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The 10 Best Real Estate Investments for Smart Real Estate Investors

by Brandon Turner on August 23, 2014 · 19 comments

  
The Best Real Estate Investments

Mom… which one of us kids is your favorite?

Admit it – if you have siblings, you probably asked that question of your mom at least once growing up. If you didn’t, you probably wanted to.  It’s a natural question for a child to ask because it plays off our competitive nature. We want to be the best and work hard to become so.  Of course, Mom’s answer was always the same. “I love you all the same, but different!”

Smooth answer, Mom. And smart.

You see, it’s impossible to say what “The Best” investments are. They are all good, but different. The question you should be asking yourself is not “Which is best” but rather “Which is best for me?”

You see, while there is no single best real estate investment, there is probably one or two that is best for you. This is the topic I want to discuss today in an attempt to help you answer the question for yourself, “What is the best real estate investment?”

The Best Real Estate Investments

Below I’ve outlined 10 of the most common types of real estate investments, as well as a brief description of what this real estate investment is and who it might be the best for.  Keep in mind that each category of investments contains numerous “sub-categories” that can be explored, each with different levels of passivity and different paths for success. The purpose of this list is to simply help you narrow down what the best real estate investment is for you.

Let’s get started.

Rental Property Investing

What it is: Also known as “buy and hold” investing, rental properties are perhaps the most popular form of real estate investing in existence and one of the most simple to get involved with. Rental property investing involved the purchase and leasing of residential properties to tenants, typically on a short term lease of one-year or less.  These properties can be single family homes or multifamily units.  Rental property investing can be accomplished by managing the properties oneself, or by outsourcing the management to a property management company.

Who it’s best for: Rental properties are great for those who are looking to build wealth slowly and confidently over a long time span. Rental property owners must be patient and be able to avoid “shiny object syndrome,” be a problem-solver to handle the tough situations that will arise with tenants, and be able to analyze a deal and understand the math behind a rental property purchase.  Furthermore, rental properties are great for those with a “day job” they enjoy and earn enough income at that job to save up the down payments required for rental property mortgages.

More information: For more information on buying rental properties, don’t miss “Buying Rental Property: A Step by Step Guide” and be sure to check out “The Rental Property Calculator” from BiggerPockets.

House Flipping

What it is: Made popular by numerous television shows, house flipping involves the purchase, rehab, and sale of residential real estate. House flippers typically find homes in distressed conditions, negotiate a great deal, manage the rehab from beginning to end, and sell the home for a sizable profit. House flippers can either do the labor themselves or outsource the labor to qualified contractors.

Who it’s best for: House flipping is a rather time-intensive field that often requires a lot of hands-on interaction on the job site. For this reason, house flipping is best for those without a full-time job or with the flexibility to work around the issues that will arise.  Flipping houses successfully requires the ability to handle contractors, bids, deadlines, and budgets all at the same time.  Furthermore, a house flipper must understand the numbers going into a flip or they will never see the right profit coming out of it.  Finally, a house flipper must be business-minded, as house flipping is as much a business as it is an investment.

More Information: For more information on house flipping, see our free guide “Flipping Houses: The Ultimate Step by Step Guide” or pick up a copy of the best-selling book from J Scott, “The Book on Flipping Houses.” Also, be sure to run your next house flipping deal through “The House Flipping Calculator” here on BiggerPockets.

Hybrid Investing

What it is: Hybrid investing is the term I’ve given to the kind of investing that crosses a rental property with a flip. In other words, a rental property is bought with the intention of adding value and reselling for a profit. Hybrid investing combines the cash flow benefits of rental properties with the lump sum profits found in house flipping. Hybrid investors typically buy property for less-than-market value, rehab the property, rent the property out, and resell when the timing is right, usually 3-5 years later (depending on the market.)

Who it’s best for: Because hybrid investing typically does require a light rehab of the property, flexibility with one’s job is helpful but not required. A hybrid investor should have all the skills that a rental property investor has, as well as all the skills a house flipper has. Hybrid investing is great for those looking to build wealth faster and willing to take a more proactive approach to making this happen.

More Information: If you want to learn more about Hybrid real estate investing, don’t miss “What is Hybrid Real Estate Investing?” or one of the most popular posts I’ve written here on BiggerPockets which shares the strategy in detail, “How to Make a Million Dollars from Real Estate: A Step By Step Path.”

Wholesaling

What it is: Wholesaling is the process of finding a great real estate deal, putting that deal under legal contract, and selling that contract to another investor (usually a “cash buyer”) for a slight markup; that cash buyer will end up buying the property. The wholesaler typically never actually owns the property, thus it could be argued that wholesaling is not an investment at all.  Wholesalers typically sell their contracts to house flippers or rental property investors and make between $1,000 and $10,000 on the markup, though the profit can vary wildly depending on how good of a deal the wholesaler found.

Who it’s best for: Wholesaling is a business – and a tough one at that. In fact, the vast majority of those I see who want to get into wholesaling end up quitting within a few weeks. To be good at wholesaling, an individual needs to be prepared to work hard and work even smarter. A wholesaler should have a strong grasp on real estate fundamentals, especially what makes a property a great deal and how much a rehab might cost. The best wholesalers I know come from a sales background and understand the importance of customer service, systems, CRMs, returning phone calls, following up with leads, and negotiation. A wholesaler must also be willing to put in the time needed to succeed – which can be a lot – so a flexible job is helpful.

More Information: To learn more about wholesaling, don’t miss “The Definitive Guide to Real Estate Wholesaling” and “How to Start Wholesaling: Getting Past The Education and Into the Field.”

Notes (and Private Lenders)

What it is: When a property is purchased with a mortgage, a “note” is created which spells out the terms of the mortgage like the amount owed, the monthly payment, due date, and more. These notes can be bought and sold just like physical real estate. Note investors, as well as private money lenders, simply own the note and collect the interest payment each month and hold a lien on the property to secure their investment. If the note holder doesn’t pay the monthly payment, the note holder can foreclose and take ownership of the property.

Who it’s best for: Note investing typically is carried out by individuals with a sizable amount of extra cash at their disposal, since a note typically needs to be paid for in cash. Note investors should have the ability to weather the storm should a foreclosure be required, and should have the creativity to help the borrower get back on track if need be. Note investors typically accept a lower return on investment than other forms of real estate investing, but the low level of passivity often makes it all worth it.

More Information: To learn more about note investing, definitely read through “Cash Flow Notes: Step by Step How to Invest in Performing Notes.”

Lease Options/Subject To

What it is: Although slightly different, lease options and subject-tos all involve investing in real estate by taking over someone else’s payment. In a lease option, an investor “rents to own” a property from a seller, rather than actually owning it themselves. A subject-to deal is similar, but title is actually transferred without paying off the seller’s mortgage, which can lead to some potential problems involving the due on sale clause.

Who it’s best for: Lease options and subject-to investing can be done with very little money out of pocket, but involve a significant amount of legal maneuvering to ensure safety. Therefore, these strategies require an individual willing to dive into the legal side of the strategies. Also, these strategies require careful “hand holding” of the sellers, so great people skills are necessary. Finally, the ability to problem solve is imperative for a lease option or subject to investor.

More Information: To learn more about lease options, check out “Rent To Own Homes: How to Profit from a Lease Purchase” or to learn more about subject-to investing, be sure to read “Subject To: Investing in Real Estate Without Paying For It.”

Tax Liens

What it is: When a property owner refuses to pay their taxes, the local municipality that relies on those taxes still need to get paid. Therefore, a “tax lien” is often sold to a real estate investor who pays the tax and then collects a monthly interest on the property until the total amount has been paid back to the investor. If the lien is never paid off and the investor’s money is not returned in the time specified, the tax lien investor can foreclose to get paid back.

Who it’s best for: Because tax lien investing is not as popular as other methods of real estate investing, information about investing in tax liens can be tough to find. Therefore, a tax lien investor must be someone willing to put the work in to research how to invest in tax liens and take some risks when learning how. Tax lien investors also need to know how to analyze a potential tax lien, so computer knowledge and investigative skills are helpful. Finally, tax liens must be purchased with cash, so a tax lien investor needs to have money available to buy the lien and wait for the money to be made – which could take several years.

More Information: Discover more about tax liens by listening to “BP Podcast 056: Syndicating Deals, Investing without Tenants, and Tax Liens with Ankit Duggal.”

Commercial Real Estate Investing

What it is: Commercial real estate investing involves the buying, selling, and leasing of non-residential real estate to businesses, including office buildings, retail stores, industrial factories, and more.

Who it’s best for: Commercial real estate investing typically requires a larger down payment and access to capital than other forms of investing. When a commercial property sits empty, the vacancy can last months or even years instead of weeks, as is common in residential investing; therefore, a commercial real estate investor must have significant cash reserves to handle this loss.  Furthermore, commercial real estate involves incredibly complex mathematics, so a strong grasp of the numbers is necessary for a commercial real estate investor.

More Information: To learn more about investing in commercial real estate, check out Three Reasons Why Commercial Real Estate Investing Might Be Your Next Step or listen to BP Podcast 047: Apartment Complexes, NNN Leases, and Commercial Real Estate with Joel Owens.

Vacation Rentals

What it is: In recent years, vacation rentals have risen in popularity as vacation-takers long for a more “authentic” vacation experience outside of a hotel. Vacation rental owners typically rent their residential properties out by the night using websites like AirBnB.com, VRBO.com, or HomeAway.com.  Vacation rentals can be managed by the owner themselves or outsourced to a property management company that specializes in vacation rental properties.

Who it’s best for: Vacation rentals are still a relatively new adventure for most, so all the laws and rules are continually changing. Therefore, a vacation rental owner must be flexible with their investments. Also, a vacation rental investor should be able to analyze a deal from a long distance and, if self managing, perfect their skills at marketing to ensure a profitable experience. Finally, vacation rentals may be more difficult to obtain loans on, so larger cash reserves and down payments may be needed.

More Information: To learn more about vacation rentals, visit Buying a Vacation Home as an Investment :Fun, Sun, and Income? or listen to a full time vacation rental owner tell his story on BP Podcast 057: An Introduction to Investing in Vacation Rental Properties with Matt Landau.

Crowd-Funded Real Estate

What it is: Perhaps the newest form of real estate investing on this list, crowd funding is the process of investing in real estate by joining hundreds (or thousands) of others in a single investment using the internet. Sites like RealtyMogul.com and Fundrise.com are leading the way in this industry, allowing investors to invest with as little as a few thousand dollars, gaining a share in a much larger investment.

Who it’s best for: Crowd funding is ideally suited for those who lack the time or energy to invest in real estate using other methods or who want to scale their investments, through real estate, with a completely passive vehicle.  The benefit of crowd funding is that it can be completely passive, but a crowd-funder has no say in how the investment performs. They can only do their due diligence up front and then hang on for the ride.

More Information: Discover more about crowd funded real estate investments by reading Crowdfunding Real Estate: How to Raise Money through the Crowd.

Conclusion

So – have you decided yet? Which is the best real estate investment for you? Is there even such a thing?

Hopefully after reading this post, at least one or two strategies stuck out to you and made you think “hey… I think I can do that!”   And you can! No matter what your position is in life, there is a real estate investment niche and strategy that will fit your life. If you are still unsure, I invite you to read through the links throughout this post, and also be sure to read through The Ultimate Beginner’s Guide to Real Estate Investing.

So what is the best real estate investment? I believe that the best real estate investment is found where your skills, resources, and passion meet. (Yes, I hope you Tweet That!)

I want to end this post with a question for you to answer in the comment section below:  simply tell me:

What is the best real estate investment for YOU?   

Leave your responses below! I look forward to reading them!

Email *
  



{ 19 comments… read them below or add one }

Antonio Coleman August 23, 2014 at 12:39 pm

Yo Brandon,

The lease option is the method I started off with back in the early 2000’s. Later on I started implementing the subject-to method that took my investors opportunities to an all new level. This the best form of investing if you’re looking for the buy and hold method. You can just hold it till it’s paid off or lease it out to allow your tenant buyer to cash out.

Man, this real estate thing is really fun Brandon once you master the investing and marketing side of it.

Antonio Coleman “Signing Off”

Reply

Brandon Turner August 24, 2014 at 8:32 am

Thanks Antonio! Yeah, I like the lease option/subject to methods, though I do worry about changing/undefined legislation some. Those who do this seem to find a lot of success, though it’s a bit risky for my blood! :)

Reply

dorothy smith August 23, 2014 at 5:55 pm

Yes wholesaling is the is one of the more difficult ways to invest. Especially if you are less experienced with it. I have found that if you sound like you might not have the right way of showing the numbers, the investor might not feel as comfortable to purchase the deal. Likely story you need to win their trust or I have found a few that feel you know enough about the numbers, they can tell you have a good deal. Some are willing to work with you. I have also have seen if you become a good wholesaler, you can make capital quite quickly. Some investors never give up on their wholesale investing because of the being able to make capital quickly with no money invested in the property. Thanks to all from bigger pockets, we can only get better from all the knowledge other investors are so generously sharing to help others take action. Thank you, for helping us all be able to have a piece of the pie:)

Reply

Brandon Turner August 24, 2014 at 8:33 am

Thanks so much for the comment Dorothy! I agree 100% – wholesaling can be great but it is tough. It’s heavily about relationships!

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Mohammad Asaduddin(Asad) August 24, 2014 at 7:28 am

Love you for this summary on real estate investing. I am a landlord and rehab flipper for a long time but lacking the efficiency of “Systems”. Now expanding into commercial, my major challenge is to build a list of distress sellers and eager buyers. Willing initially to share in my profits for good systems and marketing. Asad.

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Brandon Turner August 24, 2014 at 8:34 am

Thanks Mohammad! Keep rocking it!

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Sharon Tzib August 24, 2014 at 8:39 am

Mr. Money Mustache has been experimenting with crowd funding for almost two years now with very good results http://www.mrmoneymustache.com/the-lending-club-experiment/ – definitely something I’m considering as one of my more passive RE strategies.

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Marco Santarelli August 24, 2014 at 8:56 am

Great article Brandon!

I think investors need to consider one more very important factor between each of these options, and that is their TAX implications.

Flipping a property within the first 12 months of its acquisition is considered a short-term capital gain and will be taxed as normal (ordinary) income.

Holding a property for more than 12 months would change that to a long-term capital gain, and therefore be taxed at the lower capital gains tax. In addition to that, income producing rental properties provide other tax benefits each and every year including my favorite tax benefit of all — DEPRECIATION.

That’s why prudent buy-and-hold income property investing is my favorite strategy and has been the greatest wealth building investment formula in history.

Continued success!

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Ricky August 24, 2014 at 9:00 am

Why no love for REITs? Much safer than some of the strategies listed.

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Marco Santarelli August 24, 2014 at 9:10 am

REITs may also be an option, however I personally don’t consider them to be a true real estate investment. You’d be investing in a security — essentially a paper asset — in a real estate fund where you are not the direct owner, nor hold title to, the real estate you’re investing in. Think “mutual fund”. That’s violates Rule #9 (Maintain Control) of my 10 Rules of Successful Real Estate Investing:

http://www.biggerpockets.com/blogs/4269/blog_posts/29713-10-rules-of-successful-real-estate-investing

Continued success!

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Ricky August 24, 2014 at 9:18 am

The same could be said for tax liens, notes, (both securities) or even crowd funding. After all, mutual funds are basically crowd funding. You have no control over your investments on RealtyMogul or Fundrise.

Also, REITs can be purchased directly through individual stocks and are very liquid usually so there is more control than you think.

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Craig August 24, 2014 at 10:11 am

>>You have no control over your investments on RealtyMogul or Fundrise.

And why would you necessarily need to? The idea is that the sponsor/managers are experienced and can execute the business plan the’ve put together (and that you’ve bought into after you’ve read the docs). Apart from fraud risk I would say execution risk is next biggest risk one faces with RE syndication investing. As regards the latter, I could just as easily screw things up or make a mistake. Also, the vagaries of the RE market, like the stock market, are also applicable to both myself doing it and the syndicator/manager.

In determining whether I should get involved in RE investing directly or indirectly via syndications/reits, I thought about what I do for living, what I can make do that, and whether I had any absolute or comparative advantages relative to switching to RE investing as a full time job. Based on this and much soul searching, I chose passive vehicles like syndications and REITS and have no regrets.

http://en.wikipedia.org/wiki/Absolute_advantage
http://en.wikipedia.org/wiki/Comparative_advantage

David Krulac August 24, 2014 at 9:29 am

Brandon,
Great list and summary.

My list would be a little different. In my hybrid model, one of the motivations for this method other than income stream and appreciation value is that by holding the property for more than 1 year and renting it out for more than 1 year, you establish that this is a long term investment and subject to long term capital gains (20%) rather than short term capital gains (ordinary income) rates of 43% . this can be a tremendous tax savings.

I would also include on my list tax DEED sales ( as we talked about in BP Podcast #82), Sheriff Sales, Land development and subdivision.

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Gualter Amarelo August 24, 2014 at 11:15 am

Great post Brandon! I definitely fit the mold as a Hybrid investor. I thought I leaned towards the Buy & Hold strategy, but ultimately I intend to pyramid my way up to 50 units over the next 10 years. A hybrid strategy allows the sale of properties that cashflow and have tons of equity thanks to making excellent purchases coupled with sweat equity. I also agree with David that selling for capital gains is attractive, but the 1031 exchange is the whole Key to the
Hybrid/Pyramid Strategy. Deferring taxes is far better than paying any percentage upon sale!

Thanks again for the great post and reminding me that I might need to tackle a flip to build up some capital for my next purchse.

Cheers!

Reply

Katie Boston August 24, 2014 at 3:46 pm

I just sold my first rental property that I purchased 4 years ago when I was 22. I doubled my money and it was only vacant for 3 months out of those 4 years. I’m going to start dabbling in wholesaling and continue to do Hybrid Investing.
I also manage one vacation rental property in Florida, it’s been quite the learning experience and far more hands on than my previous investment but I enjoy it as well!

Thanks for the great article!

Katie Boston

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Eric August 24, 2014 at 6:08 pm

If you have the capital to invest, rental property will produce a lifetime income. it can definitely get you to financial independence. I know mine has.

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Kyle August 25, 2014 at 2:52 pm

Great read Brandon! I just finished a sub 2 deal so far so good!

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Keith Weinhold August 25, 2014 at 6:49 pm

Brandon,

That is a fantastic overall column for those at the beginning of the journey, where the funnel is widest, asking themselves the question, “What part of real estate investing do I want to get into?”.

The “Who it’s best for” subheader information is highly insightful. This will help narrow the funnel for some readers.

Reply

Brian Eastman August 26, 2014 at 4:44 pm

Great article Brandon.

Echoing the thoughts of many here that this is a good springboard for new investors to start asking themselves the questions that will guide them in the right direction.

Marco Santorelli brings up a very valid point with regards to tax implications. This is especially true for investors using a self directed IRA or 401(k) such as my clients at Safeguard Advisors.

Most of the investment models you note are considered a passive investment and would be fully tax sheltered under the umbrella of an IRA or 401(k). Flipping houses and in some cases participation in crowd funding or other pooled real estate funds/partnerships can have exposure to UBTI taxation. The use of leverage such as a mortgage can expose an IRA to UDFI taxation. Neither of these taxes is a definite deal-killer, but one certainly wants to be aware of the implications before entering into an investment.

When the opportunity in a given market is to flip houses, sometimes the better approach for an investor with a self directed retirement plan is to opt for private lending or the hybrid approach.

Reply

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