10 Real Estate Investment Strategies to Consider - dummies

10 Real Estate Investment Strategies to Consider

By Nicholas Wallwork

Besides simply buying and selling property, you can invest in real estate in several different ways. Take a look at a range of ways investors and entrepreneurs get into property investing or build property-related businesses.

real estate investment strategies
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As with any strategy, education is a key part of success. So, if something in this list interests you, invest some time in learning more about the strategy or business model before you put your money (and your reputation) on the line.

Buy-to-rent (single-tenant) properties

“I’m investing in real estate,” you say to Beth from the gym. “That’s interesting,” she replies. “My uncle Dave does that.” Chances are, Beth assumes you’re buying a property and renting it out to tenants in a straightforward single rental (renting the whole property to one tenant or household). That’s what most nonexperts think of when they hear the words real estate investing, which makes sense — single rentals are extremely common among first-time investors, or those who want a simple, fuss-free investment as a retirement nest egg.

Single rentals are a good investment because they’re very simple to understand, easy to set up, and, generally, straightforward to run. However, they’re unlikely to deliver very impressive rental yields, certainly not market-beating returns. In my experience, renting out rooms in the property to separate tenants is a much better way to maximize your rental income.

Most investors get started with a single-rental strategy, but this book is designed to help you progress beyond that, grow your portfolio faster, build wealth quicker, add more value, and overcome the common challenges of single-tenant rental investments (such as how to maximize your rental income in a highly competitive rental market).

If you want to really get into the nitty-gritty of being a successful buy-to-rent landlord, I highly recommend two books that will help you on that journey. The first is Real Estate Investing For Dummies, by Eric Tyson and Robert Griswold (Wiley), which is designed for U.S. readers. The second, for readers in the United Kingdom, is called Renting Out Your Property For Dummies, by Melanie Bien and Robert Griswold (Wiley).

Flipping houses

In very simple terms, flipping a house means buying it and quickly selling it for a profit.

To achieve that profit, you may do some minor cosmetic work to the property. But, generally, this strategy relies more on a rising market (or buying at a great discount) as opposed to adding any real value. The idea is to get in and get out as quickly as possible, so you don’t want to be doing any expensive, time-consuming development work on the property.

Done well, this strategy can turn a tidy profit, and it can really help you grow your real estate business. However, there are some significant downsides to consider before you take the plunge:

  • This strategy is only really successful in areas with extremely high demand for property, where demand outstrips supply. Under these circumstances, the housing market moves quickly, and prices rise faster. If there isn’t excessive demand, it can be extremely hard to sell quickly for a profit. (Unless you somehow managed to buy the property for a bargain price, in which case you can simply sell it for retail price and pocket the difference, this is how a good property sourcing agent can add value.)
  • In a strong, fast-moving market, where demand outstrips supply, buying at a good price can be a real challenge for would-be flippers. If you pay too much, and the market changes before you can sell the property, you could find yourself in financial hot water.
  • In general, any strategy that relies on rising house prices is risky business. In my opinion, you’re far better off adding real value to the property in order to generate a profit, or earn steady, long-term income from the property.
  • Too many investors overlook the costs involved in flipping houses. It’s not just about buying a house and making cosmetic improvements. You’ve got all the costs associated with acquiring the property (agent fees, legal fees, taxes, and so on), plus covering the mortgage and bills for the period that you own it. If you flip several properties a year, the acquisition costs alone can really add up.

There are lower-risk ways to earn money from property — ways that, unlike flipping houses, will work well under a variety of market conditions.

Run a bed-and-breakfast, guesthouse, or hotel

As a big fan of passive income, I have to say that the thought of running a bed-and-breakfast (B&B), guesthouse, or hotel sends shivers down my spine. I love hotels. I’ve stayed in some wonderful hotels around the world. But would I want to run one? No.

That’s because this is an extremely intensive, hands-on business. Even if you’re just running a small B&B by the seaside, you still have to be there every day to greet guests, give them a tasty breakfast, clean the rooms, change the sheets, deal with bookings and guest inquiries, and so on. The devil’s in the detail, and if you’re not a details person, you’ll probably struggle to run a successful operation.

Sure, you can simply employ people to run your B&B, guesthouse, or hotel for you, but that’s not an easy solution either. You still need to find and oversee awesome people who can handle all the little details on your behalf. And finding awesome people who can take care of things for you is very tricky in itself and comes with a cost.

Broadly speaking, running a B&B, guesthouse, or hotel is never going to be a get-rich-quick scheme. But if it’s something that ignites your passion, this strategy can work well alongside other, much more passive income strategies.

Alternatively, if providing guests with a great experience appeals to you, but the intensity of running a B&B, guesthouse, or hotel doesn’t, you may want to consider serviced accommodation or vacation rentals instead.

Own or run a care home

The costs of elder care in the United Kingdom are staggering. At the time of this writing, the average cost of housing in a residential care home (nursing home) is around £30,000 ($38,000) per year. And that’s just the cost of living there — nursing care costs even more.

On the flip side, owning or running a nursing home or assisted living facility is clearly a strategy with high income potential. There’s enormous demand for quality, safe accommodation for older people, and this demand is only going to increase.

Those are some big plus points: rising demand and high income potential. However, there are plenty of other serious considerations around owning or running a care home:

  • This strategy is extremely hands-on, and details matter. In fact, details can mean the difference between life and death.
  • The care industry is (rightly) highly regulated, so expect to cope with a lot of oversight from authorities.
  • People management is a critical skill in this business, not just in terms of the residents but the staff, too. You need highly trained care staff with excellent people skills, and they need to be managed extremely well.
  • Reputationally, this can be a high-risk strategy. When things go wrong in the care industry, it often makes the headlines and provokes national outrage.

This is a strategy with potentially very high returns, but passion and commitment to the details are key to making it work. Investing in long-term-care facilities is less about a real estate investment and more about providing a service (compassionate and high-quality care) to a vulnerable population.

Become a real estate agent, rental agent, or property manager

If you’re looking to build your knowledge and expertise in real estate, but you don’t have the money to invest in property yourself, you can do a lot worse than becoming a real estate agent (selling homes), rental agent (marketing rental properties), or property manager (looking after properties on behalf of landlords).

This strategy is a great way to learn the industry from the inside. You can develop contacts, earn income, and build a successful business for yourself. It’s pretty accessible, too, requiring little in the way of startup money (if you’re going into business for yourself). Later on, if you want to invest in properties, the knowledge and contacts you’ve gathered will be a huge help. But you may find it turns into a rewarding, lifelong career!

Becoming a real estate agent, rental agent, or property manager isn’t for everyone, though. At the very least, you’ll need to be

  • A great salesperson
  • A fantastic communicator and real people person
  • Highly driven and self-motivated
  • Very organized and able to juggle multiple projects and clients at once

If you tick all these boxes, you’re passionate about real estate, and you’re willing to learn, this could be the career move for you! Check out Success as a Real Estate Agent For Dummies, 3rd Edition, by Dirk Zeller (Wiley), to discover how to become a top-performing agent and build a successful real estate business.

Invest in real estate investment trusts

Do you want to achieve the generally steady returns of real estate investments, but you don’t want the hassle of owning and actively managing property yourself? Then real estate investment trusts (REITs) can be a good solution.

Real estate investment trusts are investment products where property is the underlying asset. A REIT is a company or trust that owns and operates properties, such as office blocks, apartment blocks, retail properties, and other kinds of buildings that people or businesses rent.

REITs can be private or public, with public REITs being traded on the major stock exchanges, just like regular shares. Public REITs are subject to all the scrutiny and regulation of any publicly traded security, which tends to make them a safer bet than private REITs — so, unless you really know what you’re doing, steer clear of investing in private REITs.

When investing in public REITs, you can choose and buy shares in specific REITs yourself or you can invest in a fund that specializes in REITs (many focus on a specific type of property, such as commercial offices). Investing in a REIT fund is great because it cuts out some of the hard work on researching suitable REITs; the fund managers choose the best investments on the investors’ behalf (and, of course, they charge a management fee for the privilege).

But why choose REITs at all? Well, on the plus side:

  • You get a totally hands-off investment, without having to devote your time and energy to finding and managing properties yourself. REITs are a great option for those who have money to invest, but not really the time (or inclination) to actively manage properties.
  • You usually get returns that are broadly comparable to buying stocks, with (generally speaking) less to worry about in terms of short-term volatility and a performance that mirrors that of the underlying asset (real estate).

But on the down side, with any hands-off investment, returns are generally lower than they would be for an investment that you actively manage. In other words, investing in a REIT fund will usually deliver lower returns than buying a property and renting it out yourself.

REITs are a useful way to further diversify your real estate portfolio, but combine them with higher-earning, actively managed investments for better returns and a more well-rounded portfolio.

Offer emergency housing accommodation

Emergency accommodation is similar to low-income housing in terms of the tenant profile, but the way it works is slightly different.

Emergency housing is short-term shelter accommodation for people who have no other options available to them, usually because they’re homeless or in crisis. Emergency accommodation is arranged through the local authority housing department, which means, as a landlord, you rent the property to the local authority, and they find and place tenants in it.

There are, as you can expect, some big factors to consider before you turn one of your properties into emergency housing. For one thing, you can expect a high turnover of tenants — with some people perhaps staying for as little as one night — which means the property will be used very intensely.

You can also expect to be welcoming some pretty challenging tenants, people who may be at the lowest point in their lives. You need to have a good understanding of their needs and be prepared for some potentially difficult tenant behavior.

That said, there’s a clear need for this kind of accommodation, so the demand is there for a well-run business to be profitable while helping provide a valuable service to local authorities. Win/win again. Because you’re being paid by the local authority, not the tenants themselves, you can usually charge a reasonable nightly rent for the extra work these tenants require and rest assured that you’ll get paid on time and in full.

To really make this strategy work for you as an investor, you need to develop a very clear understanding of the local nuances in your target area, and build good links with the local housing authority.

Commercial property

Commercial real estate is much more subject to the ebbs and flows of the wider economy than residential property. If business taxes go up, you’ll see more empty shops on Main Street. If the economy contracts, businesses go bust or downsize, leaving large empty warehouses and offices in their wake. You’ve likely seen this with your own eyes in your area at one point or another.

The success of commercial real estate investments hinges on having good, stable business tenants in place. Without a tenant, it’s just an empty building costing you money. “Duh, that’s obvious,” you say. But what’s not immediately obvious is that it can take a long time to find good commercial tenants, which means your chances of void periods (where the property stands empty) are usually higher than they are with a residential property. And even if you do find a great tenant, will they be able to stay put if the economy changes? That’s a couple of big “ifs” to consider.

So, clearly there are some key downsides to be aware of. But what about the upsides? There are some attractive advantages to investing in commercial property:

  • Commercial leases tend to be much longer than residential leases (at least 5 years, often 10 years, or maybe even 20 years!). If you can find a good tenant, that gives you some stability and potentially lowers your risk. The longer the lease, the more value this adds to the property.
  • Depending on where you are in the world, you may receive more generous tax treatment on commercial investments than residential. Your tax advisor or accountant will be able to tell you whether this is the case in your jurisdiction.
  • Tenants are responsible for customizing and maintaining the property to suit their needs, which keeps your costs low (again, providing you can find, and keep, a good tenant). Often they have a full repairing lease and have to hand the property back at the end of the lease term in the same condition at which they took it on. So, that means you often have no wear and tear to contend with like you do with residential investments.

All things considered, and unless your tenant is a big name like Microsoft or Coca-Cola, for example, commercial real estate investing is often considered higher risk than residential investments, but if you get it right, you can be in for relatively hands-off income for several years at a time. This strategy may be worth considering as part of a larger real estate portfolio or for larger investors if the right opportunity (with the right tenant) arises.

Trade in freeholds

A freehold essentially means the outright, indefinite ownership of a building and the land that it sits on. If you buy an apartment with a lease of, say, 99 years, that’s not a freehold (it’s a leasehold) because you only “own” the apartment (for a term of 99 years), not the whole building, and not the land.

Take the example of a large block of 100 apartments. Each apartment is owned leasehold by individual owners, who pay what’s usually known as ground rent to the individual or company who owns the freehold on the building. The freehold of that large apartment block can be traded, just like any of the apartments within the block can be sold.

Trading in freeholds is best left to experienced investors. The legal technicalities are stringent, regulation in this area is evolving, and, unlike a regular house or apartment, it’s difficult to add value and increase the amount earned through ground rent. What’s more, these opportunities are difficult to source and sell, compared to a regular residential property. For this reason, only ever consider trading freeholds as part of a wider, diversified portfolio and never as a main source of income.