The 10 Best Real Estate Investments for Smart Real Estate Investors
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“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.
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.
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.”
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.”
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.
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 (to learn more about how to rent your place and list for free on VRBO, click here), or HomeAway (click here to list your place for free on HomeAway—only pay when you get a booking). 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.
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!