Choosing what type of investment property you should purchase can be a challenging question. With a quick google search you’ll find articles pointing you in every direction about what the “best” type of investment is. The truth is, there is no one type of investment that is the “best”. Real Estate in general is a powerful tool if you use it right. You can make money, build wealth and create freedom for yourself through real estate in many different ways.

There are a number of questions you need to answer before you make the decision on which type of property is best. Read my blog post about getting started in real estate investing to answer these questions and best prepare yourself to make a decision on which property will be the best fit for you.

Once you have laid this foundation around your financial situation, your time commitment, and you have set goals in mind for what you want to accomplish with your investment journey, then you can begin to review the different opportunities and determine which option will fit best with your situation and goals. Below are some of the best investment properties for early investors:

house hack

Best for investors who:

Want to purchase with little to no money down
Have the ability to or want to live in your investment property
Don’t have time or experience to do extensive renovations
May be open to doing minor updates
Want to live inexpensively and reap the benefits of appreciation and wealth building through Real Estate

House-hacking is when an investor purchases a multi-unit investment property (2-4 units) with the intention to live in it and collect rent from the other units. Often times the rent collected from the other unit(s) can cover most or sometimes all of your expenses so you can live for very little expenses. Additionally, you have the pay down on your mortgage and your property is likely to increase in value every year - offering several financial and tax benefits to this option. Once you decide to move out, you can rent out the unit you previous occupied and now you have a cash-flowing investment.

Another benefit to house-hacking is that this type of purchase can be done on a conventional or FHA loan with as little as 3.5% down. The house-hack is a great investment strategy and comes with many benefits. This is the strategy that got my husband and I started in investing, which ultimately grew our portfolio to over $11M in real estate holdings. That said, I’m not biased to this strategy and it’s not for everyone, there are many other wonderful options to get started. Let’s take a look at some others…

buy and hold

Best for investors who:

Have 20-25% saved to make a purchase
Want a “set it and forget it” investment
Want to earn passive income each month
Want to benefit from the various advantages of owning rental property; pay down, appreciation, tax advantages, and cash flow

If living in the property isn’t an option for you, a long term buy and hold might be better fit. It means just what the name states - it’s where you buy a property, and hold onto it as a rental property. This can be done with a single family home or a multi-unit. For first time investors, I generally recommend 1-4 units.

The benefits with both a house-hack or buy and hold purchase are endless. A crowd favorite with a buy and hold is the passive income. Once your purchase has closed and you have the property rented, you get to collect rent each month. Assuming you’ve done your homework before making a purchase, the rental income should cover all your expenses to own the property plus 10-20% to put aside for repairs, maintenance and vacancy, and still provide you with left over cash to put in your pocket — if you’re smart you’ll save this cash for your next investment purchase! Let’s not forget the many other advantages of owning a rental property including the rental income paying down your mortgage each month, natural appreciation of the property value, and tax advantages to owning real estate and treating it like a business.

FIX AND FLIP

Best for investors who:

Would like to earn returns on their investment quickly
Have time and energy to put into renovations
Risk tolerant & understand the market today and where it is heading
Are willing to wait for the right deal to make a purchase

The Fix and Flip is a common phrase - it’s when you purchase a property (ideally significantly under market value), renovate and re-sell. Generally speaking, I recommend a fix and flip for investors who have a flexible schedule or are willing to put in time towards their investment. Even if you plan to hire all the work out to a contractor, this type of project tends to be more hands-on.

The benefit of a fix and flip is you can earn a profit in addition to receiving all of your invested capital back quickly (3-12 months depending on how extensive the renovations are), therefore you can recycle those funds into another deal. If you intend to do a fix and flip as your very first investment, I recommend working with a mentor or consultant who can help you double down on your analysis and finding the right deal, and not just a realtor. Although some realtors do have a focus on investment properties, most don’t have the experience analyzing deals or helping clients through the various other aspects of a flip like financing, contractors, dos and don’ts. Speak with a professional in the industry who is known for assisting investors and make sure you do your homework before hiring them. If you’re looking for a credible team to support your fix and flip, Team West Edge works almost exclusively with investors can help you - reach out to us today for a free consult call!

Short Term Rental

Best for investors who:

Have 10-20% saved to invest
Want a higher monthly income in addition to other long term real estate benefits
Have the time to contribute in the initial stages to get the property set up
May want to use their rental for their own enjoyment

Short term rentals are just that - short term - we really aren’t testing your knowledge with these names! Typically short term rentals have guests that stay for 30 days or less. You may be thinking Airbnb or VRBO - which are two great options for short term rentals, but there are other options as well, like traveling nurses or corporate housing.

Short term rentals have many of the same benefits as buy and hold properties, and in most cases you can earn more in monthly cash flow which is a major appeal to many investors. That said, restrictions are getting tighter in many areas for short term rentals so it’s important you do your research or work with a professional who understands what to look for in your market.

The other major difference between short and long term rentals is the amount of hands-on work. Long term rentals typically fall into the category of providing passive income, while short term rentals are more often known as active income producers - meaning you will need to spend time and energy to set up the property and run the rental to make money. Of course, there are always ways to hire out the work to a third party and create passive income with short term rentals. Regardless, this is a great option for early investors to reap the many benefits of owning real estate and grow their net worth.

No matter what option works best for you, working with a mentor, coach, or industry professional can make all the difference. Want to know more? Let’s chat about your goals and make a plan for your investment journey!

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