Generally, the real estate investing is done in four ways:
The most common type of investing is Buy and hold investing in real estate and can usually be done for a 12 percent to 25 percent down payment plus 3 percent to 7 percent in closing costs.
Types of Real Estate Investing &which one is best?
Type of Real Estate Investment
Fix & Flip
Short-term investors who want to purchase, renovate and sell a property and then move onto the next project.
Buy & Hold
Long-term investors, such as portfolio investors and landlords, who purchase real estate with the goal of building equity.
Commercial Real Estate
Business owner or experienced real estate investor.
Vacation Rental Property
Homeowner who wants to offset some of their vacation costs or a beginner real estate investor.
There is some steps to get involve in real estate investment:
1. Fix & Flip Real Estate Investing
It is just for for short-term investors wanting to purchase, renovate, and sell a property, generally within 12 months. Fix-and-flippers look for rehab projects in poor condition that if renovated, can sell for a comparatively high return.
Who Fix & Flips Are Right For
Real estate professionals such as realtors, brokers, and contractors, as well as experienced rehabbers, are most suited for a fix-and-flip project. This is because rehabs are often funded by hard money loans with unique terms and typically require extensive renovations.
As a rule of thumb, fix-and-flip real estate investing is best for investors with two to three-plus past rehab projects. However, fix-and-flippers are sometimes inexperienced rehabbers who instead rely on licensed contractors to help them with renovations. When this is the case, the contractor provides the scope of the rehab work as well as a bid for the expected overall cost.
Fixing-and-flipping properties is the right real estate investment strategy for the following:
For more information on investing in real estate through fix-and-flips, read our ultimate guide on how to make money flipping houses.
Fix & Flip Costs
Holding costs for fix-and-flip real estate investments generally include:
Fix-and-flip investors can also extend the loan beyond the term for additional penalties and fees. This might happen if an inexperienced fix-and-flipper hits unseen issues that extend the rehab timeline. This situation also might occur if a fix-and-flip investor can’t sell the property for the price they expected and hold onto it for longer. Of course, this adds to your holding costs and further eats into your profits.
Funding for Fix & Flip Real Estate Investments
Fix-and-flip real estate investing is typically financed using a hard money loan. These are short-term interest only loans that lump the purchase price and rehab budget together as a single loan. Unlike conventional mortgages, rehab loans can be used to finance a house in poor condition and are therefore the most popular loan option for fix-and-flippers.
Hard money lenders generally offer rehab loans as a percentage of a house’s ARV. A house’s ARV represents its expected fair market value after renovations have been made by a rehab investor. Lending Home, for example, offers rehab loans up to 75 percent of a house’s ARV. This means that you should expect to cover at least 25 percent of a fix-and-flip investment with cash.
Hard money lenders like lending home charge interest rates and fees between:
Hard money loans are the most common type of fix-and-flip financing, but some investors make real estate investments using all cash. Cash allows investors to purchase houses quicker as compared to rehab loans and also result in lower holding fees, thus increasing an investor’s potential profit.
Costs that eat into your potential profit include such things as:
Average Return of a Fix & Flip.
The average return on a successful real estate flip is a 20 percent gross return, calculated by taking the average gross profit of $30,000 and dividing it by the average sale price of $150,000. The average net profit on a fix-and-flip is generally a 15 percent return. This means that if you do it right, you should only incur total costs equal to 5 percent of the property’s sale price including holding costs.
Profit from real estate investing comes exclusively from the sale of the property. The net return is typically considered a short-term capital gain and requires investors to pay taxes at their ordinary tax rate. For more information on real estate tax deductions and benefits, check out our ultimate guide on real estate tax deductions and our free worksheet.
Potential Risks of Fix & Flips
While the reward is high, there are many potential risks when it comes to fix-and-flip real estate investing. This is especially true for real estate investing for beginners, who aren’t used to managing rehab budgets and timelines.
Specifically, fix-and-flip investors are exposed to:
The longer it takes to renovate and sell a fixer-upper, the longer the overall timeline and the higher the potential holding costs will be. If this is the case, you also might be at risk for loan extension fees with your hard money lender as you work on an extended timeline. Further, many fix-and-flip projects naturally result in higher than expected rehab costs that increase your out-of-pocket expenses.
Average Investment Timeline for a Fix & Flip
The average timeline for one fix-and-flip project is six months, and the term of a rehab loan offered by a hard money lender like lending home is typically around 12 months. However, the faster a rehab investor can sell a fixer-upper, the fewer holding costs a flipper incurs, thus increasing potential profit. Holding costs are the monthly costs that rehab investors have to cover until they can sell the property.
Where to Get Fix and Flip Loans
You can get fix-and-flip loans through online hard money lenders and local hard money lenders. Lending home is an online nationwide lender that offers fix-and-flip loans for investors. They can get you preapproved online in just a few minutes and they offer competitive rates.
2. Buy-and-Hold Residential Real Estate Investing
Buy-and-hold investors are long-term investors who purchase one or more rental properties. These properties include single family homes, apartment buildings, and multifamily buildings. They make money off of monthly rental income as well as real estate investment appreciation. Some buy-and-hold investors also start as rehabbers, relying on rehab loans to renovate a property before renting it out and refinancing to a conventional mortgage.
Who Buy & Hold Real Estate Investing Is Right For
Buy-and-hold investing is suitable for passive long-term investors looking to purchase residential real estate and hold it long-term. It’s right for portfolio investors with multiple properties, as well as landlords who manage their own properties. Buy-and-hold investing is also right for investors who own duplexes and multifamily properties.
Specifically, buy-and-hold real estate investing is good for:
Buy and Hold Real Estate Investing Costs
Typical costs associated with a buy-and-hold real estate investment include:
Funding for Buy & Hold Real Estate Investing
Buy-and-hold investors, both portfolio investors and landlords, typically rely on conventional mortgages to fund their investment purchases.
The typical terms of a conventional investment property loan are as follows:
Average Return on Buy & Hold Real Estate Investments
The average return on a buy-and-hold property sale price is generally around 9 percent ROI. A buy-and-hold investor’s annual ROI is inclusive of both annual rental income plus any price appreciation earned through the eventual sale.
ROI is also net of any costs, which include such things as:
Potential Risks of Buy & Hold Real Estate Investing
Portfolio investors and landlords face the same buy-and-hold risks with their rental properties. The main risks of buy-and-hold real estate investing is the occupancy rate and the potential for price depreciation. You can overcome low occupancy rates by pricing your rental units correctly. Price depreciation may be unavoidable at times, but by researching the neighborhood and buying in stable or up-and-coming areas, you can help prevent it.
Specifically, buy-and-hold investors are at risk of:
Average Investment Timeline for Buy & Hold Properties
Buy-and-hold investors typically hold a house for five to 30-plus years. However, as long as portfolio investors and landlords are able to keep long-term tenants, the trend is to hold onto the investment property for as long as 30 years or more. The benefit is that it builds family wealth through equity and property appreciation.
However, long-term buy-and-hold investors often rely on the real estate market to dictate their investment timelines. If the value of the property is growing, investors are more likely to hold. If the market peaks, buy-and-hold investors are more likely to sell their properties and realize their actual gains.
Where to Get Buy and Hold Investment Loans
For more information on rehab loans for buy-and-hold investors, Rates are competitive for prime borrowers, and prequalification can be done online in just a few minutes. Funding usually takes 21 business days.
3. Commercial Real Estate Investing
Commercial real estate investing is investing in property that is used for commercial and not residential purposes. The sole purpose of the property is for conducting business. Commercial properties are purchased by investors and leased out to companies, and include such things as office spaces, restaurants, and retail stores. Commercial real estate investors, therefore, are long-term investors who earn monthly lease income and price appreciation.
Who Commercial Real Estate Investing Is Right For
Commercial real estate investing is generally right for business owners who want to own the property their business is located in. It’s also right for experienced investors because it can be more complicated and more expensive than investing in residential real estate. It can be right for real estate beginners who have an experienced partner or mentor. Commercial real estate investors are usually people or entities who are flush with cash or willing to take out large loans and become highly levered.
The most common types of commercial real estate investors include:
Each of these investors seeks to purchase and lease a property long term. This is aided by the fact that commercial mortgage terms can span up to 25 years, and average leases range from three to five years, making it a good buy-and-hold opportunity. Large commercial property management companies help these commercial buy-and-hold investors by managing their investments.
Commercial Real Estate Costs
Commercial real estate investment costs generally include:
Some commercial real estate costs such as property taxes, maintenance and licenses are generally paid in part or in full by the tenant as part of the terms of their lease.
Funding for a Commercial Real Estate Investment
Commercial real estate properties are typically purchased using commercial real estate loans. Commercial mortgages are funded by traditional banks and have loan terms between five years and 25 years, with the exception of commercial hard money loans. The typical interest rates found on a commercial loan can be fixed or variable, and are typically between 4.5 percent and 6.75 percent. This means that some commercial mortgages will have a balloon payment towards the end of the loan.
These commercial loans come in four different types:
Commercial mortgages will usually have lender fees known as “points.” For more information on the different commercial mortgage options, check out our article on the types of commercial real estate loans.
Commercial real estate investors sometimes rely on hard money loans to fund their investment purchases. This is typically the case when a commercial real estate investor wants to renovate a property, either to sell or to lease out long term. Commercial investors might also need to move fast and commercial mortgage approval will take too long. When this happens, investors refinance to a commercial mortgage at a later date.
Hard money loans for commercial ventures have the same terms, such as interest rates between seven percent and 12 percent, lender fees between 1.5 percent and 2.5 percent, and term length between one year and 3 years. For more information on hard money lenders for commercial real estate, read our article on the best hard money lenders.
Average Return on Commercial Real Estate Investing
The 20-year average return on commercial real estate shows that the annual return is currently at a 9.5 percent gross return on investment (ROI). Commercial real estate investors earn a return on monthly lease income as well as on price appreciation when they sell their properties. Further, investors can increase their returns if they find a commercial real estate foreclosure or if they buy a property at auction.
However, the return is gross and therefore doesn’t include any costs, such as:
These expenses, similar to buy-and-hold residential investors, eat into the profits of a commercial real estate investor.
Potential Risks of Commercial Real Estate Investing
Commercial real estate investors generally face the following risks:
Average Investment Timeline for Commercial Real Estate Investing
The average investment timeline of a commercial real estate investment is long term. This is because the financing terms are typically between five years and 25 years, and many investors hold commercial real estate properties longer than the maximum financing term.
The average lease for a commercial real estate property is also between three years and five years. Commercial real estate investors, therefore, have longer-term tenants than the tenants of residential properties. This extends an investor’s average investment timeline and makes commercial investors more likely to buy-and-hold.
Where to Get Commercial Real Estate Loans
You can find a commercial real estate loan at your bank, credit union, or through an online lender like www.mypropertyzone.comPatch of Land lends on commercial properties such as apartment buildings, mixed-use buildings, and office and retail buildings. They can usually get you funded in as little as ten business days.
4. Investing in a Vacation Rental Property
Vacation rental property is a property that an investor buys to use as a vacation home and to rent out so they can offset the costs of home ownership and vacation-related costs. It’s typically purchased in an area that has tourist attractions and amenities. It’s a great way to get started in real estate investing for beginners because you get the benefit of using the property yourself and renting it when you’re not using it. Typically, you hire a management company to manage the property while you’re not there so it eases you into investing in real estate.
Who Vacation Rental Property Is Right for..
A vacation rental property is generally right for the following:
People generally purchase a vacation rental property for two primary reasons. First, they want to use the property as a second home with their friends and family. Secondly, it’s purchased as a real estate investment that is rented during the periods they aren’t using it.
Costs of a Vacation Rental Property
Typical costs of investing in a vacation rental property include:
Keep in mind that a vacation rental property typically generates higher rents than a buy-and-hold real estate investment, but the costs such as insurance, cleaning, and maintenance are generally higher too.
Funding for a Vacation Rental Property
Investors typically fund a vacation rental property with a conforming loan, a portfolio loan, a multifamily loan or, in some cases, a short-term loan such as a hard money loan or a bridge loan. Some investors use all cash to buy a vacation rental property, but using financing is more common.
Conforming Loan for a Vacation Rental Property
A conforming loan used for a vacation rental home generally has more lenient qualifications than if used for a rental property. Lenders realize that borrowers will live there for part of the year, so they’re not entirely dependent on rental income, which reduces the lender’s risk. Qualifications vary by lender, but generally a 20 percent down payment is needed.
Portfolio Loan for a Vacation Rental Property
An investor may use a portfolio loan to finance multiple properties at once or if they don’t meet the criteria for a conforming loan. Portfolio loans usually offer lower personal qualifications and fewer property requirements than conforming loans.
For more information on portfolio loans, check out our in-depth guide to portfolio loans.
Multifamily Loan for Vacation Rental Property
An investor will generally use a multifamily loan to finance a vacation rental property with two to four units. There are four types of multifamily loans: conventional mortgages, government-backed loans, portfolio loans, and short-term multifamily financing. Each type of loan has its own lending criteria.
For more specific information on multifamily loans, check out our in-depth multifamily loan guide, which includes things like where to find multifamily loans and how to apply for them.
Average Returns on Investing in a Vacation Rental Property
Returns on a real estate investment such as a vacation rental property vary based on the purchase price of the property, the location, operating expenses and the occupancy rate. Typical returns on a vacation rental property are similar to a buy-and-hold investment and are usually around 9 percent to 12 percent.
Factors that affect your vacation property ROI are:
Potential Risks of Investing in a Vacation Rental Property
There are always risks associated with real estate investing, and buying a vacation rental property is no different. Generally, the major risk will be a vacant property in between tenancies and being able to afford the carrying costs associated with the property.
Some risks of investing in a vacation rental property include:
Average Timeline for Investing in Vacation Rental Property
Investing in vacation rental property has a very similar timeline to investing in a primary residence or a multifamily property. Generally, the buyer decides on an area that is a popular vacation destination and works with a realtor who specializes in that area. This may take a few weeks to a few months, depending on the available inventory, your budget and your housing preferences.
After you find a vacation rental property, it usually takes 30 to 45 days to close on the property, if you’re financing it. During this period, you will go through underwriting with a lender if you are financing the property. A title company will conduct a title search on the property and an appraisal will be ordered by your lender. You will also hire a property inspector.
Once all of this is done, the lender will give you a “clear to close” and the settlement will be scheduled for a convenient day for all parties. The settlement usually takes place within one to two weeks of the lender’s final approval and is normally held at the title company’s office. The actual settlement takes about 90 minutes.
For more information on buying vacation rental property, check out our in-depth guide on how to buy a vacation rental property, which includes things like what to look for in a vacation rental property and what areas to buy in.
Where to Get a Vacation Rental Property Loan
Finding the right lender for your vacation rental property doesn’t have to be a headache. Fill out a short form on lending tree and let lenders compete for your business. Their online marketplace lets you quickly compare rates, offers, and find a good fit. See your options online in minutes.
Alternative Real Estate Investing Options
There are several alternative ways of investing in real estate. These generally include real estate crowd funding, investing in REITs, and tax liens. Each of these alternative investments has their own risks and rewards and are generally right for different kinds of investors.
Real estate crowd funding companies provide opportunities to invest in loan-backed, single family homes, apartments, condos, and multi-unit properties. REITs are corporations that own or finance income-producing real estate. They typically own a portfolio of real estate within a specific sector and generally pay out 90 percent of annual profits to investors. Tax lien investing happens when an investor purchases a property after the owner has delinquent property taxes. Investors then earn interest and penalty payments.
Who Alternative Real Estate Investing Is Right For
Investing in alternative real estate investments may be right for people who don’t want to be hands-on landlords. They can be right for passive short-term and long-term investors who want to get involved in real estate without purchasing a property outright.
The most popular alternative real estate investments are: