Real estate investments are one of the best ways to earn passive income and diversify your portfolio. Still, a lot of people aren’t sure where to start.
- How much capital will I need?
- What property type yields the highest return?
- How secure are real estate investments?
- How can I tell the difference between a good investment and a bad deal?
Getting educated is always a good thing, right? So congrats for taking time to build your knowledge when it comes to real estate — you’re already ahead of the competition!
When you’ve done the hard work to build your investment portfolio, then you probably want to be strategic when it comes to real estate.
Here are the top 7 ways to invest in real estate and take your next step to build your wealth.
The Top 7 Ways to Build Wealth through Real Estate
1. Single-Family Residential Property
Purchasing a single-family home to generate rental income:
For the most part, when people talk about investing in real estate, this is one of the most common investment options. Whether you’re at a dinner party or happy hour, it’s not hard to find someone who has a story about a rental property that doubled in value, or one that fell flat just as fast.
Single-family rentals are a classic option for people looking to create positive cash flow and build some equity. When purchasing a residential property, owners can estimate cash flow by researching mortgage loan options, rentals in the area, maintenance costs and tenant profiles. You can even decide how long you want to hold the property.
Should I invest in a single-family residential property to build wealth?
There are a lot of factors when it comes to your return on investment, and it depends on your real estate investment goals. Investing in a residential property is often more common as a long-term investment. This allows for fluctuations in the housing market, tenant vacancies, and unpredictable repairs that might be needed.
2. Multi-Family Residential Property
Purchasing a multi-unit property to generate cash flow through rental income:
Multi-unit properties are very similar to single-family residential properties since they are also residential properties. For example a duplex, townhouse or a 36-unit apartment complex. The key here is that they are residential properties and not commercial properties.
For investors who are ready for a bigger investment property, multi-family residential properties can be a great option to generate rental income. You can also do renovations and improvements to prepare the property for sale.
Should I purchase a multi-unit residential property as a real estate investment?
As a potential investor, you’d want to research loan options, rentals in the area, maintenance costs, tenant vacancy rates, and think about how long you might want to hold a specific property.
The owner of a multi-family residential rental property is responsible for all repairs, insurance, tenant agreements, and operational costs. As with other real estate investments it depends on your real estate investment goals.
3. Vacation Rentals
Purchasing a single-family residential property and offering it as a vacation rental:
Maybe you hit up the same ski destination every winter, or you have a favorite summer destination, or maybe there’s a tropical destination that you’d like to make a regular thing! Just like single-family residential properties, this is an individual home or condo, and as the owner, you’d be responsible for the mortgage, insurance, maintenance costs and such.
The big difference is that vacation rentals are considered short-term rentals, and aren’t considered the primary residence for the owner or the short-term tenants.
Should I purchase a vacation property as an investment?
As a potential investor, you’ll want to research loan options, maintenance costs, and whether or not the area is considered a seasonal location. Just like other residential properties, the equity will be tied to the housing market and fluctuations may impact how long you decide to hold the property.
Potential cash flow will be impacted by the location and how often you decide to rent your property. A deciding factor might be whether or not it fits into your overall real estate investment goals.
4. Flipping Houses
Purchasing a residential property to renovate and resell for a net profit:
Flipping houses is a hot topic of conversation, right up there with the tiny house revolution. There is a lot of variety here so let’s break it down to some common scenarios.
To flip a property, an investor will purchase a residential property under market value, and do renovations so that the property will resell at a higher price. This can generate a profit in a short amount of time. The original property might be in disrepair, foreclosure, or maybe it’s been listed so long that there is no longer interest from other buyers.
Some people like to buy a property and live onsite while they do the renovations, sometimes taking 1-2 years. Others live in a separate property so they can complete the work quickly and put the new property back on the market fast.
Should I renovate and “flip” a residential property as an investment to build wealth?
As a potential investor, you’ll want to research the current housing market and estimate how long it might take to complete renovations and sell the property. A lot of factors include how much capital you need to finish the renovations, how the financing will work, and if you’ll do the renovations yourself or not. As with other real estate investments it depends on your real estate investment goals.
5. REIT: Real Estate Investment Trust
Investing in a REIT (Real Estate Investment Trust):
A Real Estate Investment Trust is different from other real estate investments. When you invest in a REIT, you are investing in a fund instead of a specific property. Each REIT is an investment opportunity offered through a corporate entity, and that corporation builds a portfolio of commercial real estate and then sells shares to investors. Most REITs expand across several different real estate markets. For example shopping centers, office complexes, or apartment buildings. If you decide to invest, you’re investing in a specific fund that includes multiple commercial properties in its portfolio.
Should I invest in a REIT as a real estate investment to build wealth?
As a potential investor, REITs can help diversify your portfolio without having to invest in a specific property. You’ll want to research each fund you’re considering and evaluate how it fits in with your overall real estate investment goals. REITs are based in real estate, but your investment operates more like a stock (buying and selling shares). Since REITs are offered on standard market exchanges, you can buy and sell shares relatively easily, and with a minimum investment.
6. Real Estate Syndication
Investing in a Real Estate Syndication to generate passive income:
A Real Estate Syndication is a great opportunity to invest in real estate and generate passive income at the same time. And you don’t have to be a landlord.
Real Estate Syndications are structured as LLCs or LPs and offer investors an opportunity to invest in commercial real estate properties as part of a group. As an investor, you’d be part of a larger group of investors, investing in one specific syndication deal. Each syndication is put together with agreed terms and invests in commercial assets such as apartment complexes, shopping malls, storage facilities, and mobile home parks.
Should I invest in a Real Estate Syndication to build wealth and generate cash flow?
As an investor, you’d be one of the owners but you would not be responsible to manage or maintain the property for the life of your investment. Typically, real estate syndications have a turnaround of 5-7 years, generate positive cash flow and passive income, include great tax benefits, and have some of the biggest investment returns in real estate. Real estate syndications are another great opportunity to diversify your investment portfolio.
7. The Combination Approach
Investing in a combination of real estate investment opportunities:
If you want to own and maintain a specific property to generate rental income, then purchasing a single-family or multi-family residential property might be a great option. Add a vacation home to the mix, and you’ve got your summer planned!
If you love home renovations and you’re skilled in construction and architecture, then flipping houses will most likely be rewarding and profitable.
If you want to invest in real estate, but don’t want the hassle of managing a property, then REITs and Real Estate Syndications are definitely worth looking into next.
There are other opportunities like seller-financing, flipping contracts, and short sales, so if you love finance, these are some great routes to start researching.
The Final Takeaway
There are a LOT of investment options when it comes to real estate and how to build wealth, and there is no perfect answer. There are more than 7 ways to build wealth in real estate for sure!
For most investors, it’s good to take inventory and decide how much you might want to invest right now, and how much risk you’re comfortable with.
When you’re ready to start expanding into real estate, connecting with an experienced real estate investor can really help when it comes to figuring out which path is the best fit.
Whether you’re looking to generate passive income or build some equity over the long-term, real estate investments are a great way to build wealth and diversify your investments!