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Choosing the Right Real Estate Investment Strategy

So, you want to be a real estate investor? Choosing the right investment strategy is the key to financial freedom

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Summary

  • Real estate isn’t the best investment strategy for everyone, but can be perfect for the right type of investor

  • Read through the pros and cons to see if real estate investing is the right strategy for you

  • Understand the different types of real estate properties and identify which investment strategy makes the most sense for your financial journey


It’s no secret that of all the main asset types — paper assets, commodities, business ventures, cryptocurrency and real estate — real estate is Robert Kiyosaki’s clear favorite.

But he, like other wise investors, understands that there are many components that play into a preferred investment strategy, such as personal preferences, financial situations, and investing styles. And even individuals who consider real-estate investing to be their investment of choice, should comb through the wide variety of real estate types.

Before diving into the individual real estate investment strategies, ask yourself: is real estate the best investment target for you? If so, here is a quick list of the pros and cons provided by Robert Kiyosaki himself based on his experience, to help you find the one that’s best for you.

The Pros to Real Estate Investing

Robert identified at least seven major advantages to the real-estate investing strategies:

  • Using other people’s money (OPM). When investing in real estate, most of the money is the bank’s. Only a small percentage is your own.

  • Cash flow. If a rental property is purchased and managed wisely, it can often provide significant, regular cash flow.

  • Appreciation. Although Robert doesn’t believe that investing primarily for appreciation is a smart choice, he does agree that increases in rents and property values can provide an important supplementary revenue stream.

  • Control. Real estate investors have far more control over their income and expenses associated with their investments than do most other investors.

  • Stability. Although the value of all investments can ebb and flow with national and local economic conditions, cash-flowing properties are generally less subject to the daily ups and downs of the market than are other types of investments.

  • Tax advantages. There are significant tax advantages with real-estate investments, such as depreciation and other tax write-offs, that are not available to other forms of investment.

  • Comprehensible. Although many forms of real estate investing can be quite complex, the basics of real estate purchases and calculations are familiar to anyone who has ever purchased a home.

The Cons to Real Estate Investing

But real estate investing may not be for everyone. Here are a few of the cautionary factors that any would-be real estate investor should keep in mind:

  • Due diligence. Other than investing in businesses, real estate investing requires more time-consuming upfront due diligence than other forms of investing.

  • Liquidity. Liquidity is the ability to quickly convert an asset into cash. In most cases, it can take weeks, months, or even longer - to get into and out of real estate.

  • Management. Investing in real estate usually requires more time consuming - and typically more hands on - management than other forms of investments.

If, considering both the pros and cons, real estate investing seems like the right investment strategy, then it’s time to take the next step and identify the investment type that works best for you.

Remember, there are a wide range of real estate investment types, below are the most popular six.

Multi-family properties

Multi-family properties include duplexes, triplexes, quadraplexes, and condominium and townhouse communities. Like single-family rental homes, multi-family properties are properties that you purchase, typically fix up, and then lease to individuals or families who prefer the autonomy of non-apartment living but do not want (or cannot afford) the added expense of maintaining a single-family home

The multi-family real estate investment strategy does come with a lower risk of having now cash flow, since there are more residents. That means that despite there being some vacancies, your cash flow remains constant (though the amount varies) so long as other units are being actively rented. Additionally, the cost of maintenance can be spread out across a number of units, and financing is also easier to secure for small (less than four units) multi-family properties. Lessees in well-maintained multi-family properties tend to be more responsible and reliable, and feel more obligated to maintain their properties for the sake of their community.

Despite this, turnover rates in multi-family dwellings tend to be higher than for single family homes. Additionally, financing for multi-family properties with more than four units can be difficult and expensive to obtain.

Apartments

Apartment complexes are rental properties with as few as five to as many as a few hundred units.They can be small or large, one - or two - story properties, or they may be high-rise buildings that have a few to dozens floors. You name it. Although there are many luxury apartment buildings, renters who seek out more pedestrian apartments tend either to have relatively lower incomes or prefer low-maintenance living. This investment strategy also comes with its fair share of advantages.

Apartments tend to rent more quickly than other residential rental properties, and sometimes even have a long waitlist. Upwardly adjusting rent is easier to do with an apartment than it is for a single-family home, since you can raise rents for future tenants while keeping them stable for current residents (this also applies to multi-family properties). Any investment you make into the apartment complex ultimately increases the value of all the units, rather than just the one (as with single family homes).

However, these are more expensive to purchase than rental homes or multi-family housing, and the attached financing is much more complex. They are also much harder to liquidate, because of how expensive they are compared to single-family and multi-family homes. Finally, turnover rates can be high, and nonpayment of rent can be a common occurrence.

  1. Single-family rental home

    Single family rental homes are homes that you purchase, and lease to individuals or families after fixing it up. Oftentimes, these tenants prefer detached-home living, but either don’t have the resources, or don’t want the burden of purchasing a home.

    There are many key advantages to the single-family rental home investment strategy. To name a few: generally, they hold their value better than other types of residential property, especially if they’re well-maintained. Additionally, the cash flow is constant, and tenants tend to stay longer, which ultimately increases ROI and reduces turnover and marketing expenses. Finally, if you decide to sell your property, single-family homes tend to sell fast, because they also appeal to non-investors.

    However, remember you face a 100% vacancy rate when your tenant moves out. At this point, cash flow comes to a halt. Single-family homes also sometimes come with additional costs like HOA fees, and are subject to more vandalism and theft than in vacant multi-family properties or apartment units.

  2. Resale homes

    Resale homes, often referred to as “fix & flip '' properties, are usually single-family homes that are purchased and renovated, with the intent to quickly resell the property for profit. The potential buyer class for such properties generally parallels the population of purchases of other (non-flipped) previously-occupied single-family homes

    This investment strategy requires in-depth market research, good judgment, and sometimes some luck - but when done right, these can often produce relatively quick and sizable returns. The obligation to the property is ceased once it’s sold for profit; that means there’s only one transaction, with no ongoing management or maintenance costs. The more you flip, the better you become at it, the higher your ROI,

    But remember, there is no cash flow associated with fix & flip properties, only the hope of appreciation and capital gains. Though there are no on-going costs, the cost to renovate a home can be high, unpredictable, and more time-consuming than originally anticipated. Ultimately, you could end up losing money rather than making it.

  3. Commercial properties

    Commercial properties come in a wide variety of types, but primarily include office space, warehouses and industrial property, and retail complexes like strip malls and shopping centers.

    There are substantial differences among commercial property types and their tenants, but some of the most common advantages commercial-property investments include that lease periods tend to be much longer than they are for residential properties. This means that higher rates can be charged, and the ROI tends to be from three to six times greater than it is for residential property investments. Most commercial tenants tend to have a vested interest in maintaining the appearance of their property, so their maintenance and repair costs are minimal.

    But because of their larger size, commercial property purchases can be costly and complex. As such, the management of the properties can be more time-consuming, and expensive. Don’t forget about the legal liabilities, which are much greater than residential properties.

  4. Land

    Undeveloped land is the most basic form of real estate investing strategies. Undeveloped land can be purchased and held for resale, or it can be developed (e.g., with homes, an office park, etc.), and the individual units sold or rented out. The relative benefits of the land investing strategy depends both on the location of the land, and the purpose for which it is purchased.

    Purchases of land are generally less expensive, less complex, and less time-consuming than the purchases of an already developed property. The value of land is heavily dependent upon traffic patterns and nearby amenities; these are relatively predictable, so is the value of many land parcels. Finally, there is less competition for land than for other types of properties, so investors can often charge comparatively more when placing it for sale.

    But the value of land is often determined by local zoning ordinances, which can change unpredictably over time. ROI of land depends exclusively on appreciation, but there is no guarantee that the value of a given parcel of land will appreciate; in fact, the value can even plummet with adverse discoveries, like toxic wastes. Finally, the tax advantages for undeveloped land are fewer than for developed real estate.

Now take your pick

Now that you’ve got a high-level summary of the pros and cons of various real estate investment strategies, it’s time to identify which investment strategy is right for you. Only you, and your financial advisors can determine that. But think carefully, and be clear on your goals. Make prudent judgements, and enhance your financial education - soon, you’ll be financially free.

What are you waiting for?

Original publish date: April 13, 2023

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