Investing in real estate can be a high-risk, high-reward endeavor. Or, it can just be high-risk and leave you holding worthless property with nothing to show for it.
The goal of real estate investment is to maximize profit and get a “return” on that investment. By identifying investments that maximize Return on Investment (ROI), you can identify the right kind of investment opportunities that make money.
Here, we’ll discuss three kinds of broad investment approaches and which one offers better ROI depending on specific circumstances.
Investing in Individual Rental Properties
First, you can develop individual properties like houses for long-term rentals. This brings a lot of positives—for example, once you buy a house and repair it, you are creating long-term equity that can pay off in the long haul.
These properties can also provide a great ROI if the house can rent for a high monthly rate compared to the mortgage and cost of maintenance.
There is risk here, though. If you cannot rent the property (it sits vacant for months) then all costs come straight out of your wallet. And if anything goes wrong with the property that needs extensive repair, it’s on you.
Investing as Part of a Real Estate Investment Trust
Real estate investment trusts, or REITS, provide mechanisms for investors to minimize risk. These trusts are modeled after mutual funds in that they payout dividends based on investment and fund performance. So if you invest more and the real estate managed by the fund does well, then you make more money.
These funds are a bit more complex than individual properties, but they provide the security of letting you invest in real estate without having to manage that real estate. However, you do lose control in pricing and maintenance, and your payout is based on overall fund performance.
Buying and flipping homes can be extremely lucrative, but really risky. Flipping a home means buying a home cheaply, performing enough maintenance and upgrades to bump up the market price high enough to generate profit, and selling it as fast as possible.
Flipping a house requires a lot of money up front, both to buy the house and fix it up. And depending on the market, it can be incredibly hard to sell a house, meaning that any return will take a while to materialize (if it does at all).
However, with the right eye, flipping a house can result in a huge ROI, depending on the house, the price, and the market.
What Has the Best ROI?
There are a lot of factors that determine this. All things being equal, an individual property investment can produce more significant ROI than a REIT. But, this increased ROI comes with increased risk, so it isn’t a guarantee.
Following that, purchasing individual properties for rental purposes can provide more long-term ROI than house flipping… but smart, regular house flipping done right (and with the right market conditions) can provide huge short-term ROI—with a lot of associated risk.