Thanks to popular TV shows on HGTV like Flip or Flop, most people are familiar with house flipping, but did you know there are about just as many ways to invest in real estate as there are ways to customize your morning latte at Starbucks? There are even ways to do it with little to no money out of pocket. Investing in real estate can be a great hedge against inflation. Here are just a few ways you too can invest in real estate.
Flipping: One of the most lucrative, and “sexy”(thanks to HGTV) strategies is house flipping, but the same thing that makes this lucrative also makes it one of the riskiest. It is not for the faint of heart, requires a lot of work, and if not done properly can be a very short and expensive venture. It is often said that the money made on a flip is when it is bought, not sold. Meaning, you need to get it for the right price, this is typically 70% of ARV(after renovation value). A seasoned flipper will look at the value of comparable homes in the area that have recently sold and are in clean, move-in ready condition, then pay no more than 70% of market value ie. Comp home =$200,000 investor can only pay up to $140,000.
Buy and hold: A less sexy investment strategy that involves buying a home to lease it out. Cash flow is minimal and, unlike flipping, will take years to see a significant ROI(return on investment). Although this investment strategy is less risky than flipping, it will still take a large initial investment to get started. Because real estate is an appreciating asset, savvy investors less adverse to risk are looking to build a portfolio of homes for a long-term, and lucrative return on investment.
Short-term rentals: AirBNB has made it easy to maximize a property's rental rate potential with short-term, sometimes nightly, rentals. Getting into this type of investment strategy can be as easy as renting out unused portions of a home, or even sub-leasing a home that you don’t even own. The risk with this strategy is the ever-changing rules regulated by HOA’s and condo associations. For instance, you may buy a condo today, for the purpose of AirBNB’ing, that does not have a minimum lease requirement, but a month or two later one could be voted for and adopted. Now your out of business or becoming a buy and hold investor involuntarily.
REIT(Real Estate Investment Trusts): Investing in REITs is safer, can produce high returns and doesn’t require a lot of money to get started. A Real Estate Investment Trust is a company that pools money from different investors and uses it to buy a variety of investment properties. This can be office buildings, multi-family homes, hotels, industrial property, warehouses, or retail space. “Shareholders” get paid a dividend when the properties generate a return on investment.
Real Estate Crowdfunding: Yes, you can now crowdfund real estate. Similar to REIT, a pool of investors get together to purchase real property. This is made possible by the JOBS(Jumpstart Our Business Startups) Act, which allows companies to raise cash through crowdfunding. Organized by a “sponsor”, or company that identifies and manages the real estate, they handle the purchase, financing, contracting, and eventual sale of said property. A crowdfunding platform such as Fundrise or Realty Mogul is used to attract and vet potential investors, as well as collect monies on behalf of the sponsor. As an investor, you would get a share of the profits generated. The best part of this type of investing is that you can get into it for as little as $500 to start.
There are several other ways to invest in real estate and strategies within the strategy itself. First, you just have to pick the strategy that makes the most sense to you and your appetite for risk. Then, as Grant Cardone says, “You have to get in (the game), to be in (the game)!”
By Rob OConnor