Chapter 3: Real Estate Investments: Niches and Strategies
Very narrow areas of expertise can be very productive. Develop your own profile. Develop your own niche. -Leigh Steinberg
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.
In This Chapter We'll Cover
- Why Real Estate is Like a Box of Chocolates
- Choosing Your Niche
- Choose Your Real Estate Investing Strategies
- Buy and Hold
- Moving On
Real Estate Investments are Like a Box of Chocolates
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 what exactly you're going to find inside. In a way, learning how to invest in real estate is like that 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 might absolutely love some niches and strategies, while others might make you shudder. However, unlike that box of chocolates, as an investor, you are able to get a full view of the many different choices available to you, and you can then choose the one(s) that you enjoy the most. Best of all, 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 of it. This chapter is going to open up that box of chocolates for you to sample and let you see some of the most common niches you can get into when investing in real estate.
Remember: Once you know the niche you want to get started with, you will be able to narrow down your focus, become an expert, network with individuals within that niche, and begin building wealth by taking action and executing a plan of action.
Choosing Your Real Estate Investment Niche
The following list includes the most common property types that you are likely to deal with as a real estate investor. Each of these has many subsets as well, but remember, you don't need to know them all. This is merely a list to help you get started understanding what options are available from a 20,000 foot view.
Raw land is nothing more than basic earth. Land on its own can be improved to add value, and it can 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) that someday the land will become much more valuable due to external developments like the construction of a freeway or from a development being built nearby.
For More Information on Raw Land, see:
Perhaps the most common investment for most first time investors is the single family home. Single family homes are relatively easy to rent, easy to sell, and easy to finance. That said, in many areas, the rents derived from SFRs (single family rentals) won't be enough to provide positive cash flow.
For More Information on Single Family Houses, see:
Small multifamily properties (2-4 units) combine the financing and easy purchasing benefits of a single family home. Bought properly, these can cashflow quite well, and there is often less competition than what you'd run across bidding on single family homes. Best of all, these properties can serve as both a solid investment as well as a personal residence for the smart investor. Another perk of the small multifamily property is the ability to take advantage of "economies of scale," as only one loan is needed to secure the 2, 3, or 4 units in the property. One of the things that makes these investments so appealing is that most banks look at small multifamily properties with four units or less with the same guidelines as a single family house, which can make qualifying for a loan much easier.
For More Information on Duplexes, Triplexes, and Quads see:
- Small Multifamily Properties = Big Profits
- Financing a Fourplex Real Estate Investment Property
- New Investor Strategy: How to Buy Your First Multi-Family Investment Property & Live Rent Free
Small apartment buildings are made up of between 5 and 50 units. Though the line between small and large apartments is not set in stone, most investors typically draw the line between small and large apartment buildings at around 50 units. These properties can be more difficult to finance than single family homes or 2-4 unit properties, as they rely on commercial lending standards instead of residential ones. That said, these properties often provide significant cash flow for the investor who can deal with the more management-intense nature of the properties. Additionally, competition is generally seen on a lower scale for this property type, as they are too small for large, professional REITs to invest in (see below), but too large for most novice real estate investors.
Instead of being priced based on comps, the value of these properties are based on the income they bring in. This creates a huge opportunity for adding value by increasing rent, decreasing expenses, and managing effectively. These properties are a great place to utilize on-site managers who manage and perform maintenance in exchange for free or decreased rent.
For More Information on Small Apartments, see:
This class of property -- Large Apartments -- refers to the large complexes you might see all across the country that often include pools, work-out rooms, full time staff, and high advertising budgets. These properties can cost many millions of dollars to purchase, but can produce stable returns with minimal personal involvement. Many large apartments are owned by "syndications," which are small groups of investors who pool their resources.
For More Information on Large Apartments, see:
REIT stands for a Real Estate Investment Trust. 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, and allow 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 individual investors. This is one of the most hands-off approach to investing in Real Estate, but do not expect the returns found in hands-on investing. You can buy shares in a REIT via your stock account, and they often have a relatively high dividend payment.
For More Information on REITs, see:
Commercial investments can vary dramatically in size, style, and purpose, but ultimately 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 and consistent payments, they also may carry with them much longer holding periods during times of vacancies; commercial property 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.
For More Information on Commercial Investing, see:
- BP Podcast 004: Commercial Real Estate Investing With Frank Gallinelli
- 3 Things You Need to Know to Invest in Commercial Real Estate
- Commercial Real Estate Listing Tools, News & Discussions
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.
For More Information on Mobile Homes, see:
When homeowners don't pay their taxes, the government (local, state, or federal) can foreclose and resell the property to investors for the amount of taxes 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.
For More Information on Tax Liens, see:
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 one million dollars. 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% per year for thirty years until the full one million dollars is paid off.
If that owner decided they no longer wanted to be involved, he might choose to sell that mortgage to a “note buyer." Just like any other real estate investment, many times a note will be sold for a discount when the seller is motivated to sell. A note buyer will then begin collecting the monthly mortgage payments and will have the right to keep the note or sell it again in the future.
For More Information on Investing in Notes, see:
A Summary of Your Real Estate Investment Niche Choices
We've just outlined ten different investment niches, or vehicles, that you can invest in to take you on your journey through real estate investing. 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 in your career, you must next learn an investment strategy that you can apply to that niche. The next section will look at several different strategies that investors use to make money with the various niches already covered.
For More Information on Choosing Your Niche, See:
- Finding Your Niche in Real Estate
- Real Estate Investing principles Using Focus to Build a Solid Business Foundation
- Top 100 Ways to Make Money in Real Estate
- BP Podcast 047: Apartment Complexes, NNN Leases, and Commercial Real Estate with Joel Owens
- BP Podcast 052: Buying Apartment Complexes, Raising Millions, and Building a Profitable Business with Ken McElroy
- BP Podcast 004: Commercial Real Estate Investing With Frank Gallinelli
- BP Podcast 056: Syndicating Deals, Investing without Tenants, and Tax Liens with Ankit Duggal
Choose Your Real Estate Investing Strategies
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 vehicles.
Buy & Hold
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 that 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 gain in the future. Among the advantages of this strategy is that during the time that you hold the property and rent it out, the mortgage is paid down each and every month, decreasing your principal balance and increasing your equity in the property.
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 that 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 manage properly. These mistakes can all be avoided, however, if you simply learn the business; jumping in without proper education can be extremely costly financially and sometimes, legally.
To properly carry out the buy and hold strategy, an investor should learn how to properly identify the ebbs and flows of the market that a property is located in. Ultimately, when they perceive the market and the properties they are interested in to be at a low point (prices low, inventory high), the buy and hold investor seeks to purchase properites. When the market becomes over-heated, an experienced buy and hold investor will usually stop buying until they see things settle back down. During these slow periods, they may sell or simply continue to hold their properties. Some buy and hold investors never sell a property, choosing instead to pay the mortgage off and live on the cash flow or may ultimately sell using "Seller Financing" (see chapter 8 for more on exit strategies).
Check out the following image for a simplified example of how the real estate market cycle works:
Ultimately, there is much more to buy and hold than meets the eye, but if you can learn how to evaluate and buy good deals, find quality tenants, and manage properly, you're going to be on your path to running a successful business.
For More Information on the Buy and Hold Strategy, See:
- 3 Key Factors in Buy and Hold Real Estate Investing
- What Is Hybrid Real Estate Investing
- Back to Basics on Buy and Hold
- The Return Of the Real Estate Buy and Hold Strategy
Flipping Real Estate
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 financial gain. In reality, the flipping model is quite similar to the "buy low, sell high" model of most retail businesses.
The most popular type of property to flip is the single family home. Following a rule of thumb known as the 70% rule, an experienced house flipper will buy a home for 70% of its current value less any rehab costs. For example: Home A should 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 completed. This is simply a rule of thumb, and actual numbers must be verified and adjusted to ensure a successful and profitable flip.
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 carrying costs include monthly bills such as financing charges, property taxes, condo fees (if applicable), utilities and any other maintenance bills required to keep the house in good financial standing.
Flipping is not a "passive" activity, but instead is just 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, as well as provide financial support for other, more passive investments.
If flipping is an activity you want to get more into, we'd highly recommend that you check out the BiggerPockets newly released book, "The Book on Flipping Houses," along with the free bonus book, "The Book on Estimating Rehab Costs." These books can be fundamental in helping you learn how to start a profitable house flipping business. To learn more about these valuable resources, click here.
For more information on flipping, please see:
- Simple Things When Flipping Houses
- 9 Steps to Flipping Houses (Infographic)
- Fixing and Flipping: A Business or a Job?
- Six House Flipping Tips
- BP Radio Podcast 001: Building a Successful House Flipping Business and Losing Millions with Marty Boardman
- BP Podcast 010 : Flipping Houses 101 with J Scott
- BP Podcast 018 : Flipping, Marketing, and Wholesaling with Danny Johnson
- BP Podcast 022 – Building a Marketing Machine, Spec Houses, Flipping & Wholesaling with Tucker Merrihew
- BP Podcast 023: Flipping While Working a Job, Partnerships, and Military Investing with James Vermillion
- BP Podcast 024: House Flipping and Deal Analysis with Michael LaCava
- BP Podcast 027: Fix and Flipping, Wholesaling, Marketing, and More with Jason and Katherine Grote
- BP Podcast 032: Luxury House Flipping, Finding Deals, and Discovering Your Niche with Will Barnard
- BP Podcast 039: Dirt Cheap Land Flipping and Reaching Motivated Sellers with Seth Williams
- BP Podcast 041: How to Profit Through Long Term Flipping and Lease Options with Douglas Larson
- BP Podcast 044: Creating Systems to Flip Houses While Still Employed with Michael Woodward
- BP Podcast 050: Getting Started and No Money Down House Flipping with Mike Simmons
- BP Podcast 058: Flipping and Wholesaling Homes While Working Full Time with Justin Silverio
Don't overpay for your next real estate flip!
Use the BiggerPockets Fix & Flip Analysis & Reporting Tool to easily weed out bad deals & estimate your next big profit.
Wholesaling Real Estate
Wholesaling is the process of finding great real estate deals, writing a contract to acquire the deal, and then 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 using a variety of marketing strategies (see chapter 7), puts them under contract, and sells that contract to another for an "assignment fee." This fee is typically between $500 and $5,000 on average -- or more depending on the size of the deal. Essentially, the wholesaler is a middleman who is paid for finding deals.
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 can often get paid within days or weeks and can build solid connections in the real estate community.
Many investors choose to begin with wholesaling due to its reputation of being an easy strategy and one with low start up costs when first beginning. 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 and often receives the most attention as a result, though it is not as easy to become a successful wholesaler as they make it sound.
Wholesalers must continually seek out the best deals in order to have inventory to sell to others and must have a well designed marketing funnel to continually attract these leads. Wholesalers also must continually seek out buyers for the deals they acquire. While promoted as a strategy that anyone can do -- even someone with ZERO money -- you ultimately do need to have 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 grow their knowledge of other, more profitable strategies.
For more information on Wholesaling, please see:
- Don’t Start Wholesaling Until You Read This: Wholesale Advice from a Fix and Flipper
- How to Start Wholesaling: Getting Past The Education and Into the Field
- The Basics of Wholesaling For Beginners
- Wholesaling Real Estate Basics
- You Have a Buyer's List... Now What?
- The Flippers Best Friend: The Wholesaler
- How to Evaluate Wholesale Real Estate Deals
- How to Wholesale a Property When You're Starting Out
After reading this chapter, you should now have a clearer understanding of the many different real estate niches and strategies that you can use 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. Learning how to invest in real estate can take time. As you move forward through this guide, you will gain a better understanding of the kind of investing you want to engage in. Throughout this guide, we will give you numerous tips and sources you can use to narrow down your plan further. 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 might need.
You are probably excited to get started making money in real estate. Before you do, however, there is one major step that will make all the difference between early success and failure: building your business plan. Chapter 4 will explore this topic.
Jump to Another Chapter:
- Chapter 1: How to Invest In Real Estate
- Chapter 2: Your Real Estate Investing Education
- Chapter 3: Choosing Your Investing Niches and Strategies
- Chapter 4: Creating Your Real Estate Business Plan
- Chapter 5: How to Find Investment Properties
- Chapter 6: Financing Your Real Estate Investments
- Chapter 7: Real Estate Marketing
- Chapter 8: Real Estate Exit Strategies