Are you interested in property investing but unsure how to start? Today, there are many strategies out there, some are more popular than others. In this guide, I will break down the top five strategies that experienced property investors use when investing in the real estate market. We'll look at the basics of each approach and discuss their pros and cons. By the end, you'll have a better understanding of which strategies are the best fit for you and your portfolio.
1. BUY AND HOLD
The buy and hold strategy is one of the most well-respected strategies in real estate. It involves purchasing a property, renting it out, and holding onto it for an extended period of time, ideally long enough for it to significantly appreciate in value.
This is a great strategy for investors looking to generate passive income over time, thanks to the steady stream of cash flow you get from the property’s rent. Additionally, as property values in Chicago rise, it’s very possible to turn an extra profit upon selling the property in the future.
There are a few things to keep in mind if you’re considering the buy and hold strategy in Chicago. First, you need to choose the right property. It’s crucial to focus on properties in areas with high demand for rentals (which I can help you locate). For this strategy, it’s also extremely helpful to stick to properties that are already in good condition to avoid significant repairs or renovations in the near future.
Once you’ve found the right property, managing it effectively is a major piece of maximizing your returns. Personally, I manage all but one of my properties myself. I believe this is the best way to get started if you have the time. If you know that won’t work for you, however, I can connect you to a property management company that will handle tenant screening, rent collection, and property maintenance. These are quite helpful in making sure your property stays profitable and your tenants stay happy. I’ve also found that it’s a good idea to regularly check in with the property manager, as they tend to pay most attention to buildings whose owners follow up on a regular basis.
2. VALUE INVESTING
Another popular approach to property investing is value investing. In many ways, this is the opposite of the buy and hold strategy: here, you look for properties that are undervalued or that have the potential to increase in value, and you sell them as soon as you can make a profit. It’s common to seek out properties in up-and-coming areas or buy properties that could use some renovations and upgrades.
In Chicago, value investing is a particularly lucrative option, since the city is developing and growing nonstop. Areas like East Garfield Park, West Humboldt Park, and Hermosa that have seen a lot of gentrification in recent years are ideal areas to look for undervalued properties. McKinley Park and Brighton are other areas with strong potential for growth.
A major part of value investing is finding properties whose price doesn’t match its value, so it’s important to have a good understanding of the local real estate market. I am always happy to have conversations with you about areas that investors are interested in and how to identify the value of a property.
Fortunately, value investing is a relatively low-risk approach to investing. By purchasing undervalued properties and those with growth potential, you’re essentially buying them at a discount. Even if the value doesn’t increase, you likely won’t lose a significant amount of money.
Value investing comes with some risks, just like any investment strategy. Unexpected costs sometimes arise in the renovation process, or you may find that the property is difficult to sell or rent out. However, with research and planning, value investing can be a great way to build a profitable property portfolio.
3. PROPERTY FLIPPING
If you’re looking something with higher risk but higher reward, property flipping is for you. It involves buying a property, making renovations and improvements, and then quickly selling it for a profit. As long as you understand the associated risk, it can be incredibly profitable. Chicago is also a great city for property flipping, thanks to its vibrant real estate market.
The first half of a successful flip is careful research. Analyzing the local market, the property’s condition, and the potential resale value are all crucial—you need to make sure that you’re getting a good deal with a potential for profit. Additionally, throughout the entire process, timing is essential. To maximize profit, you want to sell the property as quickly as possible, which means pricing the property competitively and marketing it effectively.
The actual renovation process is the second half. To be successful, you need to improve the property in a strategic way that adds value and attracts potential buyers. Upgrades like a new kitchen, adding more bathrooms, and improving landscaping are all excellent choices. The goal is to make your property look similar in layout and features to nearby properties so that they can drive the price your buyers are willing to pay.
While flipping properties can be a great investment strategy, it’s important to understand the risks involved. The biggest risk is the cost of the property’s rehab, which is always a huge unknown. However, with enough strategy and research, and a good, reputable contractor, it’s very possible to consistently turn a profit. If you’re willing to put in the time, do the research, find a reputable contractor, and put in the work, property flipping can be one of the best ways to profit quickly in Chicago’s real estate market.
4. MID-TERM RENTALS
Mid-term rentals are a great way to easily make passive income through a property investment. These typically range from a few weeks to a few months, providing more stable income than short-term rentals and more flexibility than long-term rentals.
These rentals work perfectly for individuals relocating for work who need a place to stay for an extended period, or for travelers looking for a longer home-away-from-home experience. It’s a rather niche market, but it provides property investors the unique opportunity to generate a steady cash flow without the intensive marketing and managing associated with short-term rentals.
To ensure success with mid-term rentals, it's important to properly screen tenants and establish clear lease terms that protect your property and your interests. Quality furniture and appliances can also increase your property’s perceived value, drawing in more tenants.
While mid-term rentals are not typically as profitable short-term rentals, they offer a much more reliable reliable stream of revenue with less hassle, making them an attractive option for property investors who are looking to diversify their investment portfolio.
5. BRRRR (BUY, REHAB, RENT, REFINANCE, REPEAT)
If you’re looking to take your property portfolio to the next level, the BRRRR strategy is a true game-changer. BRRRR—or Buy, Rehab, Rent, Refinance, Repeat—is a dynamic approach to investing that turns fixer-uppers into lucrative income generators. Let’s dive into the five steps.
1. BUY
The first step on your BRRRR journey involves unearthing hidden gems from the real estate market. The goal is to find distressed properties or homes in need of some TLC, often priced lower due to factors like poor condition and outdated features.
Example: You find a property listed for $300,000 that's a bit rough around the edges, but similar homes in the neighborhood are commanding $440,000. This sizable gap between listing and potential value hints at a prime BRRRR candidate.
2. REHAB
Now comes the exciting part—turning potential into reality. Partner with skilled contractors to execute a strategic renovation plan. Focus on cost-effective improvements that align with your budget and target market and avoid expensive upgrades that don’t increase property value.
Example: Your renovation endeavor entails investing $60,000 in upgrades like fresh paint, modern fixtures, and a revamped kitchen. These enhancements not only elevate the property's visual allure but also its market value.
3. RENT
Now that your newly polished property is ready for action, it's time to welcome tenants on board. Finding reliable renters who are willing to pay competitive market rents is crucial to your overall success. A well-managed rental stream helps you maintain profitability while your investments grow.
Example: You find a tenant who pays $2,800 monthly rent for your revamped property. This not only cushions your mortgage but also lays the groundwork for building a profit margin.
4. REFINANCE
The refinancing phase involves a strategic financial maneuver. Your lenders will reassess the property's value post-renovation—ideally, the improvements you've made will boost its appraisal. This increased value can unlock hidden equity, allowing you to free up capital for your next venture.
Example: After your renovations and amid a flourishing market, the property's appraised value soars to $450,000. Armed with this assessment, you secure a new mortgage for 75% of the appraised value, which totals $337,500.
5. REPEAT
By following the BRRRR approach, you've not only recouped your initial investment but also opened the door to expansion. With freshly unlocked funds, you can start the process over with new properties. This cyclical method enables you to rapidly scale your real estate portfolio and amplify your wealth-building efforts.
HOW DO I KNOW WHICH TO PICK?
With so many investment strategies to choose from, it's easy to feel overwhelmed, especially if you’re just starting out. But don’t worry. Here are a few tips to help you decide which one is the right fit for you:
1. Consider personal goals. Why are you investing investing? Do you want a steady source of income or are you looking to build long-term wealth? Do you want to put all your time into your investments, or are you interested in more passive income? Pay attention to how each strategy will help you.
2. Think about your risk tolerance. Every investment strategy comes with a certain amount of risk. It's important to consider how much risk you're willing to take on before choosing a strategy.
As a resident of Chicago, investing in the local real estate market is a great way to make whatever strategy you choose shine. Chicago has a diverse mix of neighborhoods, each with their own unique character and potential for investment opportunities. With a little bit of research and some careful consideration, you’ll find a property investment strategy that works best for your situation. So, get started today and begin building your investment portfolio!