Choosing a Real Estate Niche - Which One's Right for You
By Christopher Levarek
If you’re not excited about it, it’s not the right path.
- Abraham Hicks
For those just starting the real estate journey or for those looking to change directions, this post will outline some of the basic real estate investing options. Some will focus more on the Active Investing approach, having an active role in the investment, and some will focus more on the Passive Investing approach, having a more passive role in the investment. For more on active or passive investing, be sure to check out our free eBook “Your Path to Freedom”, which offers helpful information for the reader to discover which best fits their life.
Below we will break down the most popular real estate strategies for investing and some of the benefits of each. Additionally, in this post we will call out any gotchas or things to be wary of when choosing one of these niches to ensure the best available path is used to reach the goal. The strategies listed below are not the only one’s out there however they are the most common and therefore easier to replicate from the vast amount of people already deploying them. Let’s dive in :
Wholesaling
Typically this is the number one most chosen strategy for new investors. At any meetup or event, you will commonly hear new investors or aspiring investors mention they are a wholesaler. So what is wholesaling?
Wholesaling simply means, the individual does the legwork of finding a great deal or property and then passes that deal on to another investor for a fee. The wholesaler only has to worry about finding deals and then “assigning” them to prospective buyers. The fee is usually a percentage of purchase price or the margin between the agreed amount from the original seller and the agreed amount from the prospective investor buyer.
This strategy is attractive to new investors as it appears like a quick and easy way to pass on a deal and collect a massive paycheck enabling them to do little work. The truth is that wholesaling requires a well-orchestrated lead funnel or pipeline of deals. These require systems and processes to repeatedly execute and acquire properties.
With this being said, it can be an effective and lucrative strategy however it definitely aligns with an active investor as the workload of lead intake, calling potential sellers and searching for deals can be a full-time job. For a great article to dive deeper on wholesaling, check out the BiggerPockets “The Ultimate Beginner’s Guide to Real Estate Wholesaling”
Buy and Hold
This strategy is more of a long term play and used by many sophisticated investors to build massive wealth over a longer period of time. Just like it sounds, an investor “buys” a property which is cash-flowing, making money above expenses, and “holds” the property ie. doesn’t sell the property. As the investor acquires more buy and hold properties, the incremental amounts of cashflow increase. In addition, the renting tenants pay down the loan and the overall equity/wealth of the investor increases over the long term.
Probably one of the more fundamental strategy in real estate for the common investor, buy and hold can represent a steady long term method of building wealth then wholesaling for example which can be more of a numbers game. With buy and hold, an IDEAL investment, not only can an investor increase monthly passive income but the property can always be sold if necessary or to deploy capital in another opportunity.
As a buy and hold investor, capital will typically be placed within an investment for at minimum 12 months and maximum of 30+ years, varying on the duration of the loan and refinance terms. This can limit the amount of properties to be acquired if capital is limited. For the new investor, only 1 buy and hold property might be possible at first however there are numerous ways to continue to purchase properties if researched. Some examples of finding capital include, private lenders, HELOCs (Home-equity-lines-of-credit), other passive investors, partnerships/joint-ventures, syndications, etc.
Flipping
This strategy involves finding a property needing some renovation or with value-add capability, renovating or adding-value and then selling to another buyer for profit. Typically, an investor using this method needs a specific margin between what they purchase for plus renovation costs and the amount they then sell for. If that margin is not say a clear 20% gross revenue, the deal won’t make sense due to the cost of renovations, realtor commissions and taxes on sale.
This can be a very lucrative strategy however it is one of those which requires a bit more experience and network for buying and renovating correctly. The investor using this strategy will need to understand renovation costs, necessary versus unnecessary renovations for their market/property type as well as have all the network connections for competitive construction labor/materials. It can be very easy for a new investor to intend to flip a home and due to lack of experience or network, go over budget on renovations and compromise the benefits of the entire deal. Check out this article on BiggerPockets for 6 Ways to Flip Houses with No Money.
Passive Investing
The above three strategies outline the most common methods for new investors to actively take a role in a real estate investment. The last strategy we want to outline can be the most effective method to learning real estate investment and choosing the strategy that aligns with the investor without as much risk or issues due to lack of experience, passive investing in other deals.
Whether new to real estate or a sophisticated investor, investing into someone’s else deal can be highly beneficial as it can provide a learning experience, boosts personal investing credibility(helpful for future active deals) and provide a hands-off investing vehicle. The passive investor can choose to invest in all three of the above strategies such as to a wholesale partnership(lend capital to wholesaler), investing capital to a buy and hold project or lending capital at fixed interest rate in a flip.
A very common approach with larger partnership real estate acquisitions, such as an apartment syndication, is for an investor to invest into a deal expressing desire to learn and follow along on the acquisition. This investor then “learns the ropes” so to speak without as much risk as running an active deal right away. This can be achieved on any partnership large or small and offers a smart/risk-adverse method to getting into real estate investing as well.
In Final
The above strategies are not the only options available however they are the most common for new investors to break into real estate. We suggest picking a niche and educating further on that niche to decide if it could be the strategy for you. Invest Smart!