Again, buy-and-hold investing is the classic example of real estate investing, where you buy up an investment property and rent it out for consistent monthly income. On the whole, this is a relatively active form of real estate investing. You do have to do the groundwork of marketing for a tenant, vetting all the potential applicants, and being on call to handle maintenance issues. It's also meant to be a long-term strategy since investors tend to buy an investment property and keep it in their portfolio for multiple years.
The big benefit of following a buy-and-hold investment strategy is that you have the opportunity to achieve relatively stable returns. In this case, landlords can usually count on the same amount of rental income coming in every month. Additionally, if you hire a property management company, you'll also have the opportunity to turn this into a more passive investment.
The major downside of this investment strategy is that it can be a lot of work for smaller returns than you might find with another method. As mentioned above, if you're an individual investor who hasn't hired a property management company, you have to be willing to take on landlord duties in order to receive any rental income, which can take a lot of time and effort.
Then, there is fix-and-flip investing. As you might be able to guess, this is the same type of investing that you often see on HGTV. In this scenario, the investor will do their best to find a real estate deal that's undervalued for the market. Then, they'll fix it up and market it for resale at a much higher price. Once the buyer is found, the investor gets to keep the difference between the initial investment and the final sale price as profit.
The main benefit of this type of real estate investing is that, if you find the right investment opportunity, it has the potential for high returns. Also, it's a short-term investment strategy, meaning you could see a return on your investment in just a few months.
That said, this is also a very active investment strategy. In this case, it's up to you or your real estate agent to find the right real estate deal. Then, you have to figure out how to fix up the property. Here, you can often achieve better returns if you can do the work yourself. However, if you aren't handy, you'll have to plan to pay for labor costs in your budget. Finally, there's also the risk that you could over-improve the property and lose money on the deal when it's time to sell.
On the other hand, real estate wholesalers will act as a middleman between a property owner and an end buyer. Here, the investment strategy is to find an underpriced real estate deal. Then, to quickly sell it for a higher price to an interested buyer without rehabbing it first. In this scenario, you get to keep the difference between the price you paid for the property and the price you sold it for as a profit.
In truth, this is a relatively passive investment strategy, and you have the potential to make a sizable profit. Typically, wholesalers will buy and sell a property the very same day in order to cut down on carrying costs. However, in order to make this work, you often need to have an established network of real estate contacts who can help you find interested buyers and distressed sellers.
How to decide which type of real estate investing is right for you
Once you know a little bit more about each type of real estate investor, it's important to decide which investment strategy may be the best fit for you. With that in mind, we've listed some of the criteria for you below. Keep reading to get a sense of which type of investing might be the best match for your lifestyle.
Active vs. passive investing
First, you have to decide whether you're interested in active or passive investing. As the name suggests, active investing is a lot more work. However, in exchange, you often have the potential to make larger profits. In this case, you're trading time and effort for the size of your returns. With a passive investment strategy, on the other hand, there is less to do but you may cut into some of your profits.
- Active: Fix-and-flip, buy-and-hold
- Passive: REITs, wholesaling
Long-term vs. short-term gains
Once you’ve decided between active and passive investing, the next question is whether you want to focus on short or long-term gains. While this is not always the case, often short-term gains take a lot more effort to realize then long-term ones.
- Short-term: Fix-and-flip, wholesaling
- Long-term: REITs, buy-and-hold
The Millionacres bottom line
Real estate investing can be a great way to diversify your portfolio. However, if you're just getting started in this arena, it can be confusing to differentiate between the different types of real estate investors. In light of that, use this as your guide to your options. Armed with this knowledge, you should have a better idea of what type of real estate investing is right for you.