There are many different ways to become a millionaire through real estate investing! Different real estate investment strategies can help you maximize cash flow, minimize your tax burden, or grow your net worth. To help you understand your investment strategy options, we’re breaking down 10 of the most popular real estate investing strategies. And we’re giving you the pros and cons of each.
One quick note: we’re going to focus on more advanced strategies for investing in real estate in this article. If you’re looking for classic real estate investment strategies like buy-and-hold and fix-and-flip, check out our post on how to invest in real estate.
With that said, let’s dive in! Here are 10 different types of real estate investing strategies.
1. House Hacking
House hacking is when you rent out space in your current home to generate rental income to help pay your mortgage. It can be as simple as renting out unused storage spaces or as complex as running a Bed and Breakfast from an Accessory Dwelling Unit (ADU) on your property. With recent changes to California law, it’s become easier for homeowners to build an ADU (also known as a Casitas or a Mother-in-Law Suite) on their properties, so you have more opportunities for income-generating spaces.
House hacking pros:
- Any homeowner with space can do it. Just check your local laws about running short-term vacation rentals out of your home as some cities and counties have ordinances prohibiting this type of rental.
- With so many areas to rent out (storage, parking, rooms, and ADUs), there are many different ways to take advantage of house hacking.
House hacking cons:
- You will have other people and their belongings in your space.
- Short-term vacation rentals can be time-consuming to manage due to the constant turnover.
2. Live-In Flip
In a traditional fix-and-flip, the property remains unoccupied until the new owners move in when you sell the property. But with a live-in flip, you move into the house for the duration of the rehab. This allows you to be on-site round-the-clock, but it also means you’ll be living in something of a construction site.
Live-in flip pros:
- You can avoid paying for two residences. Instead of paying for your primary home and your flip, you just make one payment to cover both.
- Without a commute to the property, you’ll have more time to spend on the actual renovation.
- You’ll be onsite to monitor the property, which can minimize the risk of vandalism or trespassing.
Live-in flip cons:
- You may feel like you can’t escape the construction zone.
- You’ll be inconvenienced often as water or electricity need to be shut off. And you may be without whole rooms like kitchens and baths for days (or even weeks) at a time.
3. Rental Debt Snowball
The rental debt snowball is a real estate investment strategy for quickly building equity and reducing debt on your rental properties. Instead of making your monthly mortgage payments as scheduled, you use your rental incomes to pay off as much of the principal as possible each month on your property with the highest interest rate.
Once that property is owned free and clear, you switch your focus to another property. And, because you’re no longer paying the mortgage for the original property, you suddenly have even more rental income to roll into the next property. As you pay off mortgages, the available income snowballs, accelerating your ability to pay off the next mortgage faster. And before you know it, you’re able to pay cash for new acquisitions!
Rental debt snowball pros:
- You minimize your interest expense.
- You can grow your portfolio of free-and-clear properties more quickly.
Rental debt snowball cons:
- All rental income will be funneled into this strategy, so you won’t get to use that money to cover your living expenses.
4. BRRRR (Buy, Rehab, Rent, Refinance, Repeat)
The BRRRR method is all about building a real estate portfolio quickly. It starts when you buy a property that needs some renovating using short-term financing. Then you rehab the property to quickly add value and create equity in the property before renting it to qualified tenants. Once the tenants move in and the property has stabilized, you can refinance to a long-term mortgage. And, because you have so much equity in the property at this point, you can typically pull cash out during the refi to fund your next acquisition.
- This method takes full advantage of debt leverage.
- As long as you can get a cash-out refi as planned, you’ll always be able to finance your next acquisition.
- You’ll be able to build a portfolio comparatively quickly.
- You need specialized knowledge in real estate analysis, property rehabbing, and leasing.
- You need a trusted network of real estate professionals, lenders, contractors, appraisers, and property managers in your corner.
- This sophisticated strategy requires accurate projections for after-repair value (ARV). You need to know that your renovation will increase the value enough that a refinance will make sense and that you can pull as much back out of the investment at that point as you’ll need to fund the next deal.
You can think of wholesaling sort of like flipping, but instead of flipping the property, you’re flipping the purchase contract. You find a property below market value and get it under contract. Then you immediately sell that contract to another buyer for more money, pocketing the difference.
This requires an extensive network of contacts because you’ll need to have buyers who can act quickly. If you can’t find a qualified buyer to take the purchase contract off your hands, you’re legally responsible for completing the purchase.
- It is possible to make large amounts of money quickly.
- Since you don’t actually purchase the property, you never have carrying costs.
- Wholesaling requires lots of time, effort, and connections.
- It’s high-risk. If you can’t find a buyer, you could be in a difficult position, financially and legally.
6. Property Tax Lien Investing
When a homeowner fails to make their property tax payments, the taxing authority can place a claim on the property, called a tax lien. Then, to recoup the back taxes due, the taxing authority will sell this debt to a real estate investor, typically through an auction. Rather than bidding up the purchase price, bidders will bid down the interest rate they’re willing to accept. The lowest interest rate offer wins the lien. The investor then pays the county the taxes due and has the right to collect this money plus the agreed-upon interest rate from the homeowner.
If the homeowner fails to pay the tax lien, it is possible for the investor to claim the property and force the homeowner out. But, in most cases, the homeowners repay the taxes plus interest.
Tax lien investing pros:
- There is passive income potential since most homeowners take the lien seriously and make their payments as scheduled.
- It is possible to acquire the property if the homeowner defaults on their tax lien payments to you. This would give you the option to resell the property or use it as a rental.
Tax lien investing cons:
- Some homeowners struggle to make their payments on time, requiring you to constantly follow up on payments.
- Since investors bid down the interest rates, the ROI is typically on the low end of real estate investing.
What are REITs? Real Estate Investment Trusts (REITs) are companies that invest in income-generating real estate. And you can invest in these companies to receive a share of the profits in the form of dividends. REIT shares trade on the stock market. So they’re easy to buy and sell. And once you buy a share of a REIT, you can own it for decades, making REITs purely passive income.
Some REITs specialize in residential properties while others specialize in commercial real estate investment strategies (involving retail storefronts, office buildings, and shopping centers). You can choose a REIT that matches your investment goals.
- Strong liquidity.
- Passive income.
- The portfolio is professionally managed.
- Lack of control. While you do get to choose which REIT(s) to invest in, you don’t get to choose the properties held by that REIT.
- You don’t own the underlying real estate; you only own a share in a company. So your investment is less tangible than owning the actual real estate.
8. Real Estate Investment Groups (REIGs)
Real estate investment groups are sets of private real estate investors who pool their resources to fund real estate projects. This is the concept that today’s real estate crowdfunding is loosely based on. What is real estate crowdfunding? It’s when real estate investors use a digital platform to organize the joint funding of a specific real estate project. But, unlike REIGs, real estate crowdfunding is accessible to the general public, rather than private investors.
Another similar concept is real estate syndication. What is real estate syndication? Syndication is essentially crowdfunding, but with a special emphasis on a stable ownership structure. With syndication, a sponsor forms a business entity with the investors as partners, all of whom own a stake in the underlying real estate owned by the entity.
- By pooling funds with other investors, you gain access to high-value properties that would otherwise be unattainable.
- REIGs are extremely flexible because they are arranged by private investors, who can decide on the appropriate project and ownership structure for the group.
- Because these are private investment groups, finding and gaining access to a group can be time-consuming and difficult. If you like the idea of being in a REIG, but don’t know how to find or join one, consider crowdfunding or syndication instead.
9. Industrial Real Estate Investment Strategy
Industrial spaces like factories, warehouses, and self-storage can be lucrative real estate investments. In the case of single-tenant spaces, you can often command long lease terms. And while self-storage investments might be shorter-term, many people who rent storage spaces end up keeping the spaces for years, if not decades.
Industrial real estate pros:
- Stable, long-term leases are possible.
- Maintenance is typically less extensive with industrial, than with residential.
- Prices per square foot can be lower than other asset classes.
Industrial real estate cons:
- Filling vacancies can be difficult.
- The upfront investment can be exceedingly high as many industrial facilities are large and high value.
10. Trading Up
Taxes play an important role in real estate investing strategies because there are inherent tax advantages for real estate owners built into the tax code. For example, with some careful planning, real estate investors can defer capital gains taxes when they sell properties to buy bigger and better properties. One of the most popular real estate investing tax strategies is trading up through a 1031 exchange.
A 1031 exchange allows you to sell an investment property and defer your capital gains tax as long as you roll all the proceeds into a qualifying replacement property. This allows your investment portfolio to grow without capital gains taxes, for quicker value growth. This puts you in control of your capital gains tax. You can dispose of your assets and realize your taxable gains in a year of low income (like during retirement), making sure you’re in a low-income bracket and minimizing your tax burden.
Trading up pros:
- Quicker portfolio value growth as you defer capital gains taxes
- Control over the timing of your capital gains taxes.
Trading up cons:
- 1031 exchanges are complex and require detailed control over lots of moving parts.
- You’ll need to hire a custodian to hold the proceeds from the sale and make sure they’re fully applied to the new purchase.
- There are strict timelines you must adhere to when choosing your replacement property.
Consider Gatsby Investment for Your Real Estate Investing Strategies
If you want to take advantage of these advanced real estate investment strategies, but don’t have the time, experience, or desire to handle them on your own, consider investing with Gatsby Investment. Gatsby is an LA-based real estate syndication firm that offers a wide range of residential investment projects, covering everything from single-family renovations to multi-family developments. We even offer long-term rental projects and luxury housing!
Whether you’re looking for a quick six-month flip or five years of passive rental income, Gatsby has an investment opportunity for you. All you have to do is sign up for a free account and choose your investment project(s). Each project is professionally managed by an expert team of real estate analysts, contractors, designers, and project managers. So your investment is in good hands.
Don’t wait another day to start building your wealth through the smart real estate investment strategies utilized by Gatsby. Get started by signing up with Gatsby Investment today!