Real estate continues to be one of the most popular alternative investments for investors across the globe. A recent study showed that 1⁄3 of Americans believe real estate to be the best long-term investment, even over stocks.
And yet, while many investors believe in the value of adding real estate to their portfolio, there are many real estate investing strategies to choose from. In this guide, we'll cover six real estate investing strategies you should know and their pros and cons.
1. Traditional homeownership
For many homeowners, owning a home is synonymous with investing in real estate. And for a good reason. As real estate prices have continued to rise over the last century, homeowners are often able to realize a reasonably sizable profit when they sell years down the line.
According to a Bankrate study, "83% of homebuyers view a home purchase as a "good financial investment."
That said, not all of the 80 million plus homeowners in America purchase a home with investing in mind. Still, there is a general consensus purchasing a home is a good investment.
Buying a house for $250,000 and selling it for $350,000 some years later may appear on paper to look like a good investment, but that isn't always the case. Many homeowners don't always factor in "phantom costs" that have a knack for eating into the potential profit of homeownership.
The reality is, not every homeowner will come out on top, from property taxes to unexpected home repairs to even less than optimal mortgage terms those costs add up. While homeowners can make money down the line, it's important to know the true costs so one can make an educated investment decision.
Of course, there's nothing wrong with owning a home, but it pays to run the numbers to ensure that your investment is financially worth it–if having a home as an investment is your number one goal.
2. Rental Properties
Perhaps one of the most well-known real estate investing strategies outside of traditional home ownership, investing in rental properties to provide 'passive' income is an increasingly common choice for real estate investors.
After all, owning multiple rental properties that generate monthly income is undoubtedly appealing. Many investors who choose the rental property route leverage their recurring cash flow to invest in even more properties, which can add up to a significant real estate portfolio over time.
That said, there are a few disadvantages to rental properties as a real estate investment strategy. For one, you generally need a significant amount of capital upfront to invest, leaving many potential investors priced out. Second, rental property income isn't always as "passive" as it's made out to be.
As a rental property owner, you have to deal with tenants, repairs, and other unexpected problems that may come up. For example, over the course of COVID, rental property owners were put in a highly challenging position.
As the Joint Center for Housing Studies of Harvard wrote, "First, as expected, landlords of all sizes struggled with rental collection during the pandemic. However, small owners, who were more likely to have tenants in arrears prior to the pandemic and who have a smaller real estate asset base to help diffuse such losses, were significantly more likely to see rental revenues drop by 50 percent or more."
A rental property can be a wise long-term investment assuming you have the initial capital to get started and you account for the time and cost commitment it takes to generate profit at scale. While you can always enlist the help of a rental management company, that investment is ultimately paid with potential profit.
3. Real Estate Investment Trusts (REITs)
For investors looking for a more passive real estate investing option, Real Estate Investment Trusts or (REITs) are also a great option to consider. REITs essentially operate as "stocks" but with real estate as the asset and are operated at an institutional level. As Bankrate notes,"by law, REITs must invest at least 75 percent of their assets in real estate and derive at least 75 percent of their gross income from rents or mortgage interest for real estate."
As of this writing, there are just north of about 1k REIT options to choose from. REITs are great in the sense that they can provide exposure to real estate in a simple and hands-off way. Simply invest in the REIT you believe has the most upside as you would with a stock. There are a variety of REIT solutions that make the process easy to get started. Generally, you also don't need a large amount of capital to get started. Some REITs are focused on commercial real estate, while others may be focused on certain areas or locations, which can be great if you are looking to invest in a specific area you believe will have high (or safe) returns.
While you can invest in REITs with as little as a few dollars that does limit your upside. The more you put into REITs the higher the upside.
There are a few disadvantages to consider when investing in REITs, however. For one, you don't own the asset outright, which could be a deal breaker depending on your investing profile. Returns on REITs are also generally considered not as high as other investment options. Additionally, REITs are unfavorably taxed compared to other options as well.
For those with limited initial capital, REITs can be a great starting point for any real estate investment strategy.
4. Real Estate Investment Groups (REIGs)
Real Estate Investment Groups or REIGs are a real estate investment strategy that operates through the pooling of funds from various investors. The investors agree to what type of real estate they intend to invest in, with each investor getting a proportional amount of shares of the returns based on the funds used.
Because funds are pooled, this typically gives those involved with the REIG the opportunity to invest in large real estate deals that may not be accessible to a solo investor. Additionally, the group typically has someone to manage the funds and deals, so you don't have to be as active in the day-to-day operations. Compared to REITs, which have more strict guidelines and regulations, REIGs are a little more flexible in terms of operations. There are generally no requirements for investment size or the number of investors, which can be both a pro and a con.
The knowledge of real estate and markets plays an incredibly important role in the success of Real Estate Investment Groups. There's no guarantee the group can choose the best properties and deals. Additionally, depending on the terms of the group, it can be difficult to remove your capital, and some REIGs require an annual fee which can reduce your overall potential profits.
In general, Real Estate Investment Groups can be a great strategy if you find a group that is knowledgeable in the space.
5. Fix and flip
Made popular in mainstream culture through the seemingly endless amount of "House Flipping" shows on T.V, the fix and flip model is a straightforward and easy-to-understand real estate investing strategy.
Essentially with this option, you purchase homes with the sole intent of flipping them shortly thereafter for a profit. This is typically done by investors choosing a home that can see a substantial increase in price through strategic renovations.
Investors with extensive knowledge of the real estate markets and intimate knowledge of what buyers look for in homes can do exceptionally well with this strategy.
Notably, fix and flip is not a hands-off real estate investing strategy. Not only do you need to be able to invest in the needed renovations, the entire process is incredibly time-consuming, and usually involves the hiring of multiple 3rd party vendors for renovations.
For full-time real estate investors, fix and flip can be a great option to generate sizable profits, but it's not without risks. You're never guaranteed to be able to sell the home for more than you purchase it. Additionally, while renovating a home, you may come into some unexpected costs that also eat into your profits.
For example, you may find during the process of fixing and flipping that the home has previously unknown structural or water damage that may cost tens of thousands of dollars to repair.
There is certainly money to be made with this strategy, but it is definitely not recommended for those just starting out with real estate investing.
6. Exposure through digital real estate
All the above strategies can be great options for those looking to add real estate to their portfolio. And yet, one of the biggest challenges of investing in real estate remains: the cost to get started and time commitment.
With the Parcl Protocol, you can invest in real estate assets that are tied to the real world prices of physical real estate for less than a cup of coffee and there's no need for you to manage your portfolio daily.
The Parcl Price Feed mimics the behavior of real-world real estate markets and gives users access to price exposure without the burdens of owning or transacting hard assets. By creating a digital representation of property values from various cities and neighborhoods, the Parcl Protocol allows you to gain exposure to entire cities like Manhattan or Miami.
If you want exposure to real estate price swings without the hassle of some of the options listed above, the Parcl Protocol is designed for those wanting a modern real estate investing experience. No large amounts of capital needed—no need to deal with the hassle of tenants, maintenance, and unexpected expenses.
Invest in your favorite neighborhoods and cities with just a few clicks of your mouse.