The real estate market is a dynamic one. Because it keeps changing, it’s easy for investors to get swayed quickly. Many opportunities promise better profit-making options with different strategies. However, most investors who jump at what seems like “the next big thing” only end up hurting themselves.
Mastering one real estate niche works much better than trying a hundred different ones. Still, it’s important to choose the real estate investing strategy that will work best for you, your personality, and your circumstances.
The three most common real estate investing niches
A successful real estate investing career begins by selecting and focusing on one of the three main real estate investing strategies: buying and holding, wholesaling, or fix and flip. Trying to “do it all” can spread you too thin and actually lead to failure. Furthermore, each strategy offers different benefits and requires different skills that will appeal to each investor.
1. Buy and hold
The buy and hold real estate niche is exactly what it sounds like. You buy a property (house, office building, land, whatever) and rent it. Usually, these properties are held for at least several years, if not decades.
So, what are the benefits of this strategy?
- Monthly income: Hopefully, the rent you charge will be more than your expenses to have positive cash flow every month.
- Steady income: Sure, rentals go vacant every once in a while, but for the most part, you can count on a steady monthly income.
- Income tax benefits: Depreciation can be a wonderful thing— so wonderful it can drop your adjusted gross income to zero.
- Wealth accumulation: This is a great strategy to accumulate wealth over time as you pay down the loan and appreciate in value.
What about the negative side?
- Tenants: Dealing with tenants can be a real challenge.
- Management costs: Don’t like tenants? Then there will be management costs and management headaches.
- Maintenance: You have to maintain these properties—and that costs money.
- Capital needs: Most times, you will need some capital to get started. Banks or other lenders will rarely lend 100% on a property. Plus, some reserves are needed for those maintenance issues mentioned above.
This strategy involves finding a property and simply turning it over to another investor very quickly for a fee.
Here are the pros:
- Low capital requirements: You do not need much money with this strategy, as you will likely not close on the property. This fact makes it great for those starting with little or no money.
- No tenants: A pain you get to avoid.
- No contractors: You will not be the one fixing it up, so you do not have to worry about finding, hiring, and paying contractors.
And the cons to this real estate niche:
- Finding the properties: This is not as easy as it is often made out to be.
- Marketing: You need to do a lot of continuous marketing to be truly successful here.
- False leads: You will have to explore a lot of dead ends before you find one that works.
- Negotiation: You need to have or develop decent negotiation skills to deal with both sellers and buyers. This could actually be a pro for some.
- Buyers: You must have some credible buyers lined up before you get a property under contract, or you just might be stuck with it.
- Tax consequences: That $5,000 fee you collected is considered active income, and you will pay self-employment and income taxes on it.
3. Fix and flip
Finally, there is the fix and flip, where an investor purchases a property, fixes it up, and sells it to a retail buyer for (hopefully) a nice profit.
- Chunk of cash: This strategy’s greatest benefit is the large chunk of cash you can make. It is not uncommon to walk away with $20,000 or more at the end of the day.
- No tenants: Enough said.
- Pride: It’s fun to transform an ugly house and make such a large project come together.
- Large capital requirements: You will need money to buy, fix, and hold for a while. This could be quite a bit of money depending on the scope of the project
- Retail buyers: Retail buyers can be very picky and selective, and it takes the right type of personality to deal with them.
- The wait: You may be waiting a while for the right buyer to come along and, thus, for your payday.
- Contractors: You will have to hire, manage, (possibly) fire, and pay the contractors.
- Project management: A property rehab has many moving parts that you will have to coordinate and keep moving.
- Tax consequences: Your income will again be considered active, and, thus, the IRS will want its share.
- Competition: The competition for these properties can be fierce depending on the market.
Over time as you learn more about the real estate business and gain some experience, you should be doing a bit of each strategy. But usually, our personalities and circumstances direct us to focus on one over the others.
The Real Estate Rookie Podcast
New to real estate investing and not sure where to get started? Join Ashley Kehr and Tony J Robinson every Wednesday and Saturday as they break down the basics with deal analysis, investor interviews, and listener Q&A. Tune into the Rookie Podcast to learn and be inspired about real estate investing for beginners.
Choosing a real estate niche
So, how do you decide which real estate niche to start with? Let’s go through the seven steps to find—and stick with—the right real estate investing strategy for you.
1. Don’t get caught up in the “shiny stuff”
For the old-time investor, books were a valuable asset. They told you where to invest and what not to do, but they got redundant quickly. Today, the internet gives much more recent and relevant information.
But the information comes with a caveat: overload. There’s just so much information online that it becomes close to impossible to sift out the reliable from the unreliable. Secondly, there are way too many courses and boot camps that promise to transform your career overnight. They are the “shiny stuff” people are chasing because they promise to be life-altering. While they may appear more profitable and lucrative, don’t get caught up in their fancy words. Sticking to your plan may seem tough, but that is always the smarter thing to do.
So, instead of going around falling for what pops up from time to time, stick to one strategy, and master its ins and outs until you’ve perfected it. Focus on what works and get rid of what doesn’t.
2. Decide on an existing strategy
While there are many business strategies out there in the market, there will only be a few that work for you. The one that works should match the requirements in the markets you operate in, match your timing commitments, and most importantly, be in harmony with your financials.
Based on these parameters and your expertise, experience, and comfort levels, decide on an existing market strategy. And once you’ve researched what will work best for you, move to the next step.
3. Know that it will work
It’s tough to be convinced that only one strategy can work, but it will. A proven market strategy exists because it is a workable and profitable one. Over time, as you master each of these strategies, you could also get better at it. Because you know how the market behaves, you can properly plan the kind of deals to take, how much to save, and how to get through low-cash times.
Many investors make the mistake of making emotional decisions based on the values of fear and greed. These propel them to take up many strategies, and you can avoid it by sticking to one and rising above those sentiments.
4. Stick to it
Once you have identified a market and a strategy, adopt it, use it, and work on it. Stick to the strategy and master its ins and outs. Keep improving upon it at every opportunity that presents itself. Once customers identify you for your specialization, they are bound to come to you, making much more commercial sense in the long run. They say that mastery comes after 10,000 hours of doing just one thing.
5. Get the right people
Getting together the right kind of team can make all the difference in the world. When you are building a superstar team, ensure that all members share the same vision regarding your real estate strategy. Build a team that promotes mutual support over the competition.
6. Work on people skills
Your interpersonal skills are what customers look for in you. Your drive and determination should appear as a strong motivational factor for your customer. Your verbal and written communication skills should be strong as well. These will help formulate a clear understanding between you and your customer and between the people you work with.
Good negotiation skills are also a must for any business and, thus, an important skill set here. Finally, arrive on time, respect schedules, and listen to your customers more than you speak. These skills can make you a better real estate agent, so couple them with a strong conviction that your choice of strategy is the right one.
7. Give it time
If you’re planning to get rich quickly with real estate, you should know that the markets don’t work that way—no matter which real estate niche you chose. You need plenty of patience to learn, experiment, and learn some more. Only then can you intend to make a career out of real estate. So give it time, learn as you go, and take projects that fit your line of strategy.
After you decide on your strategy, the next step is to master your real estate niche. Show other real estate agents, brokers, and potential buyers that you are the expert in your niche. Learn everything you can about it—and then find out what you don’t know still. This adds to your credibility and will make a lot more people want to work with you.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.