If you’re just starting out in real estate investment, you may be overwhelmed by a large number of real estate investing strategies to choose from. You have the option to flip, buy and hold, go commercial, go for REITs, partner with someone, and many other options. To help make your life easier, we have chosen and evaluated the three top real estate investing strategies for beginners: buy and hold, lease options, and short sales.
Related: Top Six Real Estate Investment Strategies
Real Estate Investing Strategy #1: Buy and Hold
Buy and hold is one of most popular long-term passive real estate investing strategies. It is most ideally used if market conditions are improving and are expected to improve in future years. Today, buy and hold is an excellent strategy due to increasing property prices nationwide.
To go through with a buy and hold strategy, you need to find a good property, and consider renting it out for monthly return. If you’re struggling with finding a good property, use Mashvisor. Search for the desired city and/or neighborhood, and our investment property calculator will show you breakdowns of property information. You can also use our property comps to find the best investment for your buy and hold.
A good buy and hold property should provide you with a positive cash flow and a steady passive income. You may eventually decide to sell your property, and at the rate home prices are increasing, you will gain significantly on appreciation.
Related: How to Make Money in Real Estate Passively
Advantages of Buy and Hold
Out of most real investment strategies, buy and hold is one that achieves effective wealth building. It is a great source of passive consistent income – and nothing’s better than passive income! Additionally, the high demand for property nationwide can drive up inflation forces. Inflation causes increases in rent prices which means higher cash flows for you as an investor. Another advantage of buy and hold is appreciation. Home prices in multiple states and cities are expected to continue to increase as long as inventory is low and supply is short. Appreciation also means that your property will build equity and will have high potential for growth. Moreover, buy and hold properties are accompanied by multiple tax advantages such as tax deductions. And finally, when it’s time to sell a buy and hold property, you will make significant profits.
Disadvantages of Buy and Hold
Buy and hold is a one of the most profitable and efficient real estate investing strategies. However, there are some concerns you need to tend to when considering Buy and hold. To begin with, you need to carefully screen and select your tenants. It is always advised to try and choose good tenants to avoid problems and struggles in dealing with them.
One other rather far-fetched concern is a real estate market crash. It is not impossible, but unlikely at this point. Real estate markets are doing really well across the US. Analysts do not predict a market crash in coming year.
Real Estate Investing Strategy #2 Lease Option
One of the most overlooked real estate investing strategies is lease options. It can generate impressive profits and it’s a great strategy if you’re starting out in real estate. With a lease option, you can rent out your property to a tenant who has the right to buy the property when an agreed upon lease is up.
Advantages of Lease Options
Property owners usually use lease options if they wish to sell their property, but do not have enough equity built up against it. So if you’ve been having difficulty selling your home, this strategy can help you get it off the market. At the same time, you have full control over your property and you’re generating profit off of rental income.
For buyers or renters, it’s advantageous if they do not have enough money to put in a down payment, or if they wish to try or test the property beforehand. It also helps them save money for a down payment.
Disadvantages of Lease Options
The primary disadvantage of a lease option as one of our real estate investing strategies is the fact that your renter may end up not buying the property. You will need to find yet another renter and start the process of lease option all over again.
To add to that, if you agree in your contract on a lock-in price, and property values increase, you are then selling your property below market value. And if home values decrease, and the renter walks away from the deal, your property is left unsold, and you would have been better off selling it a year or too without using lease options.
Real Estate Investing Strategy #3 Short Sales
The third one of our recommended real estate investing strategies is short sales. A real estate short sale is a strategy usually used instead of a foreclosure. It helps the seller recover faster and affects them less severely than a foreclosure.
Advantages of Short Sales
Buying a short sale means that you get to purchase a property well below market value and for much less than it’s worth. This is the principal advantage of short sales and is usually an investor’s biggest incentive. Additionally, using short sales of most real estate investing strategies allow the investor to have relatively high negotiating power. The seller doesn’t have many options and must settle in a way or the other with the investor. This gives you as an investor more privilege to negotiate a lower price.
Disadvantages of Short Sales
A short sale is a very lengthy and tedious process, and you can never predict how long it will take. It could take a month or a year. So if you’re planning on purchasing a property quickly, this may not be the best strategy. Furthermore, there is an opportunity cost that comes with the long short sales process. You may be missing out on other investing opportunities during the waiting period.
While the investor has some negotiating power with the seller, it is not the seller, but the lender who has to eventually approve of the sale. And it is more difficult dealing with the lender. In addition, if there are multiple liens on the property, the sale may be even more difficult to be approved.
One last disadvantage to investing in a short sale is that you have to buy the property “as is”. This means that neither the seller nor the lender will take care of property repairs, maintenance, or pest problems. This leaves you with the property in its current conditions which could end up costing you a large sum of money.
We have listed the top 3. Watch the video below to learn about the 8 best real estate investment strategies for beginners!
Conclusion
Choosing among different types of real estate investing strategies depends on your financial situation, investment goals, and investment portfolio in general.
If you need help finding a property to invest in, use Mashvisor’s investment analytical tools to view information on cash on cash return, cap and occupancy rates, rental income, and much more. Our interactive investment property calculator will help you decide which of the multiple real estate investing strategies to use to make the most returns.
Related: Why an Investment Property Calculator Is Better Than Spreadsheets