I see so many questions in the forums and in general from people just getting started and trying to figure out which route to go with investing. The problem is, it is almost impossible for anyone else to answer that for you. Reason being, no one knows what is best for you better than you do but usually because more so the answer depends on your goals and you may not even know those for yourself yet.
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There are a million different ways to invest in real estate. Okay maybe not a million but there are so many ways that I could never list them all out. I probably don't even know them all actually. There are investing methods that are right for you and the trick is to find them. I'm a big advocate of the best way to figure out your niche is to find what resonates best with you by letting the method find you rather than you find it. Your job is to do as much research as you can, try different things, and constantly push towards succeeding with something and eventually you will fall into a rhythm with your best niche.
What are the basics though? How do you know which avenue to start pursuing in order to learn more ways of investing, especially the less obvious ones? I think it makes the most sense to first look at the most general categories of investing methods, the ones you hear about the most. Start with one of those, continue to pursue that route, and you will gradually learn more and more about related options and you can tweak your system as you go from there.
General Real Estate Investing Methods
What are the most general methods? If I were to pick, I’d say the following categories encompass just about every method out there:
- Flipping
- Wholesaling
- Rental Properties
- Paper/Notes
Each of these general methods, and all of their associated more specific methods, accomplishes different things, offers different benefits, and requires different levels of involvement and risk. If you understand what each of these methods offer, you can choose the one that best fits your needs (and wants) and you can make that your starting point.
I’m going to break down the realities of each general method and then you can match which method most fits with your goals and comfort levels.
Understanding Each Method
My goal is to keep my explanation of each investing method very high-level. That is all you really need to get started anyway since complicating things will just cause you to overwhelm yourself. So I’m going to specify each explanation by including the purpose of each method, the upsides and downsides, the risks, and the involvement levels required.
1. Flipping
Purpose: Flipping is the best way to get the most amount of income the fastest.
Upsides:
- A lot of cash in a short amount of time
- More ways for creative financing
- Can be done in most markets
Downsides:
- High tax penalties
- Contractors can be difficult to manage
- Risk
Risk level. High
Significant risk items: Unexpected repairs (can significantly time and budget), inability to resale
Involvement level: High
More Information: House Flipping: The Best of BiggerPockets
2. Wholesaling
Purpose: Provides income with little money to start.
Upsides:
- Little to no money required to start with high income potential
- Can be done in any market
- Doesn’t require management of contractors or tenants
Downsides:
Risk level: Low
Significant risk items: Potential legal hiccups depending on state laws and situation
Involvement level: Very high. In no way do I even consider this "investing method" actual investing. It is a job. It is not investing. I only mention it as a method because so many people see it as an investing method and the large majority wants to start their "investing" careers with wholesaling. But it's not an actual method of investing. Be clear on that. You will gain an atrocious amount of excellent knowledge that you will be able to use when you do start investing and it is 100% related to real estate investing, so there is nothing wrong with it but realize it is a job and a means of acquiring capital that can be used for investing rather than actual investing.
More Information: Wholesaling Real Estate Basics
3. Rental Properties
Purpose: Long-term passive income.
Upsides:
- Significant tax benefits
- Passive income versus active income, i.e. way less work
Downsides:
- Income comes over a longer period of time in small increments
- Can’t be done in all markets
- Tenants can be really annoying and cause you to lose faith in humanity
- Financing can be more difficult
Risk level: Medium
Significant risk items: Tenant damage, property maintenance
Involvement level: Zero to High. Zero to low if you use a (good) property manager, low to high if you landlord the property(ies) yourself.
More Information: Buying Rental Property: A Step by Step Guide
4. Paper/Notes/Liens
Note: I have no experience with investing in paper, notes, or liens. Therefore I have little information to fill in these blanks, so don’t take this one for gold. Any investors who have experience with these, please leave comments to help summarize this style of investing (or to edit my answers)!
Purpose: Passive income, typically over shorter amounts of time.
Upsides:
- Secured liens
- Less capital usually required to start
- Passive income versus active income, i.e. way less work
- Doesn’t require management of contractors or tenants
- Can be done in all markets
Downsides:
- Lack of liquidity options, if any
- Lack of control
Risk level: Medium
Significant risk items: Owner declaring bankruptcy and title issues (tax liens), risk to personal credit (notes)
Involvement level: Low
More Information: Five Advantages of Note Investing
Summary
There is obviously a lot of detailed information on each investing method not included here, but the point is to give people newer to investing a general feel for the purpose and risks of each route they can choose to take. The first step is to know your own goals and how much time (and mental capacity) you have, or want, to dedicate to real estate investing.
Real estate can be as passive as you want it to be or as intensive as you want it to be. The spectrum is huge! If you don’t pick out a starting point, you could be doing circles forever. That is not to say that if you pick one method that you can’t do another, and you may eventually work multiple methods in conjunction with each other (which is really smart), but to start out keep it simple. By choosing the route right for you, you will be able to focus in on who the experts of that field are, learn from them, research that field, and gain a solid foundation in one method before moving to the next.
If you are still unclear as to which method to focus on, read through BiggerPockets blogs and forums and if you see someone who is writing about something that interests you, reach out to that person! That is what BiggerPockets is for- networking and learning!
Happy investing!
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