There are dozens of real estate investing strategies for a new investor; choosing which ones you think will work best for you can be daunting.
Most commonly, people are exposed to real estate when they buy a property and live in it, hoping to gain capital appreciation in the future when it comes time to sell, hopefully in a way that benefits you as an investor.
But, this can take a while before you are able to recognise gains and make such an investment worthwhile.
So, let's dive into five real estate investment strategies for investors in 2023.
Real estate investing, for many people, is buying a property and waiting for its value to appreciate.
But, in recent times, you don't have to own any equity in the underlying property to gain exposure to the real estate market; three of the five methods mentioned below require just an internet connection and a few hundred dollars, depending on the platform and strategy.
Tokenized investing is where instead of owning shares in a property like fractional investing, you digitize that share by minting them as tokens on a blockchain. This allows investors to take advantage of smaller minimum investments, lower transaction costs, and greater transparency.
This is dependent on the platform and its offerings. Tokenized property tokens can also be traded on secondary marketplaces.
The benefit of tokenized real estate investing is that it can provide access to the real estate market many people have been priced out of due to rising property prices. Blockchain technology makes property investing more affordable than traditional real estate investing.
Depending on which platform you invest with, you could receive regular rental payments for the properties you choose to invest in and a token pegged to the valuation of that particular property; that token is what you could, in theory, trade on secondary marketplaces.
Another benefit is that you invest in physical real estate without owning any property but still benefit from rental payments and price appreciation.
With many tokenized investing opportunities, you're investing in a fund that follows the price fluctuations of that individual property; the fund is what owns the real estate, not the investors.
Another huge benefit is that you could possibly take advantage of greater liquidity thanks to this technology as you can, in theory, buy or sell an investment at any moment, which removes the months-long process that traditional investors won't need to go through to sell a home.
Synthetic assets are similar to traditional derivatives; the latter financial product revolutionized how traders take advantage of additional value from assets such as equities.
But, thanks to blockchain technology, synthetic assets allow investors to trade any asset that pricing oracles can track.
This new technology is used for geographical trading areas such as neighborhoods or cities. So, essentially you can go long or short on areas like Manhattan or Miami.
The greatest issue with this is that the pricing feeds aren't backed by physical assets like tokenized real estate investing. These pricing feeds are created by collating various pieces of information built directly by the marketplaces or platforms offering such a service.
The one benefit of synthetic real estate trading is that no commitment is needed to manage a physical portfolio. Think of it like trading stocks but for geographical areas.
The BRRRR method stands for Buy-Refurbish-Rent-Refinance-Repeat. And when done successfully with careful management and budgeting, it can be an effective way of building a property portfolio.
The strategy involves looking for a "fixer-upper" property that can be bought for below value to refurbish the property using a short-term cash loan or financing to buy and refurb.
Once complete and you find tenants to start paying rent, you can refinance the property to go then and buy the second property and repeat the entire process.
An obvious benefit of this method is that it can quickly grow a property portfolio while continuously providing passive income from rental payments and the appreciating value of the property itself.
Some risks include going over your budget and needing more capital to finish the project, not finding tenants, this could keep any further refinancing plans on hold, or you can't refinance the property, meaning less capital for further property investments.
You also have the burden of managing the property portfolio and many tenants, which can bring a host of issues and extra payments.
House-Hacking is simply buying a home to live in and renting out any remaining rooms to cover the cost of the mortgage or to profit.
This is one of the savviest ways to invest in real estate while keeping those costs and your risk exposure lower than other property owners that pay the mortgage from their own pocket.
One of the greatest benefits of house hacking is that it can lower your living expenses by up to 40%. For many people, you should only spend between 30-40% of your monthly salary on rent. What other areas could you be investing this money in?
You could also get into the short-term vacation rental game with Airbnb, which is known to be more profitable and less burdensome with following up on rental payments and managing tenants compared to long-term rentals.
But with Airbnb being susceptible to seasonality, there is more security in renting out to longer-term tenants.
The first and biggest issue that most house-hacking wannabes come by is the startup costs involved with buying a property.
You'll also be taking on more risk than other methods mentioned in this article. With more traditional means of investing in real estate, like the BRRRR method or house-hacking, you're allocating larger sums of capital and time than you would in a tokenized investing, which requires significantly lower cash reserves and commitment.
If you want a detailed guide on how to develop a house-hacking strategy, check out this guide.
Real estate investment trusts (REITs) allow you to hold equity with many commercial, income-producing properties. One of the main benefits of a REIT is that it's completely passive once you buy into one.
REITs are a great way to gain exposure to real estate markets without the need to manage property and tenants. Consider these like real estate stocks, but they pay out distributions instead of dividends.
REITs typically pay out 90% of their income, but if they face economic adversity, the payout can often be lowered to cover rising costs or market hardship.
Because real estate investment trusts typically distribute 90% of their income to investors, they struggle to have enough cash flow to invest in future opportunities. New funds are often raised through debt financing and issuing new units (shares), which would dilute current investors.
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