8 ways to invest in residential real estate

There's more ways to invest in residential real estate than many people think. The most common being purchasing a rental property but there are a plethora of options which each have differing levels of risk. They also vary in that some are more active investments such as running a rental property while others are more passive, such as investing in a REIT (Real Estate Investment Trust). We will cover them all briefly here. In later sections we will focus more on the active side of real estate investing as this is where you can use leverage to grow your real estate portfolio.

Some people may consider buying and living in your principal residence a form of investing in real estate. Although you will benefit from future appreciation, you're still paying the entire mortgage and other expenses. For that reason, most investors do not consider their principal residence as a real estate investment.

House Hacking

But, there is a form of this that many investors would call a true real estate investment. That's house hacking. House hacking comes in many forms. At the simplest, it's renting out the basement of your house. It could also be renting out rooms or running a part of your house as an STR (short-term rental), all while living in the home yourself. The idea is to have all or a big chunk of your mortgage payment paid by rental revenue from tenants.  Many real estate investors get their start in this way since it solves the problem of shelter. This helps the investor save faster so that they can purchase their next property. It's a great way to buy your first rental property.

Buy and Hold

Buy and hold could include buying and holding a parcel of land or buying, holding and renting out a residential property. Generally buy and hold residential properties already have everything in place, require minimal repairs and in many cases already have tenants. This could be more a turnkey solution to real estate investing if you're looking for something that requires minimal work aside from maintenance and leasing. The buy and hold method is traditionally one of the most popular and sound ways of investing in the long term.

BRRRR (Buy, Renovate, Rent, Refinance, Repeat)

The BRRRR method is one of the most popular and potentially lucrative techniques to use when investing in real estate. The first step is to find a property which is undervalued. This could be due to the property not being cared for and requiring repairs or just needing new floors and a coat of paint. Another reason could be that the property is being underutilized. For example, it's a single family home which could easily be zoned as a duplex if the necessary amenities were added. Once you find something that fits this criteria, the next step is to carry out the required renovations. You'll be looking for an uplift in appraisal value here, so for every dollar you spend in renos, you should aim to get more back in home value increase. The aim is to get as much returned from your refinance as possible but within limits so that you're rents still cover the mortgage and operating expenses. Using this technique you may sometimes experience a "home-run" where you're able to pull out all the money you originally put down on the property. But that's not always the case and even half of that can be a huge win.

Flipping

Flipping a home involves finding under valued properties, applying some sweat equity in the form of renovations and repairs then turning around and selling it as quickly as possible. The key to a successful is to understand the market you're flipping in. Estimating how long the flip will take, how much money it'll require and the ARV (After Repair Value) are crucial components to get right in this type of transaction.

Wholesaling

Wholesaling real estate involves finding properties where the owners are willing to sign an agreement which lets the wholesaler buy the property at a specific price. The wholesaler will then find a buyer who's willing to pay more for the property than the contracted price. When the buyer is found, the wholesaler will "assign" the contract to the new buyer, securing their profit via the difference in prices or a set fee depending on the details of the contract.

Rental Arbitrage

Rental arbitrage is when you rent a property and sub-lease the units or rooms. This a method used solely to generate cash flow by arbitraging the rental market. Multiple strategies can be used for sub-leasing such as running it as a short-term rental.

Multi-Family Real Estate

Multi-family real estate could be considered any property with at least 3-4 residential units. This could be in the form of smaller multi-family homes or larger apartment complexes. Strategies such as the BRRRR method can be a smart way to get into these types of properties in order to enhance utilization of the property and force appreciation. Although the initial capital requirements for multi-family properties will be much higher, investors benefit from scale since the larger the property, the lower the cost per unit.

Passive Methods

REITS

Real Estate Investment Trusts (REIT) are generally a collection of income generating properties traded on a stock exchange. These could be commercial, industrial, residential or mixed. REITs provide a dividend yield, capital appreciation in the shares you own and easier liquidity than a traditional real estate investment. Investors looking for passive income from the real estate sector may be interested in investing in these. The downsides of investing in REITs is you're giving up the leverage you would find in traditional real estate investments.

Fractional Real Estate

Similar to investing in a REIT, fractional real estate allows investors to share in the purchase of a single property. In return, they receive their share of cashflow generated by the property.

With fractional real estate, if you purchase 10% of a fractional property, you're entitled to 10% of the cashflow and 10% of the appreciation.

In a traditional real estate transaction where you take on mortgage debit, you could put 10% down on a property and own 100% of it giving you 100% of both cashflows and appreciation.

In the next section we'll talk about why active real estate investing is such a powerful force because of the leverage it provides.