In the past, homeowners and investors expected their properties to appreciate somewhere between 4% and 6% each year. Recently, the market has blown those expectations out of the water. Home values reached a growth rate of 12% in 2021 and 18.8% in 2022. In certain areas of the country, like Florida, North Carolina, and Tennessee, appreciation rates rose as high as 30% in the last year. There’s potential for huge returns in real estate, but many investors aren’t sure which strategy to use when first entering the market.
To avoid costly mistakes, find out the best investment properties to own, where to buy, and other insights that will teach you how to get into real estate and have successful ventures.
- Long-term rentals provide reliable and steady income, but choosing the right market is key.
- Short-term rentals have the potential for higher returns. However, they require more time and effort to manage.
- REIT investing is perfect for the investor looking for completely passive income, but it provides little control over the investment.
- REIGs lower the risk and the time commitment involved in buying a rental property.
- Online investment platforms are a high-risk investment strategy that requires little upfront cash.
- Investors who enjoy home renovation may choose a fix-and-flip investment strategy, however, there is more risk involved with this choice.
6 Ways to Start Investing in Real Estate
1. Buy and Hold Properties as Long-Term Rentals
The most common real estate investment strategy is buying and holding properties as long-term rentals. In this case, investors keep their property in good condition in exchange for monthly rent from tenants. As a result, investing in long-term rentals provides steady, passive rental income as well as long-term appreciation gains.
Rental income from a good investment property should produce a positive cash flow while also covering the cost of mortgage payments, repairs, maintenance, property taxes, insurance, and any other expenses.
The median rent in the U.S. as of April 2022 was $1,827 per month, meaning an investor earning the median rental income would bring $21,924 per year before any expenses. However, the market you choose can significantly affect your rental income.
Although rent in cities like San Francisco, LA, and New York can easily exceed $3,000 a month, rent in midwestern regions is typically below $1,500. To maximize ROI, find a market with relatively low home values in relation to the price of rent.
While owning a rental property is often considered a source of passive income, filling vacancies, communicating with tenants, and keeping the property in good condition can take several hours a month for each property. Landlords often hire a property management team to free up their time and turn their investments into truly passive income.
5 of the Best Places to Buy Rental Property
An ideal market to own a long-term rental will have a growing population, a strong economy, and a good price-to-rent ratio. Ken McElroy, a real estate investor who has completed over $1 billion in transactions, wrote in The ABCs of Real Estate Investing, “Starting off on the right foot involves doing one thing really well: evaluating your market and submarket.”
These five markets are top performers in median home value and rent:
|City||Median Home Value||Median Rent|
|Fort Wayne, Indiana||$205,534||$1,329|
|Raleigh, North Carolina||$465,717||$1,900|
Pros and Cons of Long-Term Rentals
- Steady income
- Passive income (if working with a property manager)
- High returns through rental income and home appreciation
- Reduced taxable rental income by deducting expenses
- Requires a property manager to be truly passive income
- A poorly chosen market can greatly affect returns
- Rental properties are a relatively non-liquid real estate asset
2. Convert Properties Into Short-Term Rentals
With the growing popularity of platforms like Airbnb and VRBO, an increasing number of investors are choosing to buy investment properties as short-term rentals. Short-term rentals have the potential for much higher returns than long-term rentals. However, they typically require significantly more work.
However, short-term rental owners have responsibilities that long-term rental owners don’t have to deal with. This includes communicating with guests almost daily, cleaning the property regularly, and ensuring new guests are booking stays.
A short-term rental with 75% occupancy and a daily rate of $150 could bring in $3,375 per month, $1,548 more than the median monthly rent for a long-term rental. Just like with long-term rentals, the market makes all the difference when it comes to occupancy rates and the price of rent.
Top Markets for Short-Term Rentals
A good short-term rental market has a high occupancy rate, high average daily rates, short-term rental-friendly regulations, and homes for sale in your price range. The following markets meet all the criteria for a profitable short-term rental business.
|City||Median Home Value||Occupancy Rate||Average Daily Rate|
|Kenai Peninsula, Alaska||$237,000||67%||$262|
|Crystal River, Florida||$249,000||69%||$221|
|Joshua Tree, California||$342,000||66%||$327|
|Southwest Harbor, Maine||$399,000||76%||$330|
|Black Hills, South Dakota||$338,000||72%||$261|
Pros and Cons of Short-Term Rentals
- Increased potential for higher rental income than long-term rentals
- Gain returns through rental income and home appreciation
- Can function as a personal vacation home when not used by guests
- Requires either a property manager or significant time to manage
- Income can be less regular compared to long-term rentals
- Short-term rental regulations are volatile
3. Invest in Real Estate Investment Trusts (REITs)
A REIT, or a real estate investment trust, is an investment fund similar to a mutual fund. But instead of trading in listed companies, REITs invest in real estate assets, both residential and commercial. REIT investing is a great strategy for someone who wants to invest in real estate while having the ability to trade investments like stocks.
REITs pay out 90–100% of their earnings to shareholders, making them a great source of passive income. The National Association of Real Estate Investment Trusts (NAREIT) reports the dividend yield of the REIT index is 2.9% and an annualized return rate of 10.5% over the last 25 years.
REIT funds have performed especially well in recent years as the national real estate market climbed in value. While the 2022 economy looks less certain, REITs historically perform well during periods of high inflation.
Dividends earned from REIT funds are taxed as regular income, meaning your tax burden will likely be higher for REITs than your returns when buying an investment property. Experts recommend using REITs as a diversification strategy rather than as your sole investment in real estate. The NAREIT reports that 5–15% is the optimal REIT portfolio allocation.
Investing in a REIT is similar to investing in the stock market. You can purchase shares in an individual REIT or invest in a REIT mutual fund. To do this, open a brokerage account through a brokerage company like Charles Schwab, TD Ameritrade, or Fidelity.
Pros and Cons of REITs
- Greater liquidity than traditional real estate investing
- Less volatility than the stock market
- Completely passive income
- Potential for high returns
- Requires less cash upfront to begin investing than purchasing your own property
- REITs perform well in times of high inflation
- Investors have no control over the performance of their investment
- The money you earn through dividends is taxed as ordinary income, potentially creating a larger tax burden than owning your own real estate properties
- REITs generally must be held long-term to see significant returns
4. Join a Real Estate Investment Group (REIG)
A real estate investment group, or REIG, is a business that focuses primarily on buying, selling, renovating, or financing real estate properties. When you invest in real estate through an REIG, the group buys or develops a group of real estate properties and allows investors to purchase them through the company, becoming a member of the group. The investment group then manages the property and takes a percentage of the monthly rent.
REIGs provide more control to individual investors than REITs because the group typically allows you to make specific investment decisions within the portfolio. However, a REIT simply uses your investment capital as it sees fit.
The benefit of joining an REIG rather than buying a rental property as an individual investor is that many REIGs pool their money to protect the other investors from occasional vacancies. While your monthly income may be slightly lower than if you owned the property outside an REIG, your risk is much lower.
Pros and Cons of REIGs
- Decreased risk compared to individually investing in real estate
- Passive income
- Potential for high returns
- Greater control over investment decisions than through REIT investing
- Appreciation gains
- Lower monthly income compared to individually owned and managed investment properties
- Less control over management decisions of your property
5. Explore Online Real Estate Investment Platforms
Online real estate investing platforms allow large investors and developers to crowdfund real estate projects. These platforms permit investors to invest in real estate without owning or managing properties. Most platforms also let investors contribute significantly smaller amounts than would be required to own property.
Unlike REITs, which invest in various income-producing assets, online real estate investment platforms typically authorize investors to invest in individual real estate projects. If the project is immensely successful, your returns can be higher than that of a REIT investment. But it also means that you have much lower levels of diversification, exposing you to greater risk. Online investing platforms are best for investors willing to make a high-risk, high-reward investment.
Popular Online Real Estate Investment Platforms
- Fundrise: This platform allows you to invest in diversified commercial real estate portfolios or professionally managed residential real estate. With a minimum investment of $10, it’s a good starting point for investors interested in getting their feet wet in the industry.
- Arrived Homes: With a minimum required investment of only $100, the barrier of entry is low for this crowdfunding platform. This company allows you to buy shares in rental properties without participating in management responsibilities. Arrived Homes investors collect quarterly dividends from their investments.
- Crowdstreet: Crowdstreet is for investors looking to make a larger investment. The minimum investment is $25,000, and investors can choose to invest in individual deals, diversified funds, or tailored portfolios.
Pros and Cons of Investment Platforms
- Investors don’t need large amounts of cash to enter the market
- Passive income
- Potential for high returns
- High-risk investment
- Lower liquidity than REITs
6. Become a Fix-and-Flip Investor
Fix-and-flip investing is more popular in 2022 than it has been in the last 20 years. Nearly 1 in 10 homes sold during 2022 had been flipped. Historically, house flippers have aimed for a 15–20% ROI, but the profit margin can vary tremendously.
In 2019, real estate agent and house flipping investor Dustin Parker told HomeLight, “I would say the average margin for a flip is 15%. However, it’s possible you’ll hit a home run and get 50% or 60% on one flip alone.”
While 15–20% was the goal for investors in the past, skyrocketing home prices, supply chain issues, and inflation have recently cut into profits. The National Association of Homebuilders reported the cost of building materials rose 31.3% between 2020 and 2022.
In 2016, analysis conducted by RealtyTrac showed 12% of flips sold at break-even or at a loss. In 28% of those flips, the gross profit was less than 20% of the purchase price. Generally, you’ll need a profit of at least 30% to break even on the cost of renovations. As house flipping becomes more expensive, investors will need greater expertise to achieve 15–20% margins. Without this, a house flip can lead to losses for investors.
House flipping is not ideal for investors looking for passive income. Whether you hire contractors or do all the renovation work yourself, the project will still require long hours to plan and carry out.
2022’s Top Markets for House Flipping ROI
Fix-and-flip investors see greater returns in markets where home values are rising quickly, and there is a large supply of distressed homes and foreclosures. House flippers in these five cities saw astonishingly high-profit margins in Q1 2022 that far outpaced average profits in the U.S.
- Scranton, Pennsylvania: 115.5% average ROI
- Bristol, Virginia: 114% average ROI
- Reading, Pennsylvania: 108.6% average ROI
- Pittsburgh, Pennsylvania: 105.7% average ROI
- Johnson City, Tennessee: 101.1% average ROI
Pros and Cons of House Flipping
- Quick returns
- Potential to make a significant profit
- House flipping is a fun strategy for people who enjoy the renovation process
- Profits are falling lately as house flipping becomes more expensive
- Not a passive income investment
- Requires skill and experience to reliably make a profit
- Taxes can be higher when selling homes you held for less than a year
Which of the Real Estate Investing Strategies Is the Best?
There’s no one-size-fits-all answer when deciding the best real estate investments to start with. If you’re looking for an investment with the highest potential profits, start by buying and holding investment properties as short-term rentals. If you’re looking for slow and steady growth with low risk, start with REITs.
Yet, the best real estate investment strategy is always a diversified one. As your investments grow, increase your chances of profitability by investing in a mix of long-term rentals, short-term rentals, REITs, REIGs, and crowdfunded projects. If you enjoy house flipping, add that into the mix, as well. Your portfolio can never be too diversified.
The Takeaway of Real Estate Investing Strategies
Real estate investing brings reliable returns to investors and enables investors to leverage their equity to build long-term wealth. Through both appreciation and rental income or dividends, real estate investors can create long-term, stable wealth.
Property developer and home renovation TV show host Sarah Beeny explains why she remains consistently bullish on real estate. She says, “In any market, in any country, there are developers who make money . . . there will always be people who make money because people always want homes.”
To learn how to get started in real estate investing, check out the following articles: