Let’s look at some traditional real estate investment strategies and how they stack up against alternative investing to help you make a solid investment decision. Both traditional and alternative strategies cut across all real estate asset classes. So, you can invest in any type of property, from commercial spaces and self-storage units to multi-family homes and short-term rental properties. Keep in mind that all investments involve a certain level of risk. Besides investment objectives and financial goals, it is important to figure out which real estate investing strategy matches your risk tolerance. Consult a financial planner prior to investing to determine what investment vehicle fits your individual needs. Here are some common traditional real estate strategies:
Traditional Real Estate Investing Options
Please consider the risks associated with each investment strategy below prior to investing. Consult a financial advisor to determine what investment makes sense for your financial needs.
Buy and Hold Strategy
The buy-and-hold approach is a favored strategy in real estate because it’s suitable for both beginner and experienced investors. This method involves acquiring properties, like single or multi-family homes, and retaining them over a prolonged duration. The primary objective is to earn rental income and potentially realize capital appreciation. Its success hinges on the consistent rise in property value and stable rental revenue.
House Flipping Strategy
The property renovation and resale strategy, often termed “fix and flip,” is ideal for those willing to invest in a hands-on strategy. It involves acquiring undervalued or distressed assets, refurbishing them, and subsequently selling them at a profit. You will need to master the local market to achieve success in this strategy. Precise calculations of refurbishment expenses and anticipated sale price are vital to ensure a profitable outcome.
Rental Asset Strategy
This strategy requires you to purchase property with the anticipation of consistent rental income. Meticulous property management is needed to sustain high occupancy levels and uphold the property’s value. As an investor, you can opt for self-management of your asset or engage property management companies.
House Hacking Strategy
House hacking is a popular strategy among new real estate investors. It involves acquiring a multi-unit property, occupying one of the units, and leasing out the rest. The rental income can offset mortgage payments and management costs. This strategy presents a pragmatic entry point into real estate investment while reducing your living expenses.
“BRRR” encapsulates the steps: Buy, Rehab, Rent, and Refinance. This strategy facilitates portfolio expansion without consistently investing large amounts of funds. Initiating the BRRRR approach begins with the acquisition of a distressed or undervalued asset. The key objective is to secure a price that, even when rehabilitation expenses are factored in, the property’s value remains below the current market value. After the renovation phase, the refurbished property is put up for rent. The set rental price should not account for inherent costs like mortgage payments, taxes, insurance, and a decent profit margin.
Once the property has been rented, you refinance. You obtain a new mortgage that reflects the property’s new value. This mortgage can be used to clear the initial loan and any money left can be used to begin a new BRRR strategy for your next property.
Common Drawbacks of Traditional Real Estate Investing
High Initial Capital
Traditional real estate investments typically require significant upfront capital. Most lenders require a 20% mortgage down payment for a standard family home. Taking into account the over 400k median price of a home in 2023, you may be required to put down about $80,000 for the mortgage. This can be quite a sum of money for a new investor. Contrast this with investing as little as $1000 in an alternative strategy like a mortgage purchasing fund that guarantees an 8 – 10% annualized return.
Property management requires time and effort. It can also be a costly expense if the property is not maintained properly. If you choose to manage the property yourself, the costs might be lower, but it would require you to directly deal with renovations and tenant concerns. The other option is to hire a property manager or a property management company. These entities will manage your property holistically, but you may need to pay more for their services.
Traditional real estate investments are not as liquid as stock market shares. If an investor needs to divest quickly, it may be challenging to sell an investment property without sacrificing the value of the property.
Dependence on Local Markets
The success of a traditional real estate investor often hinges on the local market’s health. Real estate values can be impacted by local job markets, local government policies, and real estate developers’ activities. While some investors diversify their real estate exposure by investing in properties across different regions, others may find themselves too heavily concentrated in one area.
Investing in traditional real estate brings in additional costs. Real estate agents provide valuable assistance in finding and securing properties. Typically, you will be the one paying their commissions. Purchasing property can also involve legal fees. Over time, these costs add up and can affect your bottom line.
Alternative Real Estate Investing
Alternative real estate investing encompasses unconventional approaches beyond traditional property ownership. These strategies range from syndication partnerships and real estate investment trusts to passive income strategies like mortgage note funds. Alternative strategies offer different ways of investing in real estate without necessarily owning property.
This enables greater investment flexibility and lower capital requirements compared to traditional investing. The structures of alternative investment strategies can mitigate some of the challenges that traditional real estate investors face. When this is coupled with the comparatively lower capital requirements, it makes alternative investing an appealing strategy for investors.
How Alternative Investing Solves The Challenges of Traditional Real Estate Investing
We’ve seen that real estate is still a viable investment avenue in 2023. However, despite its potential for lucrative returns, traditional real estate investments have some drawbacks that alienate a broad section of investors from participating in the market.
Alternative real estate investing can address the challenges of the traditional approach, making it more accessible, manageable, and cost-effective for a broader range of investors. While alternative strategies offer compelling options for those looking to tap into the real estate market, always be guided by your risk tolerance and overall financial goals. Talk to an investment consultant if you need more information about your investment capabilities. Here are some attributes associated with alternative real estate investing that make it more viable than the traditional approach.
I. Reduced Initial Capital Requirement
You can start investing with relatively smaller sums compared to the large down payments required for traditional real estate. In an earlier example, we saw that an investor may require a down payment of $80,000 for a mortgage of a standard $400,000 home. Several investors can put as little as $5000 into a mortgage note fund like CWS. This democratizes the investment process, allowing more people to participate in the real estate industry.
II. Streamlined Property Management
A major attraction for alternative strategies is that you do not need to directly manage the properties. Alternative strategies usually have dedicated teams to oversee property management, maintenance, and tenant issues. Therefore you can enjoy the benefits of real estate returns without the daily hassles of property management.
III. Diversification Across Markets
Alternative investments can hold multiple properties across different regions or sectors. This ensures that investors aren’t overly reliant on the performance of a single local market. Such diversification can mitigate risks associated with economic downturns in specific areas or unforeseen local events.
IV. Lower Intermediary Costs
Many alternative real estate investment avenues are designed to minimize intermediary costs. Such strategies leverage technology and the expertise of experienced professionals who work for a common goal. For example, when purchasing a house for investment, you might have to incur costs like real estate agent commissions, legal fees, and property management fees. On the other hand, when investing in CWS’ mortgage note fund, for instance, there will be no commission or management fees incurred.
Would You Like to be an Alternative Real Estate Investor?
Alternative real estate investments can offer promising avenues for portfolio diversification and lucrative returns. Mortgage note investing incorporates risk mitigation techniques, making it an appealing investment strategy to many investors.
CWS Investments specializes in purchasing distressed mortgage notes for profit. We have a fund where you can put your investment capital into and in return, we aim to provide investors with an 8-10% annualized return. These returns are designed as dividends and are distributed monthly ensuring that you have a steady stream of cash flow from your investment. If you need more information about how to invest in the fund, talk to a member of our team today.
5 Frequently Asked Questions about Real Estate Investing
1. Are real estate funds good investments?
Real estate funds, which can include exchange-traded funds (ETFs) focused on real estate, can be good investments for diversifying a portfolio. They offer exposure to a variety of properties, including commercial properties and owner-occupied properties. However, like all financial topics, their performance can vary based on market conditions and management strategies. Consult a financial planner prior to investing.
2. Is real estate the riskiest investment?
While real estate can be subject to market fluctuations, interest rates, and other factors, it has historically been a stable and appreciating asset over a decade or longer. Many experienced investors consider it less risky than certain other investment options, like individual stocks. However, specific strategies, such as house flipping, can carry more risk due to market volatility and the significant amount of capital tied up in a single investment.
3. How do interest rates impact real estate investments?
Interest rates play a critical role in determining the cost of financing for real estate investments. High-interest rates can increase monthly payments for properties bought on finance, potentially reducing after-tax profits. Conversely, low-interest rates can make financing more affordable, increasing the potential for steady cash flow and higher returns.
4. What’s the difference between investing in my own home and other properties?
Investing in your own home, or primary residence, is often driven by personal needs and desires, whereas investing in other properties is typically driven by potential returns. While both can benefit from price appreciation, other properties, especially rental ones, can also provide additional income from potential renters.
5. Is house flipping still a viable strategy?
House flipping can be profitable if executed well. It involves purchasing a property at a lower purchase price, renovating it, and selling it for a profit. However, it requires a keen understanding of the market, a substantial upfront capital investment, and often, a knack for renovations. The success of house flipping depends on market conditions, purchase price, renovation costs, and the final sale price.