Most people who get into real estate investing end up choosing among three routes: REITs, buy and hold, or fix and flip. None of them is the wrong answer. Each can make money, and each asks for something different in cash, time and tolerance for risk.
Here’s how they compare.
Real estate investment trusts (REITs)
A REIT is a company that owns, operates or finances real estate. That might be apartment buildings, shopping centers, storage facilities, or mortgages. Simon Property Group and Public Storage are two of the best-known names.
You can buy shares of an individual REIT, or buy a fund or ETF that holds many of them. Either way you get exposure to real estate for the price of a single share, with no tenants and no repairs.
REITs are required to pay out most of their taxable income as dividends, which is why many investors hold them for income. Dividends can still rise or fall, and share prices move with the market, so they aren’t risk-free.
Best for: beginners, and anyone who wants real estate in a portfolio without owning property directly.
Buy and hold
Buy and hold means purchasing a property and keeping it, usually to rent out. You collect rent month to month, and over the years the property may gain value as well.
It takes more money and more work than buying shares. You’ll need a down payment, a plan for maintenance, and either the time to manage tenants or the budget to pay someone who will. In return you own a real asset and control how it’s run. Our post on keeping good tenants covers the management side.
Best for: investors who want steady income and are comfortable with a long time horizon.
Fix and flip
Fix and flip means buying a property that needs work, renovating it, and selling it for more than you have in it. It’s a short-term strategy, and the profit arrives all at once at the sale.
It’s also the least forgiving of the three. Before you buy, you should know:
- What repairs are needed and what they will cost
- How long the work will take
- What the finished house should sell for
- How long you can afford to carry it if the sale is slow
If you can answer those with confidence, flipping can be very profitable. If you can’t, the carrying costs add up fast. Our fix and flip tips for new investors go into more detail.
Best for: hands-on investors with a reliable contractor and a clear budget.
So which one?
If you’re brand new and want to start small, REITs are the easiest way in. If you want income and ownership, look at buy and hold. If you have the time, the team and the appetite for a project, a flip may suit you.
Plenty of investors do more than one. And if your plan involves buying property, you’ll need capital. Sachem Lending makes fix and flip loans and other short-term real estate loans to new and experienced investors. Give us a call to talk it through.
