Discover why so many successful investors support their investment careers with house hacking—and learn from a frugality expert who has “hacked” his way toward financial freedom!
While at first it may seem important that you learn everything you can about real estate investing, in
reality, it is best to focus on two things: an investment vehicle and a strategy for using that vehicle. This
chapter is going to introduce you to some of the most popular investment vehicles, as well as the most common
strategies for moving forward.
Very narrow areas of expertise can be very productive. Develop your own profile. Develop your own niche.
Have you ever received a box of chocolates as a gift over the holidays? There are always so many choices, and
sometimes, you need to take a little bite of each one to figure out exactly what’s inside. In a way, learning how to
invest in real estate is like that same box of chocolates. There are dozens (if not hundreds) of different ways to
make money as a real estate investor, and it's up to you to choose the niche you want to get into.
You may absolutely love some niches and strategies, while others may make you shudder. You don't need to choose them
all. Learning how to successfully invest in real estate is about choosing one niche and becoming a master. This
chapter will open up that box of chocolates for you to sample, pulling back the curtain of the most common real estate
Remember: once you identify the niche you want to get started with, you will be able to narrow down your focus, become
an expert, network within that niche, and begin building wealth by executing a plan of action.
The following list includes the most common property types that real estate investors deal with. Each has many subsets
as well, but remember, you don't need to know about them all. This is merely a list to help you understand what
options are available, from a 20,000-foot view.
Raw land is nothing more than basic earth. Land, on its own, may be improved (adding value), and it may be leased or
rented to create cash flow. Land can also be subdivided and sold for profit. Some investors choose to buy raw land
with hopes (or plans) to someday sell it to be used in external developments like the construction of a freeway or a
Perhaps the most common investment for most first-time investors is the single family home. Single family homes are
relatively easy to rent, sell, and finance. That said, in certain areas, the rents derived from single family rentals
(SFRs) won't be enough to provide positive cash flow.
Small multifamily properties (two to four units) combine the financing and easy-purchasing benefits of a single family
home. Bought properly, these can produce a good amount of cash flow, and there is often less competition than you'd
run across bidding on single family homes. Best of all, these properties can serve both as a solid investment and a
personal residence for the smart investor.
By buying a small multifamily property, you’ll be taking advantage of the economies of scale, because only one loan is
needed to secure multiple units. One of the things that makes these investments so appealing is that most banks
evaluate small multifamily properties (less than five units) with the same guidelines as a single family house, which
can make it easier to qualify for the loan.
Small apartment buildings are generally made up of between five and 50 units, although the line between small and
large apartments is not set in stone. Properties with more than 50 units can be more difficult to finance than single
family homes or those with two to four units, because they rely on commercial lending standards rather than
residential ones. However, these properties often provide significant cash flow for an investor who can deal with the
more management-intense nature of these properties. Additionally, there is generally less competition for this
property type, because they are too small for big professional Real Estate Investment Trusts (REITs) to invest in
(more on this below), but too large for most novice real estate investors.
Instead of being priced based on comparable properties (often referred to as “comps”), the value of these properties
is evaluated based on the income they bring in. This creates an enormous opportunity to add value by increasing rent,
decreasing expenses, and managing the property effectively. These properties are a great place to utilize on-site
managers who manage and perform maintenance in exchange for free or decreased rent.
This class of property refers to the large complexes across the country that often have pools, work-out rooms,
full-time staff, and high advertising budgets. These properties can cost millions, but they can also produce stable
returns with minimal personal involvement. Many large apartments are owned by syndications—small groups of investors
who pool their resources.
In the most simplistic definition, a REIT is to a real estate property as a mutual fund is to a stock. A large number
of individuals pool their funds together, forming a REIT. This alliance makes it possible for the REIT to purchase
large real estate investments, such as shopping malls, large apartment complexes, skyscrapers, or bulk amounts of
single family homes. The REIT then distributes profits to its individual investors. You can buy shares in a REIT via
your stock account, and they often have a relatively high dividend payment. This is one of the most hands-off
approaches to investing in the real estate business, but you should not expect the returns to be as great as those
produced by hands-on investing.
Commercial investments can vary dramatically in size, style, and purpose, but ultimately will involve a property that
is leased to a business. Some commercial investors rent buildings to small local businesses, while others rent large
spaces to supermarkets or big-box megastores. While commercial properties often provide good cash flow by way of
consistent payments, they also may carry much longer holding periods during times of vacancies; commercial properties
can often sit empty for many months or years. Unless you are starting from a very solid financial position, investing
in commercial real estate is not recommended for beginners.
You can start investing in mobile homes with little money out of pocket. Whether it’s a home in a mobile-home park or
on its own land, many of the strategies used in other types of real estate investing can be applied to mobile homes.
When homeowners don't pay their taxes, the government (local, state, or federal) may foreclose and then resell the
property to investors for the amount owed. This can often mean incredibly inexpensive properties, but be sure to do
your due diligence and don't just jump into this kind of investing unprepared. Tax-lien sales are complicated
transactions that require research, knowledge, and experience.
Investing in notes involves the buying and selling of paper mortgages. When a home is purchased with a loan, a “note”
is created explaining the terms of the contract. For example, an apartment owner decides to sell his property for $1
million. He offers to carry the full note (thus allowing the new buyer to avoid using a bank loan), and the new buyer
will make payments of 8 percent per year for 30 years until the full $1 million is paid off.
If the owner decides he no longer wants to be involved, he may choose to sell the mortgage to a note buyer. Just like
any other real estate investment, a note will oftentimes be sold at a discount when the seller is motivated. A note
buyer will then begin collecting the monthly mortgage payments and can keep the note or sell it again in the future.
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We've just outlined 10 different investment niches, or vehicles, that are ripe for investing in on your foray into the
industry. When starting out, it's helpful to simply pick one (or, at most, two) niches to focus on and become a pro at
that niche. You can always expand later as you get more experience and knowledge.
While you can use any of these investment vehicles throughout your career, you must first learn an investment strategy
to apply to that niche. The next section will look at several different strategies that investors use to make money
within the various niches already covered.
The section above looked at a number of different investment vehicles that you can use to invest in real estate.
However, when learning how to invest in real estate, it is not enough to simply know what these property niches are.
Instead, as an investor you will use a variety of strategies when dealing with these investment niches to produce
wealth. The section below explores three of the most common strategies that you can use to make money with these
Perhaps the most common form of investing, the buy-and-hold strategy involves purchasing a property and renting it out
for an extended period of time. It's probably the most simple and purest form of real estate investing there is.
Essentially, a buy-and-hold investor seeks to create wealth by renting the property out and either collecting monthly
cash flow or simply holding the property until it can be sold for a future gain. Among this strategy’s advantages is
the fact that while you hold the property and rent it out, the mortgage gets paid down each and every month,
decreasing your principal balance and increasing your equity over time.
One of the most important things for a new buy-and-hold investor to understand is how to evaluate deals and
opportunities. By far the most common mistake we see new investors make with this strategy is buying bad deals because
they simply don't understand property evaluation. Other common problems include underestimating expenses, making bad
decisions on tenant selection, and failing to properly manage your assets. These mistakes can all be avoided, however,
if you simply learn the business. Jumping in without proper education can be extremely costly—both financially and
To properly carry out the buy-and-hold strategy, an investor must learn how to properly identify the ebbs and flows of
the market a property is located in. Ultimately, when the market and the properties in it are at a low point (prices
low, inventory high), it’s a good time for the buy-and-hold investor to seek property purchase.
When the market becomes overheated, an experienced buy-and-hold investor will usually stop buying until things settle
back down. During these slow periods, the investor may sell—or simply continue to hold—his or her properties.
Some buy-and-hold investors will hold onto a property for a long period of time, choosing to pay off the mortgage and
live on the cash flow or ultimately sell it much later using seller financing (see chapter 8 for more on this and
other exit strategies).
Ultimately, there is much more to buy-and-hold investing than meets the eye, but if you can learn how to evaluate and
purchase good deals, find quality tenants, and manage your assets properly, you're going to be on your way to running
a successful business.
One of the most popular tactics for making money in real estate, due largely to the numerous shows on cable TV that
promote it, is flipping houses. House flipping is the practice of buying a piece of real estate at a discounted price,
improving it in some way, and then selling it for a profit. In reality, the flipping model is quite similar to the
retail model "buy low, sell high."
The most popular type of property to flip is the single family home. There’s a rule of thumb in house flipping known
as the 70 percent rule, whereby an experienced house flipper will buy a home for 70 percent of its current value (less
any rehab costs).
For example, home A would be worth $100,000 if it were in good condition, but it needs $20,000 worth of work. A
typical house flipper will purchase the home for $50,000 ($100,000 x 70% – $20,000) and seek to sell it for the full
$100,000 when the works is completed. Keep in mind that this is simply a rule of thumb, and actual numbers must be
verified and adjusted to ensure a successful and profitable flip.
Check out the free BiggerPockets
70% Rule Calculator
to quickly check if a deal is feasible using this rule of thumb.
One of the key aspects in flipping a house is speed. A house flipper will attempt to buy, rehab, and sell the property
as quickly as possible to ensure maximum profitability and to avoid many months of expensive carrying costs. These
costs include monthly bills like financing charges, property taxes, condo fees (if applicable), utilities, and any
other maintenance bills required to keep the house in good physical or financial standing.
Flipping is not a passive activity. Instead, it’s like an active day job. When an investor stops flipping, they stop
making money until they begin flipping again. Many investors choose to use flipping to fund their day-to-day bills and
to provide financial support for other more passive investments.
If you’d like to get into house flipping, we highly recommend checking out the BiggerPockets book, The Book on
Flipping Houses, along with our free bonus book, The Book on Estimating Rehab Costs. Both books will be fundamental in
helping you learn how to start a profitable house-flipping business. To learn more about these valuable resources,
The wholesaling process involves finding great real estate deals, writing a contract to acquire the deal, and selling
the contract to another buyer. Generally, a wholesaler never actually owns the piece of property they are selling;
instead, a wholesaler simply finds great deals by using a variety of marketing strategies (see chapter 7), puts them
under contract, and sells that contract for what we call an assignment fee. This fee typically ranges between $500 and
$5,000 (or more depending on the size of the deal). Essentially, a wholesaler is a middleman who is paid for finding
Some wholesalers sell their contracts to retail buyers, but most sell their contracts to other investors (often house
flippers), who are typically cash buyers. When dealing with these cash buyers, a wholesaler may get paid within days
or weeks, building solid connections in the real estate community all the while.
Many investors choose to begin with wholesaling due to its reputation as being an easy strategy and one with low
start-up costs. Because the property is never actually owned by the wholesaler, there are no rehab costs, loan fees,
contractors, tenants, banks, or other complications. Wholesaling is the most popular strategy taught by real estate
gurus. As a result, it often receives the most attention, although it is not as easy to become as successful a
wholesaler as the gurus make it sound.
Wholesalers must continually seek out the best deals in order to keep up inventory to sell to others. They also must
have a well-designed marketing funnel to continuously attract leads and constantly be seeking out buyers for the deals
they acquire. While promoted as a strategy that anyone can utilize—even someone with zero money—you’ll ultimately need
financial resources to build your marketing funnel. That said, those who persist in growing their wholesaling skills
often find great success and a good source of income while they learn about other more profitable strategies.
After reading this chapter, you should have a better understanding of the many different real estate niches and
strategies available to build wealth in real estate. Don't worry if you don't know exactly which one you want to
pursue yet—this is simply the beginning of your education. Learning how to invest in real estate will take time.
Throughout this guide, we will provide numerous tips and sources to help nail down your plan. As mentioned earlier, be
sure to check out the BiggerPockets forums, where you can ask questions. And, of course, search the site to find any
more help that you may need.
You are probably excited to get started making money in real estate. Before you do, however, there is one major step
that may mean the difference between early success and failure: building your business plan. Chapter 4 explores this
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Next: Chapter 4 - Create your Real Estate Investing Business Plan
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