One of the most attractive things about real estate—besides its profit-earning potential, of course—is that it offers a variety of different ways to invest in properties. In this post, we will go over the seven most common real estate investment strategies a smart investor should definitely know about. The strategies are listed in no particular order of importance. This is a quick overview. If you are interested in any one particular strategy, spend some time exploring it further.

Let‘s get started.

Strategy #1: Development

This strategy involves buying a piece of raw land and building on it. With this option, you don‘t just purchase a ready-made house; you build it yourself. (We don‘t mean you actually have to do any work yourself—unless you are qualified to do so, of course. You can hire professionals.) This could be any type of property: a single-family home, multi-family dwelling, commercial property, or mixed-use commercial and residential building. It all depends on what you are in the market for. Development can be a very lucrative way to invest in real estate from the ground up. But there is a downside to this strategy as well: it is the riskiest and most expensive strategy, and one that requires the most skill. You not only have to know the local real estate market very well, but you also must be able to hire and oversee contractors, negotiate the best possible prices on supplies, understand how zoning and permits work in the municipality in which you are building, line up millions in financing, and know how to market your development for top dollar. Development can be a very lucrative business, as the profits in a hot market can be outstanding. On the other hand, developers tend to be the first to bust in a market downturn, as they are so exposed financially. The rewards can be very high, but so is the risk.

Strategy #2: Buy, Fix, & Sell (Flip)

Flips are probably the best-known style of investing, featured in several TV programs that focus on this particular strategy. The concept is that you buy a run-down property on the cheap, fix it up as quickly and inexpensively as possible, and then sell it at full market value (or as close to it as possible). If you are a handy person, this strategy might be right up your alley. It‘s exciting to hunt for and find a deal, break down walls with a sledgehammer, and see a whole new house emerge from the rubble. If you can then sell the property quickly and make good money on it, this strategy will work well for you. But keep in mind that it could also be a risky undertaking: if you make a mistake in the initial purchase and the renovation costs you a lot more than you expected, or if you don‘t sell the house quickly, then you won‘t make as much profit as you had anticipated. Flipping property is a short-term, appreciation-based investment strategy. The profits per deal tend to be lower than longer-term buy-and-hold deals, but this is offset by the number of deals that can be done in a relatively short time. Still, many investors swear by this strategy and do many successful flips each year. As in any real estate investing strategy, if you are prepared, well educated, and have a great team around you, you can be very successful with this tactic.

Strategy #3: Single-Family Home Rentals

Next to flips, this is probably the most recognized style of real estate investing because it‘s so simple and easy to understand. With this strategy, you buy a house and rent it out to a tenant. There are many pros to this kind of real estate investing. The biggest one is the sheer number of single-family homes on the market. It‘s also a very desirable rental because most families prefer to rent a house rather than an apartment—it provides more space and more privacy. It‘s also the kind of property that the banks are very happy to finance. However, the challenge with single-family home rentals is getting positive cash flow from them. Typically, these houses are the most expensive kind of rental properties to purchase because you are buying a structure plus the building lot that it‘s sitting on. Quite often, the amount of rent that you can charge will only cover your hard costs, such as your mortgage payment, property taxes, insurance, management, and maintenance. At the end of the month, there may not be anything left over for cash flow. In fact, as rental properties, single-family homes are often cash flow negative. There are, however, ways to get around this. The most common is to build a basement suite, turning one property into two rental units.

Strategy #4: Rent-to-Own (Lease Options)

This is a creative strategy that goes like this: instead of just renting a single-family home, you lease it to a tenant and give the option to purchase the property at a specified time and price in the future. With this strategy, you can typically charge above the market rent rate and get the tenants to take care of all the maintenance and upkeep on the property. Usually, the tenants will be motivated to do this since the house will eventually will be theirs. The advantage of this strategy is that you can create a lot more cash flow than normal from a single-family home. Also, at the beginning of the lease you can get a deposit that‘s much higher than a usual damage deposit on a property. Plus, there are usually fewer tenant management headaches with the rent-to-own strategy than with traditional rentals, because tenants are motivated and agree in their lease to take good care of the property. However, there are some challenges with this strategy as well. The bulk of your profit is based on appreciation of the property. Not all rent-to-own deals work out as initially planned, with either the tenant backing out of the deal or the market not cooperating with the final price that you had agreed upon. Also, rent-to-owns are usually short-term deals, lasting from two to four years. After that, you will need to find another property in order to keep your real estate investing business going.

Strategy #5: Multi-Family Properties (Apartment Buildings)

Traditionally, multi-family properties are two units or more. If you have a single-family home with a basement suite, it would be a multi-family property. The banks consider anything more than four units as a commercial residential property. The financing rules and regulations change for that class of investment. The advantages of multi-family homes are many. First of all, you have a much better efficiency ofscale. So instead of having one rental unit with its own roof, furnace, hot water system, etc., you have multiple rental units under one roof all sharing the same heating system, water system, etc. Due to the greater efficiencies, your revenues and cash flow per unit tend to be higher, and your cost per unit is much lower than with single-family properties. You also benefit from the efficiencies of management. This means that if you had, say, a 12-unit apartment building instead of 12 properties in 12 different areas of town, you would have just one property to manage. The challenge of multi-family property investing is that it can be a bit more dificult to get financing for these kinds of buildings. Also, finding good deals may not be easy because there are fewer of them compared to single-family homes.

Strategy #6: Commercial Properties

Strip malls, office buildings, commercial bays, and other buildings that house businesses all fall under the category of commercial properties. As with any strategy, there are pros and cons you should know about before youdecide to pursue this option. The big advantage of commercial real estate is that the tenants tend to pay higher rent and they are responsible for more of the expenses associated with the property. The rent you charge is often based on what is called triple net. This means that the tenant is not just responsible for paying rent, but also for all of the utilities and property taxes as well. And quite often, the tenant also makes any improvements that are needed for their particular business. Commercial tenants usually sign long term leases and guarantee those leases personally. So once you get a commercial tenant who has a successful business, that tenant will probably stick around for a long time, requiring very little management and maintenance. Now let‘s look at the challenges. The main one is that when commercial properties become vacant, especially during an economic down- turn, they may remain unoccupied for a very, very long time. This means, of course, that you get no cash flow from that property and have to pay for all of the associated expenses out of your own pocket. If you are interested in buying commercial properties, make sure that you really understand how this sector works. You may even benefit, at least initially, from investing with somebody who is a true expert in that area.

Strategy #7: Tax Lien Certificates & Tax Deeds

This particular investment strategy is primarily used in the United States. Tax liens and tax deeds are a way for the local municipal governments to collect on unpaid taxes from property owners. In the case of tax deeds, if a homeowner has been delinquent on their property taxes for a set period of time, the municipal government can take the property and auction it off. The property will go to the bidder who pays the overdue taxes. In the case of tax lien certificates, the municipality (or county) will auction off the tax bill. The bids are based on how much interest the bidder wants to receive. When the property owner eventually pays their taxes, they will be charged a penalty on top of delinquent taxes. The back taxes plus the penalty are then paid to the investor who bought that particular tax lien certificate. If the property owner does not pay taxes within a specified period of time, the investor may then foreclose on the property and take legal ownership of it (quite often for just pennies on the dollar). Over 95 percent of the time, the taxes and penalties are paid in full and the investor enjoys a nice return on the money, which is backed by the local government. Tax deeds are the same, except that by paying all of the back taxes and the penalties to the government, the investor actually ends up owning the property free and clear! Each municipality has its own rules and regulations about exactly how this works. Different states are either tax lien or tax deed states. A few states are both. Either way, this is an opportunity to literally buy properties for a fraction of what they are truly worth. The important thing to know about tax liens and tax deeds is that you must do proper due diligence on the property you are going to bid on. That way, you‘re making sure that if you do end up owning it outright, you actually want it and it is worth what you paid for it. This strategy has some challenges. For example, different municipalities may have different rules about this process, so it would be wise for you to focus on one particular area and get to know it really well. Again, if you are interested in this strategy, get educated or work with a real estate entrepreneur who fully understands tax liens and tax deeds.

Summary:

Seven of the most common investment strategies in real estate include developing a property from scratch and building new structures on it. Then there is the buy, fix, and sell (flip) option, single-family home rentals, a rent- to-own strategy, multi-family properties, commercial properties, and tax liens and tax deeds. In the next post, we will talk about all the steps involved in purchasing a property either alone or with investment partners. If you need further information about any of the strategies outlined in this post, or you would like to find out about our preferred strategy, please book a call with us. Real estate investing is a complex team activity. In the following two posts, we will dive into what‘s involved in doing a deal, and who we want to have on our team.