Real estate investing is a great method to diversify your portfolio of investments. 

Home prices are significantly less erratic than those of securities, and real estate has no link with the stock market. Property owners can also take advantage of numerous tax breaks, which boosts their investment's return.

Last but not least, building a portfolio of rental properties in geographically diverse areas makes investors more resilient and able to weather numerous economic crises. 

Real estate assets (such as commercial real estate, single-family rental homes, apartment buildings, real estate wholesaling, real estate loans, and others) come in a number of forms, and the same is true with real estate investments.

Which approach is best for a particular investor relies on a variety of factors, including their degree of risk tolerance, the amount of control they desire over the asset, whether they are seasoned or novice real estate investors, the amount of cash they have available for a down payment, and the amount of cash flow they need. 

Here are some examples of different real estate investment methods.

1. Investing In Single-Family Rental (SFR) Homes.

The United States residential real estate market is one of the most effective engines for fostering intergenerational prosperity, and rental property is one of the most promising real estate investments, thanks to a combination of fixed-rate mortgages, gradual price increases, and tax incentives that encourage home buying.

After the housing meltdown of 2008, institutions and retail buyers started to see single-family houses as highly investable assets. With a market value of $4.6 trillion, they have since grown to become the largest asset class in real estate. In 2021, the SFR and build-to-rent sectors received an expected $45 billion in institutional funding, according to John Burns Real Estate Consulting.

Although there have been ups and downs in particular markets, as this chart from the Federal Reserve of St. Louis demonstrates, overall house values have improved.

Investors may employ leverage by borrowing from banks to finance assets that offer rental income (cash-on-cash) as well as capital growth over time. Monthly rental income assists in partially or completely covering the mortgage as the investor builds equity.

Real estate also guards against inflation, which over time diminishes the value of fixed mortgage payments.

Rental property is an essential part of a diversified investment portfolio because of its low correlation to the stock market.

2. House Hacking

The down payments on investment mortgages may be too expensive for some would-be investors. Through "house-hacking," buyers could hasten the process of building equity in rental properties.

Purchasing a home to live in and then renting out a portion of it is known as "house hacking." In this manner, individuals can use the rental money to lower their mortgage payments and occasionally even turn a profit. This so-called passive income is available to the house hacker to use any way they see fit, whether to pay off the mortgage, make a sizable purchase, or even put money down for a second property to increase their portfolio.

The investor has access to residential mortgages through home hacking, which has several benefits including cheaper interest rates than investment mortgages and a far smaller down payment.

3. Real Estate Flipping

Flipping involves making quick repairs to homes and then selling them. Since the flipper continues to make mortgage payments until the house is sold, the success of a flip is determined by the seller's profit over the purchase price and the speed at which the property sells. 

Flippers look for deals that are below market value, improve the homes to a sufficient extent that they can significantly increase the price, then sell the properties rapidly. The most desirable property for a flipper might be one in need of significant repairs, provided they can do it without going over budget.

Successful flippers have a system in place, including easy access to low-cost materials, a team that can complete work of a high standard at a reasonable cost, and a real estate agent who can sell a house quickly.

The drawback of flipping a home is that the seller will pay more capital gains taxes as a result than if the property were held for at least two years.  

4. The Live-In Flip

The live-in flip enables an investor to live in a fixer-upper while making improvements and then sell it for a significant, tax-free profit afterward. The live-in flipper uses the house while it is being renovated, even though they lose money for each month the house is in their possession.

They can use owner-occupied finance to live in a property they are treating as an investment if they can discover a home that is under market value or one where modifications can raise its value. 

The live-in flip can be a potent investing technique, particularly if the investor is eligible for low-interest loans like Veterans Administration loans. 

Gains up to $500,000 for a couple or $250,000 for an individual are exempt from taxes under the U.S. tax code when investors sell homes. For the Section 121 Exclusion to apply, the investor must own and occupy the home for at least two of the five years preceding the sale.

Some investors use the money they make from a live-in flip to buy a nicer property, to grow their portfolio, or use the money to buy a home without incurring debt. 

What is the live-in flip's drawback? Every few years, the investor must relocate while living on a construction site. And there's always the chance that the house has more significant issues than they initially thought.

Additionally, there is a chance that an investor will have to vacate while a live-in flip is ongoing. Depending on the circumstances of the move, you might be eligible for a partial Section 121 exclusion.

• Change in health 
• Job relocation 
• Unforeseen circumstances
• Military deployment

If an investor is compelled to make an early move, they should speak with a tax expert.

These are just some strategies for real estate investors. We’ll share more investing techniques in our next post so be sure to check our website for updates.