There are a lot of options when it comes to investing in real estate. Flipping houses is a very active form of real estate investing. On the other hand, buying shares of a mutual fund that holds real estate is very passive. And there are many strategies in between. Are you looking for a particular strategy to fit your investing needs? Consider the pros and cons of these eight most popular strategies.
1. Rental Property Investing
Rental property investing involves finding, acquiring, and managing residential dwellings — single-family homes, duplexes, townhouses, and condominiums — for a profit. The majority of investors own rental units that have “cash-flow,” meaning that the monthly rental income exceeds the monthly rental expenses. This isn’t always possible in an expensive and rapidly growing market. And investors may choose to break even or even fund part of the monthly cost in anticipation of holding and selling the property for more money down the road.
Rental property investing is best suited for those with the skills and interest in taking a very active role — including researching, selecting and acquiring homes, property management, maintenance, and handling tenants. If you need help finding a good rental property, you can use a free service like HomeLight to find a real estate agent in your area who can help you find the best deal for you.
Pros Of Rental Property Investing
- Once set up, you can benefit from passive monthly cash flow
- You can benefit from powerful tax benefits including depreciation
- Capital appreciation potential — If bought and managed wisely, rental properties generally appreciate in value over time while your cost of ownership decreases typically
- Rents go up with inflation, increasing monthly cash flow over time
- Tenants pay down your mortgage for you
- You maintain control over your investments
- You can use leverage (debt) to create a portfolio of rental properties quickly
- As a direct form of real estate investing, rental properties are not directly correlated to the stock market
- You can buy a distressed property, do some or all of the work yourself and benefit from instant equity
- Unique tax benefits such as depreciation
Cons Of Rental Property Investing
- You are a landlord dealing with tenants (or you’ll need to find and pay a qualified property manager)
- It’s a long-term investment (expect to hold on to the property for at least ten years)
- High transaction fees
- Takes time, knowledge and active participation to be successful
- Your funds are not liquid if you have a financial emergency
- Can take 30–45 days to close on a property
- Harder to achieve investment diversification because of the high cost of each property
- Capital intensive — You need lots of cash