Real Estate Investing Approaches

Investing in Real Estate can be one of the best and most predictable ways to build your long-term wealth. If you are just getting started it’s important to go through a process of self-discovery to determine an investment strategy works best for you. After you have spent some time assessing yourself to understand your risk tolerance, primary objective, skillset and knowledge base you can start figuring our which investment approach works best for you. There are many approaches and strategies available so I’m just going to cover the most common here.

Buy and Hold

The “Buy and Hold” approach is the simplest and most common way most people get started in real estate so I won’t spend too much time on this. This involves buying a property as your primary residence. Although many don’t consider your primary residence as an asset on your balance sheet it’s still a great way to start investing. This a low risk investment, allows you to build equity, enjoy tax benefits, get familiar with the home buying process and start learning about basic house maintenance. That experience will help if and when you decide to step into one of the other categories, e.g. “Buy and Rent”, “Fix and Rent” or “Fix and Flip”.

Buy and Rent

This approach is great for someone looking to build long-term wealth with relatively low risk. The “Buy and Rent” approach isn’t sexy, doesn’t have any TV shows (that I’m aware of) glamorizing it but I believe it is one of the best ways to build long-term wealth and a great way to get started in real estate investing.

“Buy and Rent” is basically buying a property (Condo, Townhouse, Single Family House) that is immediately ready to rent out. Some people call this “Turnkey” or “Move-in Ready”. This could be a brand new property, a property that is a few years old but in great condition or a house that someone has recently renovated. This could be a house that someone “Fixed and Flipped”. Of course you need to do your homework but with this approach you can acquire a property that is producing monthly cashflow (tenant rent), principle paydown (tenant rent), price appreciation as well as tax benefits.

This approach is relatively low risk because you’re not impacted by shifts in the market. If prices decline temporarily or the market suddenly becomes a buyer’s market you won’t be impacted at all since selling the property is not part of your short-term (or even mid-term ) strategy. See my blog posts “Why You Should Invest In Rental Properties” and “The Power of Leverage'“ for a deeper dive.

Fix and Rent

The “Fix and Rent” approach is one of my favorites but depending on the size of the project, could result in many of the same challenges as the “Fix and Flip” approach. This approach involves purchasing a property that needs some work, performing renovations then keeping it as a rental. This approach combines some of the benefits of the “Fix and Flip” approach in that you are instantly adding value with the renovations along with the benefits of the “Buy and Rent” approach since a tenant will be providing cash flow and principle paydown. You’ll also be able to enjoy the depreciation expense (since retaining ownership). Your risks are also mitigated since you will not be as dependent on market conditions compared to other investment strategies like “Fix and Flip”.

Of course, I must caution that you will run into the same challenges completing the renovations as with the “Fix and Flip” which is why I would recommend limiting the scope to cosmetic upgrades. I recently completed my first “Fix and Rent” project which had its challenges but ultimately was very rewarding. Here are the before and after photos of my project.

Fix and Flip

The “Fix and Flip” strategy is probably the most well known strategy due to the popularity of TV shows like “Property Brothers”, “Flip or Flop”, “Fixer Upper” and “Love It Or List It”. Although this strategy can result in large profits it’s not nearly as easy as these shows make it appear and is the riskiest approach on this list.

Conceptually this approach is simple. Buy a house, that needs a lot work, renovate the house and sell it for a profit. This approach works best when you can purchase the house below market rate and if you have trusted contractors who are ready to start right away and charge reasonable prices. Unfortunately most people don’t have the connections, experience, knowledge or skillset to complete quality renovations, within a reasonable amount of time and stay within a budget that will result in a significant profit when the house is sold.

Based on first hand experience I found that it is extremely difficult to find reasonably priced, reliable contractors who perform high-quality work. So what often happens is people who aren’t professionals end up cutting corners. They’re basically forced to when their cost starts ballooning. This results in a lower quality renovation which then makes it difficult to sell at the price you were planning.

This approach is high risk because it’s not only dependent on several contractors to perform the work but it’s also highly dependent on the housing market. If the market suddenly shifts while you are completing your renovation you may have a difficult time selling the property (at no fault of your own). The “Fix and Flip” approach can be very lucrative but it’s much higher risk and requires a much greater skillset than the others in this list.