There’s no one-size-fits-all real estate investment strategy. Every property is different — a unique combination of its location, its condition, the revenue it generates and how it’s been managed.
Every investor is different, too — a combination of the capital they have access to, the risk they’re willing to assume and the amount of time they want to put into managing their real estate investments. Investors build unique portfolios of these properties based on their financial and personal goals.
Most investors choose properties that, while not necessarily similar to one another, are similar types of assets. Focusing on managing established rentals, flipping properties, or buying and holding the right parcels of land allows investors to eliminate some redundancies as their portfolios grow. And as they develop expertise in a given type of real estate investing, their deals can get smarter and smarter.
Established Rental Properties
Purchasing an established property with tenants in place can be a good first step for real estate investors. The goal of this real estate investment strategy is to build a portfolio of properties that generate steady income immediately — whether that comes from tenants renting apartments, operating retail businesses or having offices in your building.
Ideally, established rental properties already have tenants in place. A new owner will need to fill space as it becomes available and potentially make minor improvements, but they should not face heavy up-front costs.
The primary advantage of this real estate investment strategy is predictability. “Core” investors likely value cash flow over appreciation and stability over high risks that come with high rewards.
Related Webinar: How Successful Investors Sell Their Properties
Adding Value to Rental Properties
Investors who are willing to take on slightly more risk might consider properties that require some more work up-front. They may need updates or minor renovations, vacant space filled with tenants, or both.
Value-add properties, also known as “core plus” properties, could include an older property in a popular neighborhood. This building may require renovations now or in the not-too-distant future, but if the owner made improvements, the market would support higher rents.
Other value-add properties may be partly leased but have some vacancies. Opportunistic investors may appreciate the challenge of filling that space, whether by improving the property or simply updating its marketing strategy.
Value-add properties offer cash flow up-front, which can be helpful for investors who want to see returns right away. But with targeted improvements and effective marketing, investors can attempt to raise the value of the property, increasing future cash flow and ultimately the property’s sale price.
If you’ve watched HGTV, you’ve watched (a highly edited version of) property flipping. Flippers purchase property opportunistically and invest heavily in renovations in the hopes of leasing the space at high rates or selling the property for a profit.
Flipping, naturally, is a much riskier real estate investment strategy than buying established properties. Investors who flip property need high levels of financing right away to purchase the property and then to renovate it. Because the up-front costs are so high, they often do not see returns for several years.
However, risks can pay off. Investors who choose property in up-and-coming neighborhoods, or who correctly identify a trend on the horizon, can reap the benefits of appreciation. With the right updates, a property with a low sticker price in a prime location can generate significant returns.
Buy and Hold
Buying and holding property is a passive real estate investment strategy. It’s fairly straightforward: investors purchase properties that they think are likely to appreciate, then hold them until they can sell them for a profit.
Buying and holding is common among investors who deal in land or vacant buildings. There will be little to no cash flow up-front, and depending on how long the investor holds the property, taxes and utility bills may start to add up. Appreciation may take more time than you anticipate. But while buying and holding is a risky investment strategy, it can result in significant profit while requiring little to no management.
Which Real Estate Investment Strategy is Right For You?
Before you begin commercial real estate investing, think about what you hope to gain.
If you’re seeking a steady passive income stream that you can count on to help you reach your financial goals, focus on building a portfolio of established rental properties. You can diversify your portfolio by pursuing different product types in different neighborhoods but count on each property for fairly predictable returns. The more capital you have access to, the more you might consider properties that require some value-adding but still offer steady cash flow.
If you’re a high-risk, high-reward investor in a region with some fast-appreciating neighborhoods, flipping or buying and holding properties might pay off. It will take longer to realize your returns, but they could be significant. Unfortunately, so could your losses.
No real estate investing strategy is risk-free. If you’re new to this investment class, it takes time to learn to think like an experienced real estate investor. Consider working with a consultant to develop a business plan tailored to your market and your needs. WindWater’s team is here whenever you’re ready to get started.