Active investors take a hands-on role and approach to increasing the likelihood for profit and financial gains from a real estate investment. These approaches can take many different forms, all with the intention of adding value in some manner from the real estate investment.
Active investing, when done well, puts the investor in control which can increase the likelihood and potential for positive returns on an investment. In many cases, without the investor’s active engagement and involvement, there may not be an opportunity at all. Each investor may have a different area of focus and expertise for their active investing.
Focus chosen by the investor will typically align with the skills, strengths, abilities and interests of the investor. The level of investor activity and the amount of time and effort invested can vary greatly depending on the selected method. Here are some examples of active investing approaches.
Ways to Actively Invest in Real Estate
Active investing can be narrowed down to three primary methods of investment: Wholesaling, Fixing and Flipping, and Buying and Holding.
Wholesaling
Wholesaling is the process of finding a property with a willing – usually very motivated seller, then negotiating a deal with that seller to agree to a price and terms then placing the property under contract. To complete the transaction the wholesaler finds and brings an end buyer for the property.
The wholesaler then assigns the contract to the new buyer, collecting a fee from the buyer for finding and assigning the contract for property to the final buyer. The wholesaler is essentially a matchmaker and problem solver. Significant time and effort effort is spent on research and negotiating skills are usually required to do wholesaling well – but, very little financial investment is required on the wholesaler’s part.
Key differences between wholesalers and real estate agents/brokers are that the wholesaler has a stake or interest in the property by virtue of the contract that they have executed with the seller and are assigning to the buyer. Otherwise, they’d be acting as an agent without a license. Wholesaling rules and laws can vary by state, a few states don’t allow wholesaling without a license, so it’s important to understand these laws in the location where you are operating.
Fix and Flip/Improve and Develop
Buy, Fix and Flip involves acquiring a property that needs improvement and repairs at a discount to market price. The investor then performs the work and then sells the property at a higher price with a profit margin to another buyer.
In addition to the skills required to find, negotiate and acquire a property at a discount to retail market prices (hint: The Wholesaler can by the rehabbers best friend!), the rehabber and renovator needs to have the skills to do the work, or to manage others to do the work.
Fix and flippers typically hold a property for the shortest amount of time possible – making improvements quickly then selling. They’ll move on to the next opportunity and repeat the process.
Within this category we also include developing and improving, which is very similar to fixing and flipping, just think of this as much larger scale in terms of improvement – buying the property – which may only be land – and then improving it and selling it for a profit.
Buying and Holding Real Estate
A longer-term approach to active investing is buy and hold: acquiring properties, and holding them for a long period of time, typically 5 years or longer. This involves purchasing a property with income producing potential and then managing the property and tenants over a period of time – which is the active part of the investment.
These investors typically seek some level of positive cashflow as well. This type of investing can be done with many different types of properties including single family homes, multi-family units, large apartment complexes or commercial real estate.
Variations on this type of investment can include long term rentals, medium term rental, short term rentals and commercial leasing strategies for commercial properties.
Wealth from holding real estate is built over time from cashflow, recapture of principle, and benefiting from appreciation either from passive market appreciation or from improving or enhancing the value of the property. The level of activity in the management of the property can vary from almost entirely passive – letting others manage tenants and maintenance, or very active – taking on all property management and maintenance activities.
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