How to Select the Right Real Estate Investment Strategy for You
Selecting the right real estate investment strategy requires a reflection of your own goals and lifestyle. Each strategy is different and has unique variables of risk and reward.
Investing in real estate opens a whole new door of opportunity and wealth. Real estate investors find success by choosing the right real estate investment strategy that suits their goals and lifestyle best. Whether it’s pursuing short term or long term, strategies have unique sets of risk and reward.
Not to mention strategies are determined based on personal preference of real estate investors such as narrowing down on turnkey properties, flipping, or even short-term rentals. How do you select the right real estate investment strategy for you? Let’s take a look.
Residential rental properties are purchased by an investor with the intent of leasing the building out to tenants. They can be single-family homes, condos, duplexes, townhomes, or any kind of similar property up to code for living conditions. Rental properties could also be leveraged with debt which is attractive compared to a more demanding investment such as stocks. Furthermore, rental properties have the potential to appreciate in value, produce a steady monthly cash flow, and investors receive tax write-offs.
A turnkey rental strategy may be right for you if you’re the kind of investor who doesn’t have the extra time to make repairs. Turnkey properties are typically freshly renovated and ready to move in right after closing. A tenant could simply “turn the key” and move in without any additional work or hassle. Turnkeys are beneficial to an investor when they have the capital to purchase. Since turnkeys are updated properties, they are sold at a premium price.
On the flip side, turkeys are attractive to prospective tenants and are less likely to report complaints to the landlord. While the barrier of pursuing the turnkey strategy is higher than other strategies, it’s ideal for a passive investor who doesn’t want to deal with uncertainties in the real estate market. Investors have no upgrades to complete and don’t take on additional risk of a failed renovation project which could land you in the red before you even start your rental agreement,
Short-term has been a hot trend in real estate for rentals. With the emergence of Airbnb alone, millions of listings are accessible for vacationers looking for a temporary home. A short-term rental is when you purchase a property and rent it out by the day or week. Tourists are popular tenants for short-term investors because they pay higher prices. For example, if your property is in a vacation hot spot, it’s possible to charge hundreds of dollars per night.
The short-term rental strategy is great because it’s flexible. Your pricing strategy is dynamic and you could change it at any time. As long as you have demand and your vacancy is low, you have a serious opportunity to make a substantially larger yield than a long-term rental. Not to mention, short-term rental investors leverage helpful tax deductions including mortgage interest, depreciation, and travel expenses. The downside of short-term rentals is your competition and volatility. Once an off-season arrives and your demand for renters shrinks, your income is less stable. It’s important to prepare for off-seasons and expanding competition which may limit your occupancy rate.
A long-term rental is a lease agreement typically lasting between six months to a year long between a landlord and a tenant. It’s a more stable real estate investment strategy compared to short-term rentals. Long-term rentals have less turnover and fewer vacancies than the short-term strategy because of locked-in agreements.If you consider the long-term rental strategy, you have different options available to purchase. Usually, long-term rentals are suitable for two paths — single-family or multi-family property types.
When you only have a single unit to rent, it has its benefits. Single-family property types such as a house are more simple than renting out a multi-family unit. Single-family units almost always have a demand, so if it appreciates in value, you can always sell it in the future. When you search for a tenant, you can stay tight on your policies and securely pick because you don’t have multiple units to rent out. Single-family homes are also smaller which means it’s an easier space to maintain compared to a multi-family home.
A multi-family property has its differences from a single-family. For instance, multi-family units are valued based on how much income they generate from tenants. This is also perhaps the largest advantage that multi-family properties have — multiple cash flows. Although investors are more dependent on tenants and filling more units, collecting several rents every month is more lucrative than single-family homes with a singular rent. Multi-family properties do have their challenges though. Insurance is higher, there are more codes to follow, and vacancies are more common, just to name a few.
House flipping involves purchasing a property before rehabbing and selling it. A renovated property usually nets a higher return on investment than selling without any rehab. Rehabilitation may include minor home improvements such as:
- Interior/exterior painting
- Flooring replacement
- Light fixture swap
- Bathroom vanity upgrade
Of course, renovations are limitless and investors could add as much value as they want to. Major renovations such as a full kitchen or bathroom remodel cost tens of thousands of dollars and take time. One of the largest benefits of the home flipping strategy is short term ROI. It’s more than possible to purchase a fixer-upper, make the necessary repairs, and sell the home, pocketing the difference.
However, home flipping is for experienced investors who know how to create an effective plan. If you don’t like a hands-on investing experience, home flipping might be more than you could handle. For example, a condensed house flipping checklist might look something like this:
- Budget mapping
- Contractor search
- Walkthroughs and inspections
- Project management
- Market the home for sale
Each step is crucial and home flippers work as quickly as possible before time eats into their profit margin. Consider home flipping if you want a short term and active strategy.
Recognizing the right investment strategy
Selecting the right real estate investment strategy starts with reflecting on your own investment goals. A passive investor may not have time to handle the tedious and active process of flipping a home. Furthermore, an aggressive investor with lots of time on their hands might pursue a short-term rental strategy which requires dynamic management. Your strategy optimizes as you gain more experience, so it’s essential to set yourself up for success by choosing the option that suits you best.