In our previous article we discussed five common strategies that have allowed people to achieve wealth and financial freedom through real estate investing.
Today, we are going to continue detailing five more strategies that you can use for your own investments.
Remember that some of these categories have some overlap with one another. These aren’t hard and fast definitions, just loose explanations of the mindset and methodology of several different types of real estate investors.
When trying to scale your real estate portfolio, it can be wise to test out some strategies you may not have implemented yet, as there are always gaps in the market:
6. Long Term or Institutional Investors:
This is perhaps the most old school and time consuming, yet proven method, for earning passive wealth through real estate.
I’ve included two types of investors into this category as they behave similarly, just at completely different segments of the market.
The first would be long term rental property investors. These are usually a single individual, husband and wife team, brothers, or some other small kind of partnership. This kind of real estate investor buys cash flowing properties in their market(s) of choice and sits on them for a long time – often their entire lifetime.
This isn’t the method to get the absolute most for your dollar, as your return on equity may not be maximized, but it’s highly effective over a large enough portfolio.
These are usually people with their own career and a steady income stream separate from their real estate investments. It may take them many years to amass a large portfolio, as they have to save up for the down payments for the first few properties, but eventually their equity and cash flow increases to the point that they can leverage their existing investments to purchase new ones.
The majority of the time, this kind of investor sticks to residential investments only.
Next, we have the institutional investor. The institutional investor is usually a very high net worth individual, investment group, or family office. They will buy very expensive real estate assets with positive cash flow and sit on them for years. They want a consistent return on their investment and have a lower risk tolerance, so may be willing to accept a slightly lower return, with the knowledge that the return isn’t going anywhere for years to come.
An example of what type of assets these investors might purchase would be a new construction 200-unit multi-family development. The developer constructs the property, then stabilizes it by renting to or near full occupancy. Once the building is up and running, the developer sells to the institutional investment groups who may hold on to it for many years, depending on their investment strategy.
7. Office:
Another popular strategy that has seen increasing amounts of investor attention over the past 40 years is in office real estate. This is a different animal than the residential investments most people start off with, and thus require a different game-plan.
Office will often have a much higher vacancy rate than its residential counterpart, no matter what the market. Even highly desirable office space may sit vacant for a few months. This is normal, but if you got your start in a low vacancy market owning residential apartments, it might be easy to get a little spooked if you don’t know this going in.
Lease terms may be longer, depending on the type of office. When renting to larger companies in more desirable office, you’ll typically have longer lease terms and more tenant responsibilities.
For smaller, affordable office space that might be rented to small local businesses, you may have similar annual leases to those you might see in residential real estate. Some things to keep in mind when investing in office space is you need to learn to monitor the credit-worthiness of businesses as opposed to just individuals.
Another important one is to make sure you stagger the timing of your lease renewals. It can be devastating to have multiple tenants all vacate at once, especially if it may take some time to fill a single vacancy.
8. Retail:
Many of the broad strokes of retail are similar to office, but there are a couple key differences. Accessibility to major streets/routes is important for both, but absolutely vital for retail. The same is true of the amount of cars that pass by per day. An office park may be nestled in a tucked away area, so long as it is accessible from major routes, but visibility is extremely important for retail space. Stay away from properties where the traffic count per day is less than 25,000.
9. Mobile Home Parks:
This type of investment has really caught on over the past ten years. The need for affordable housing is extremely high today and mobile home parks provide a form of housing that is within reach to most people. They built up a negative reputation, perhaps partially for good reasons, but now the stigma has caused it to be next to impossible to develop and set up a new mobile home park. This makes the existing stock more valuable as more eyes are looking for mobile park opportunities.
A typical mobile home park will include some rented units and some homeowner units. The property owner will either rent a pad space to the owner of their own mobile home, or rent a mobile home they own to a tenant. Property ownership tenants tend to be much more stable, but most parks tend to include some combination of the two. Look for parks with a higher percentage of homeowners and make sure that the utility lines are in good shape, as these are the owner’s responsibilities.
10. Short Term Vacation Rentals:
These have become more and more popular in recent years due to the success or AirBNB, VRBO, and their competitors. The idea here is to find a place where people like to go on vacation, or a city that is highly travelled for business or other reasons. As the name implies, you’re looking for a place that has people coming and going that want shorter stays. Your direct competition, other than other short term rental owners, would be the lodging/hotel industry. For that reason, we like to “beat the hotel” in some way or another when we invest in short term rentals.
Your rental needs to have some kind of key advantage that will make it more desirable than traditional lodging. Some short term rental owners live on the property and can thus give excellent service as a host, but as investors that can’t work for us. We like to look at two things: location and affordability. Perhaps you’ve found a lakefront property in a popular vacation destination where the nearest hotel is next to an ugly highway exit. Just by the nature of your location, you have a competitive advantage the hotel can’t really respond to.
When thinking about affordability, there are two options: the value option or the luxury option.
The value option involves giving your customers a better value than the hotel by charging lower nightly rates, or charge comparable rates for a larger space of the same or higher quality.
The second is the luxury vacation model, where you build or renovate one-of-a-kind single family villas that wealthier families will rent out for a week or more at a time. When the COVID pandemic hit in 2020, we saw many people worrying about their more affordable short term rentals, but we were in great shape. We actually had our next year’s Summer booked solid in the middle of the pandemic. This is because very wealthy people will not cut back on their travels regardless of an economic downturn. You just need to make sure you’re building or investing in a property that actual very wealthy people would want to stay in. Get in touch with a broker in your area who deals with those kinds of clients and they can help steer you in the right direction.
In our previous article we discussed five common strategies that have allowed people to achieve wealth and financial freedom through real estate investing.
Today, we are going to continue detailing five more strategies that you can use for your own investments.
Remember that some of these categories have some overlap with one another. These aren’t hard and fast definitions, just loose explanations of the mindset and methodology of several different types of real estate investors.
When trying to scale your real estate portfolio, it can be wise to test out some strategies you may not have implemented yet, as there are always gaps in the market:
6. Long Term or Institutional Investors:
This is perhaps the most old school and time consuming, yet proven method, for earning passive wealth through real estate.
I’ve included two types of investors into this category as they behave similarly, just at completely different segments of the market.
The first would be long term rental property investors. These are usually a single individual, husband and wife team, brothers, or some other small kind of partnership. This kind of real estate investor buys cash flowing properties in their market(s) of choice and sits on them for a long time – often their entire lifetime.
This isn’t the method to get the absolute most for your dollar, as your return on equity may not be maximized, but it’s highly effective over a large enough portfolio.
These are usually people with their own career and a steady income stream separate from their real estate investments. It may take them many years to amass a large portfolio, as they have to save up for the down payments for the first few properties, but eventually their equity and cash flow increases to the point that they can leverage their existing investments to purchase new ones.
The majority of the time, this kind of investor sticks to residential investments only.
Next, we have the institutional investor. The institutional investor is usually a very high net worth individual, investment group, or family office. They will buy very expensive real estate assets with positive cash flow and sit on them for years. They want a consistent return on their investment and have a lower risk tolerance, so may be willing to accept a slightly lower return, with the knowledge that the return isn’t going anywhere for years to come.
An example of what type of assets these investors might purchase would be a new construction 200-unit multi-family development. The developer constructs the property, then stabilizes it by renting to or near full occupancy. Once the building is up and running, the developer sells to the institutional investment groups who may hold on to it for many years, depending on their investment strategy.
7. Office:
Another popular strategy that has seen increasing amounts of investor attention over the past 40 years is in office real estate. This is a different animal than the residential investments most people start off with, and thus require a different game-plan.
Office will often have a much higher vacancy rate than its residential counterpart, no matter what the market. Even highly desirable office space may sit vacant for a few months. This is normal, but if you got your start in a low vacancy market owning residential apartments, it might be easy to get a little spooked if you don’t know this going in.
Lease terms may be longer, depending on the type of office. When renting to larger companies in more desirable office, you’ll typically have longer lease terms and more tenant responsibilities.
For smaller, affordable office space that might be rented to small local businesses, you may have similar annual leases to those you might see in residential real estate. Some things to keep in mind when investing in office space is you need to learn to monitor the credit-worthiness of businesses as opposed to just individuals.
Another important one is to make sure you stagger the timing of your lease renewals. It can be devastating to have multiple tenants all vacate at once, especially if it may take some time to fill a single vacancy.
8. Retail:
Many of the broad strokes of retail are similar to office, but there are a couple key differences. Accessibility to major streets/routes is important for both, but absolutely vital for retail. The same is true of the amount of cars that pass by per day. An office park may be nestled in a tucked away area, so long as it is accessible from major routes, but visibility is extremely important for retail space. Stay away from properties where the traffic count per day is less than 25,000.
9. Mobile Home Parks:
This type of investment has really caught on over the past ten years. The need for affordable housing is extremely high today and mobile home parks provide a form of housing that is within reach to most people. They built up a negative reputation, perhaps partially for good reasons, but now the stigma has caused it to be next to impossible to develop and set up a new mobile home park. This makes the existing stock more valuable as more eyes are looking for mobile park opportunities.
A typical mobile home park will include some rented units and some homeowner units. The property owner will either rent a pad space to the owner of their own mobile home, or rent a mobile home they own to a tenant. Property ownership tenants tend to be much more stable, but most parks tend to include some combination of the two. Look for parks with a higher percentage of homeowners and make sure that the utility lines are in good shape, as these are the owner’s responsibilities.
10. Short Term Vacation Rentals:
These have become more and more popular in recent years due to the success or AirBNB, VRBO, and their competitors. The idea here is to find a place where people like to go on vacation, or a city that is highly travelled for business or other reasons. As the name implies, you’re looking for a place that has people coming and going that want shorter stays. Your direct competition, other than other short term rental owners, would be the lodging/hotel industry. For that reason, we like to “beat the hotel” in some way or another when we invest in short term rentals.
Your rental needs to have some kind of key advantage that will make it more desirable than traditional lodging. Some short term rental owners live on the property and can thus give excellent service as a host, but as investors that can’t work for us. We like to look at two things: location and affordability. Perhaps you’ve found a lakefront property in a popular vacation destination where the nearest hotel is next to an ugly highway exit. Just by the nature of your location, you have a competitive advantage the hotel can’t really respond to.
When thinking about affordability, there are two options: the value option or the luxury option.
The value option involves giving your customers a better value than the hotel by charging lower nightly rates, or charge comparable rates for a larger space of the same or higher quality.
The second is the luxury vacation model, where you build or renovate one-of-a-kind single family villas that wealthier families will rent out for a week or more at a time. When the COVID pandemic hit in 2020, we saw many people worrying about their more affordable short term rentals, but we were in great shape. We actually had our next year’s Summer booked solid in the middle of the pandemic. This is because very wealthy people will not cut back on their travels regardless of an economic downturn. You just need to make sure you’re building or investing in a property that actual very wealthy people would want to stay in. Get in touch with a broker in your area who deals with those kinds of clients and they can help steer you in the right direction.
