Real estate has attracted people looking for wealth-building opportunities for generations. Anyone who has written a rent check or bought a building knows that real estate can produce value again and again. Christopher Graeve has built his career upon this fact.
Just as there are different forms of real estate, there are different ways to invest in real estate. An investor’s resources, personal goals, and interests influence choices about how to approach real estate investing.
Main Types of Real Estate Investments
The major categories are fix-and-flip, rental homes or multi-family buildings, vacation rentals, commercial real estate, REITs, real estate crowd funding, and tax lien and tax deed investing.
Chris Graeve has become an expert at fix-and-flip real estate investing. Also known as house flipping, this method is a short-term investment. Investors expect to sell the property at a profit within 12 months or less.
Success in the fix-and-flip business depends on identifying homes below market value, rehabilitating them quickly, and finding a buyer right away. Because many aspects of the investment need to be done right, experienced real estate professionals or contractors are good candidates for this form of real estate investment.
A person without any house-flipping experience could still pursue a project, but a partnership with an experienced home rehabber or contractor would improve the odds of success. Lenders look for experience with house flipping when considering loan applications.
House Flipping Math
Knowledge of local real estate markets is essential for finding distressed properties with value potential. An investor must purchase a property in a neighborhood that will demand a much higher price once the home is fixed up. The difference between the purchase price and sale price must be large enough to cover expenses and produce a profit.
A quality fix-and-flip investment should result in a 20% return. The project depends on successfully calculating the cost and timeline for rehabilitation. Other costs include the purchase price, financing costs, holding costs, and selling costs.
2. Residential Rental Property
Unlike house flipping, rental property investing is meant as a long-term pursuit. Investors typically intend to hold the property for at least five years and often for decades.
Rental investing has some qualities that make it a good choice for beginners. They don’t have to overcome the challenges of getting everything right and on budget within a short timeline like house flippers. Although Christopher Graeve focuses primarily on fix-and-flip opportunities, he also engages in rental investing because it has good value to offer.
Investors could realize long-term returns of about 8%. Rental revenue and growing equity represent the sources of profit. On the expense side, investors need to cover costs for financing as well as ongoing bills for utilities, insurance, property taxes, and sometimes homeowners association fees.
Common Challenges of Rental Investing
The vacancy rate also known as the occupancy rate drives the profitability or lack thereof for rentals. Units sitting empty mean that rent is not coming in. Ideally, units will only be empty less than 5% of the year. Property damage, unpaid rent, and eviction costs also chip away at profits.
Falling real estate prices present another potential risk. If the value of the property declines, then equity is degraded alongside resale value. Long-term investors are always hoping for their properties to appreciate, but it’s not always easy to predict long-term values in a specific market.
3. Vacation Rental Investing
A vacation rental is a home, condo, or multi-unit property located close to popular tourist attractions, on a waterfront, or in another area desired by vacationers. An investor often vacations at the property as well but rents it out by the day, week, or month when not present.
Owners can charge much higher rates than a regular residential rental but can still take advantage of rental property deductions. The potentially higher revenue pays the mortgage, unless the person bought with cash, and covers other expenses.
Vacation Rental Expenses
Expenses for vacation rentals will likely run higher than residential rentals. Property management companies are usually retained because owners might not live nearby or want to deal with day-to-day issues.
An owner could outsource tasks like marketing, rent collection, cleaning, and maintenance to a professional manager. Property management costs range from 15% to 30% of rent.
Property taxes and vacation rental insurance might run high as well. Average annual insurance costs reach between $2,000 and $3,000.
A vacation rental investment is accessible for both new or veteran investors. A new investor might have an easier time getting a loan for a vacation rental when planning to occupy the property part time.
Vacation rentals represent a buy-and-hold investment like residential units. Returns on investment average between 9% and 12%. Issues such as off-season vacancies will cut into profits.
4. Commercial Real Estate Investing
Commercial properties include offices, retail, restaurants, warehouses, and industrial locations. The commercial investment arena calls for substantial real estate experience. These are long-term investments of at least 5 years.
Business owners also invest in properties for their own purposes. For example, a businessman like Chris Graeve might choose to buy an office property. Ownership bestows control over some costs and enables potential profit upon the sale of the building. Average returns after holding a commercial property for 20 years equal about 9.5%.
Commercial Real Estate Financing
The money to buy commercial property could come from private investors, SBA loans, or banks. Costly commercial appraisals will be needed to initiate financing. Loans could have fixed or variable rates of 6% to 10%. Down payments will need to be at least 20% to 25%
Commercial tenants often sign 3 to 5 year leases. The longer terms create greater revenue stability. A collapse of market rent rates or the loss of tenants presents substantial risks to the investment.
Commercial properties will have higher maintenance and repair costs. They are larger than houses, have more complex HVAC systems, and parking lots. Utilities will cost more than residential properties as well. Owners must also buy liability insurance in addition to property insurance. Property taxes are an ongoing expense, and owners often choose to hire property managers.
5. Real Estate Investment Trusts
A real estate investment trust, or REIT, sells people shares of real estate investments managed by a company. It’s a passive investment that does not require people to do anything except buy shares. REITs specialize in various forms of property and offer investors a wide variety of opportunities. REITs pay dividends, and shares are sold on exchanges like stocks.
6. Real Estate Crowd Funding
With this approach, a person pools resources with other investors to buy a property or property portfolio. This allows someone to have a stake in a property that would otherwise be financially out of reach.
Risks arise when people fail to make loan payments to investors. When things go well, investors receive returns of about 6% to 10%. Investment opportunities come in either short or long-term forms.
7. Tax Lien and Tax Deed Investing
This real estate niche allows cash investors to earn a return on their money and possibly gain ownership of a property well below market rate. When local governments place properties with unpaid taxes for sale, people can buy the tax liens or tax deeds.
Property owners have a few months or years to repay the tax lien owner. The payment will include interest and penalties that produce a return for the investor. If the tax lien or deed owner is never repaid, then the property transfers entirely to the investor.