More Real Estate Reads for Savvy Investors:
About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.