REAL ESTATE INVESTING
Buying real estate is a popular way to invest, and if you do it right you can make some real money! Real estate investing comes in different shapes and sizes. Here are the most common ways people invest in real estate.
LONG TERM INVESTMENT
The term "buy and hold real estate" refers to a specific strategy investors use when they purchase property and retain it for a certain period of time. Ultimately, it's a long-term approach to investing. While you hold onto the property it will go up in value building equity. You can use this equity while in the home with a home equity line of credit. If rates drop you might want to refinance your current loan for a lower monthly payments. At some point you might want to sell and use the funds for another purchase.
Buy & Rehab: Rehabbing is the process of renovating a property to improve it. Rehabbing can be approached in several ways, but it is most often purchased at a discounted price and renovated with the intention of reselling. What is the difference between a fixer-upper and a rehab? Perhaps the best way to understand it is this: if you can live in the home safely and comfortably while you're working, chances are it's a little fixer-upper, not a full-scale rehab, also known as a gut job.
Buy & Rent: Buying and renting a property can be a short- or long-term investment. The idea is to rent the property for an amount that covers the bills and provides income. While you hold onto the property it will go up in value building equity you can later use with a HELOC, refinance or selling the property. There are two schools of thought regarding rental properties. Some landlords want to do the minimum to get the property rent-ready. This typically involves making repairs and cosmetic work, such as painting and carpeting. Other landlords will do a more extensive rehab. This may involve replacing mechanicals like the HVAC unit and water heater, updating plumbing and electrical systems, and replacing the roof. There is no right way to do this.
Rental Pros: Rental properties offer steady, long-term income. While that income may not be substantial, it adds up over time. With rentals, it's not the monthly income that's attractive - it's the ability to hold onto a piece of property for the long-term without having to pay for it in the meantime. Tenants are paying off your mortgage, property taxes, and insurance for you. Meanwhile, your property is gaining value. Once the mortgage is paid off, you can keep most of the rental income for yourself - minus the cost of property tax, maintenance, and insurance. Eventually, you can sell the property to earn a nice profit on top of the income you've earned from renting. It's also considerably easier to hold multiple rental properties and passively earn income. You can hire property managers to oversee the maintenance of your properties and collect rent checks on your behalf.
Rental Cons: The only real drawback to rental properties is that the returns aren't quite as substantial as they are with flipping. You realize gains slowly and over a long time. If you have a 30-year mortgage on the property, you'll be waiting three decades to collect most of the profits on your monthly rental checks. There are exceptions to this rule, of course. If the property is located in an area where you can charge substantially more than your monthly upkeep and mortgage costs, there's the potential to see a higher return more quickly. But these properties are rare and usually snatched up quickly. If you've invested in a community rental property, such as an apartment building, you can also earn a higher monthly return.
SHORT TERM INVESTMENT
Flipping requires a more hands-on approach. You could hire someone to take care of the leg work for you, but the cost would eat into your profits significantly. Purchasing a revenue-generating asset to sell quickly for a profit needs a plan, a strict timeline, and a budget, to be profitable.
Before anything else, you'll need to decide how much you can spend on your flip, including the price of the property.
• Repairs and upgrades. How much do you have to spend on fixes? What can you do yourself, and what will you need to hire a professional for?
• Carrying costs. Consider what recurring costs you'll have to absorb while you own the home. That can include a mortgage, homeowners' insurance, property taxes, homeowners' association fees, and utilities.
• Closing costs. Even if you're paying cash or buying at auction, there will be fees.
• Your team. This includes tradespeople, a real estate attorney, and a Realtor.
You can't just buy cheap property, upgrade all of the usual suspects (kitchen, flooring, and bathrooms), and expect to reap huge profits. You need to study the market, find out what types of homes people are looking for, and find a property that you can turn into that "ideal" home. If you're using sweat equity and doing the work yourself, you may want to consider the value of your time. How many nights and weekends are you willing to give up for your flip.
Build Your Team: You don't necessarily need to start hiring; just be sure you've got the numbers of trustworthy electricians, plumbers, HVAC technicians, and so on that you can call if needed. To maximize the profits on a house flip, you need to own the property for as short a time as possible. The sooner renovations start, the sooner you can sell that home. If you need a general contractor, schedule an appointment right away, since they book jobs weeks, if not months, out.
Secure Financing: Paying cash for a home flip can save on closing costs and interest. In early 2021, nearly 60% of flippers used cash, though it’s not always an option for first-timers. If you have home equity, a cash-out refinance or home equity loan could fund the purchase, though both carry risks. Alternatively, an investment property mortgage is an option but comes with stricter requirements and higher rates. Comparing rates from multiple lenders can help you secure the best terms.
Purchase Property: Many house flippers use the 70% rule to determine the maximum they'll pay for a property. The idea is that you should pay no more than 70% of the home's value after repairs, minus the cost of the work.
Renovate Property: Sweat equity can help you get more cash out of the project. It's important to stay within your area of expertise. Shoddy repairs may be flagged during a home inspection or, worse, trigger a lawsuit from your eventual buyers. As the homeowner, you can save quite a bit by getting the permit yourself instead of through your contractor.
Market & List Home For Sale: Some house flippers choose to sell by owner, forgoing a listing agent (and their commission) in order to maximize profits. As with renovations, whether to go FSBO or work with a listing agent comes down to your priorities. Selling without an agent will save you that 2.5%, but it can also be time-consuming, and you can miss out on buyers willing to pay more. It's better to have more options.
Find A Flipping Market: When you're trying to make a profit buying and selling real estate, location could make the difference between a tidy sum and a big regret. A real estate agent who has experience working with investors can be helpful and may come in handy as a listing agent when it's time to sell. They'll know what's considered standard in a neighborhood, and have the latest info on comparable sales.
Fix & Flip Pros: The most obvious benefit of flipping houses is instant gratification. Rather than having to wait years to pay off the property and reap all the profits from your monthly rent check, you can enjoy immediate gains when flipping a house. And unlike the stock market, which can change in the blink of an eye, real estate markets are predictable. Overall, flipping is considered a lower-risk investment strategy.
Fix & Flip Cons: But there are considerable costs that come with flipping a home. Distressed properties, the types of properties that are ideal for flipping, may come at a lower upfront cost than, say, a brand new home. But repairs may require a significant investment, depending on the home's condition. Transaction costs can be high at both the buying and selling ends, which all investors need to consider. Another important thing to consider: the market itself.
RETURN ON INVESTMENT (ROI)
If you’re looking to earn rental income through your investment property, you will need to determine the property’s ROI. ROI is how much money you made divided by how much money you spent, expressed as a percentage.
Calculating your ROI involves the following steps:
- Estimate your annual rental income. This requires a bit of research. You can start by researching rent prices for similar properties in the area to understand what you could expect to rent your property for.
- Estimate your annual expenses. When calculating this, include taxes, insurance, maintenance, repairs and any homeowners association fees. Add your mortgage payments, including interest.
- Determine your net operating income (NOI). Calculate your NNOI by subtracting your annual expenses from your annual rental income.
- Determine your total cash investment. You can find this by adding together your down payment, closing costs and any upfront renovation or repair costs.
- Divide your NOI by your total cash investment. The result here will determine your ROI.
With so many variables to consider, there’s no single overall average ROI in real estate. It’s important to note that this average would depend on what part of the real estate market is being discussed, so while metrics are useful for predicting results, they are by no means a guarantee.
PROPERTY DEPRECIATION
One of the biggest tax advantages of owning a rental property is depreciation. Depreciation allows rental property owners to recover the cost of purchasing and improving a property by deducting a portion of its value from their taxable income each year.
Instead of taking one large tax deduction in the year you purchase or renovate a rental property, the IRS allows you to spread those deductions over the property's useful life. For most residential rental properties, this period is 27.5 years, allowing you to deduct approximately 3.636% of the building's value each year.
It's important to remember that only the value of the building can be depreciated—not the land it sits on. Depreciation begins as soon as the property is ready and available to rent, even if a tenant hasn't moved in yet.
Because rental property is considered an income-producing business, depreciation helps offset rental income and can reduce the amount of taxes you owe each year. You can continue claiming depreciation until you've recovered the property's depreciable value or until the property is no longer used as a rental, such as when it's sold or converted into your personal residence.
Key Takeaways:
- Depreciation is a valuable tax benefit for rental property owners.
- It allows you to deduct the cost of the building and qualified improvements over time.
- Most residential rental properties are depreciated over 27.5 years.
- Only the building is depreciated—not the land.
- Depreciation can significantly reduce your taxable rental income, helping you keep more of your investment earnings.
Property investing can be one of the most rewarding ways to build long-term wealth, but it is not a "get rich quick" strategy. Successful real estate investing requires careful planning, market knowledge, financial discipline, and patience. Every investment carries risks, from finding the right property and securing financing to managing renovations, tenants, maintenance, and changing market conditions. Building a profitable real estate portfolio doesn't happen overnight—it takes time, experience, and a well-thought-out game plan. Surrounding yourself with a skilled team of professionals, including a knowledgeable real estate agent, lender, contractor, property manager, accountant, and attorney, can help you make informed decisions, avoid costly mistakes, and maximize your return on investment. With the right strategy, realistic expectations, and expert guidance, real estate investing can become a powerful tool for creating long-term financial security and generational wealth.