Which Real Estate Investing Route Should You Go?I see so many questions in the forums and in general from people just getting started and trying to figure out which route to go with investing. The problem is, it is almost impossible for anyone else to answer that for you. Reason being, no one knows what is best for you better than you do but usually because more so the answer depends on your goals and you may not even know those for yourself yet.

There are a million different ways to invest in real estate. Okay maybe not a million but there are so many ways that I could never list them all out. I probably don’t even know them all actually. There are investing methods that are right for you and the trick is to find them. I’m a big advocate of the best way to figure out your niche is to find what resonates best with you by letting the method find you rather than you find it. Your job is to do as much research as you can, try different things, and constantly push towards succeeding with something and eventually you will fall into a rhythm with your best niche.

What are the basics though? How do you know which avenue to start pursuing in order to learn more ways of investing, especially the less obvious ones? I think it makes the most sense to first look at the most general categories of investing methods, the ones you hear about the most. Start with one of those, continue to pursue that route, and you will gradually learn more and more about related options and you can tweak your system as you go from there.

General Real Estate Investing Methods

What are the most general methods? If I were to pick, I’d say the following categories encompass just about every method out there:

  1. Flipping
  2. Wholesaling
  3. Rental Properties
  4. Paper/Notes

Each of these general methods, and all of their associated more specific methods, accomplishes different things, offers different benefits, and requires different levels of involvement and risk. If you understand what each of these methods offer, you can choose the one that best fits your needs (and wants) and you can make that your starting point.

I’m going to break down the realities of each general method and then you can match which method most fits with your goals and comfort levels.

Understanding Each Method

My goal is to keep my explanation of each investing method very high-level. That is all you really need to get started anyway since complicating things will just cause you to overwhelm yourself. So I’m going to specify each explanation by including the purpose of each method, the upsides and downsides, the risks, and the involvement levels required.

1.       Flipping

Purpose: Flipping is the best way to get the most amount of income the fastest.

Upsides:

  • A lot of cash in a short amount of time
  • More ways for creative financing
  • Can be done in most markets

Downsides:

  • High tax penalties
  • Contractors can be difficult to manage
  • Risk

Risk level. High

Significant risk items: Unexpected repairs (can significantly time and budget), inability to resale

Involvement level: High

2.       Wholesaling

Purpose: Provides income with little money to start.

Upsides:

  • Little to no money required to start with high income potential
  • Can be done in any market
  • Doesn’t require management of contractors or tenants

Downsides:

Risk level: Low

Significant risk items: Potential legal hiccups depending on state laws and situation

Involvement level: Very high. In no way do I even consider this “investing method” actual investing. It is a job. It is not investing. I only mention it as a method because so many people see it as an investing method and the large majority wants to start their “investing” careers with wholesaling. But it’s not an actual method of investing. Be clear on that. You will gain an atrocious amount of excellent knowledge that you will be able to use when you do start investing and it is 100% related to real estate investing, so there is nothing wrong with it but realize it is a job and a means of acquiring capital that can be used for investing rather than actual investing.

 3.       Rental Properties

Purpose: Long-term passive income.

Upsides:

  • Significant tax benefits
  • Passive income versus active income, i.e. way less work

Downsides:

  • Income comes over a longer period of time in small increments
  • Can’t be done in all markets
  • Tenants can be really annoying and cause you to lose faith in humanity
  •  Financing can be more difficult

Risk level: Medium

Significant risk items: Tenant damage, property maintenance

Involvement level: Zero to High. Zero to low if you use a (good) property manager, low to high if you landlord the property(ies) yourself.

 4.       Paper/Notes/Liens

Note: I have no experience with investing in paper, notes, or liens. Therefore I have little information to fill in these blanks, so don’t take this one for gold. Any investors who have experience with these, please leave comments to help summarize this style of investing (or to edit my answers)!

Purpose: Passive income, typically over shorter amounts of time.

Read The Rest On BiggerPockets.

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Comments
  • Richard S.
    Reply

    Minimizing risk and maximizing profit is probably the most important feature realtors are looking for in investments. Essentially, any way you go it can be turned into black numbers. There are rules and fiscal responsibility which if followed can bring nice numbers to an account.

  • Dave
    Reply

    Great overview! Regarding wholesaling, I totally agree with your take. In fact, I council a lot of beginners interested in wholesaling to consider getting their real estate license and completing some agent transitions instead. They earn capital to invest, and also a ton of knowledge, but with (usually) more support and less risk. What are your thoughts? Again, great article!

    • Ali
      Reply

      We don’t work with wholesaling at all, but it certainly sounds like a good gig for anyone who is interested!

  • kaec
    Reply

    Honestly speaking, I was not aware of these real estate investing methods in detail but glad got an idea of how they can do wonders for an agent or for an investor. I am thinking a bit off and would like to go after a bit hybrid approach probably a mixture of all.

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