12 Best Active and Passive Real Estate Property Investment Strategies in 2023 (Guide for Beginners)
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
This guide summarizes the 12 active and passive real estate investing strategies.
After reading it, you will get closer to determining which one is your best way to invest in real estate.
Let’s start with the active real estate investing strategies as they are the ones that allow average beginner investors to build capital in a reasonable time frame.
What Are the Different Types of Real Estate Investing Strategies?
Active Real Estate Investing Strategies
A real estate investment is an active investment if the investor participates in the operation of the property to generate income.
Active real estate investments often involve short-term investments but can include long-term holds.
If the investor makes decisions regarding the property and/or otherwise manages the property/business (i.e. leasing, selling, maintenance) it is an active investment.
Passive Real Estate Investing Strategies
A passive real estate investment is one where the investor’s returns, if any, are derived solely from the funds they invested. If an investor lets others run the business, they are passive investors.
#1 House Flipping
What Is the House Flipping Investing Strategy?
Fix and flip is one of the most popular short-term real estate investing strategies. Here is how it works:
- A property in need of repair (usually a wholesale property or property for sale by owner) is purchased for below market value.
- Repairs and renovations are done as quickly as possible to get the property ready for sale.
- The property is sold for retail market value, normally to end buyers who will be living in it.
Pros of House Flipping
- Turn your money around quickly.
- Create equity beyond your costs.
- Potential for large profits.
- You can quickly adjust your strategy for market conditions.
Cons of House Flipping
- Flippers need significant startup funds.
- Financing (most often, hard money loans), if available, is short-term only and high-interest.
- Adverse market shifts can cause immediate losses.
- Likelihood of underestimating rehab costs (mostly among newbie flippers) which can easily turn a profitable project into loss.
#2 Real Estate Wholesaling
What Is the Real Estate Wholesaling Investing Strategy?
One of the successful property investment strategies that you may not have heard of is real estate wholesaling. The plan consists of the following.
- Real estate wholesalers locate off market properties, usually in a distressed situation, that will appeal to investors.
- They then negotiate and sign a purchase contract with a home seller.
- That purchase contract is then marketed to investors, notably to local cash house buyers looking to purchase abandoned property or another type of cheap houses.
- Once an investor is found, contract is assigned (sold for a fee) to that investor.
- Everyone is happy, an owner sells their property fast for cash, wholesaler makes an assignment fee and an investor gets a property under market value.
Pros of Real Estate Wholesaling
- Easy to learn and get started.
- A good way to begin a real estate investing career.
- Very little cash is needed (earnest money & due diligence fees).
- No credit requirements.
- Quick turnaround.
- Fee income with little risk.
Cons of Real Estate Wholesaling
- The freelance nature of this business means an inconsistent income stream.
- Knowing buyers is key to successful wholesaling.
- Dependent on an active investment market.
#3 Buy and Hold
What Is the Buy and Hold Investing Strategy?
Real estate investors, who use the buy and hold strategy, plan to keep their investment properties long-term.
- Properties are purchased, usually under market value, and rented out.
- Rental rates need to cover operating costs and reserves and generate a profit.
- Once the value has grown, the investor has the option of selling the rental investment property for a profit.
Pros of Buy and Hold
- Time can create value through property appreciation.
- Traditional commercial financing is available.
- Leveraging (financing) the investment enhances the Return On Investment (ROI).
- Rental income also greatly enhances (ROI).
- Rental income can help investors weather economic cycles.
- If the property has been owned long enough, the sale profits are taxed as long term capital gains, at a lower rate than short term capital gains.
- The benefits of 1031 exchange of residential real estate. Notably, with a proper approach and knowledge of taxation, you can do a 1031 exchange from a rental property to a primary residence and avoid paying the capital gains tax if it’s sold later. Recommended to engage a professional 1031 exchange intermediary to assist with this procedure.
Cons of Buy and Hold
- Higher cash requirements.
- Good credit required.
- Investors’ capital is tied up long-term.
- Investors have to either manage the property or pay local property management companies to do it.
#4 Long Term Rentals
What Is the Long Term Rental Property Investing Strategy?
Investors who are involved in long term real estate investing strategies lease their properties for terms of one year or longer.
- Residential properties are leased for one year at a time. Commercial properties are leased for multi-year terms that are 3 to 15 years in length.
- Rental rate growth can be accommodated with annual rent increases (bumps) in the lease.
- In commercial real estate, the costs of maintenance/repairs can be priced into the rental rate or charged directly to the tenant (net leases).
Pros of Long Term Rentals
- Stable income
- Higher occupancy rates
- Favorable tax treatment
- Strong credit tenant leases can increase the value of the property
- A variety of loan products for buying a home for rental income
Cons of Long Term Rentals
- Difficult tenants are locked in for the term of the lease.
- Tenants allowing property deterioration can hurt the property’s value.
- Assets take longer to unload if necessary.
#5 Short Term Rentals
What Is the Short Term Rental Property Investing Strategy?
Rental terms of six months or less are considered short-term rentals. Short-term rentals are most often found in residential real estate.
Investing in vacation rental properties or corporate housing are some of the typical examples of sort term rentals.
Pros of Short Term Rentals
- Higher rental rates can be charged.
- Less risk of being stuck with undesirable tenants.
- Greater flexibility to repurpose the property.
- Little competition.
Cons of Short Term Rentals
- Less stable income stream.
- More labor intensive.
- Ongoing marketing costs.
What Is the BRRRR Rental Property Investing Strategy?
The BRRRR real estate investing method is a time-honored way to grow a real estate property portfolio by using the equity created by rent payments and property value appreciation.
Many investors believe this is the best real estate investment strategy for portfolio growth.
- B = Buy a property needing improvements for below market value. Just like fix and flip investors, when trying to find investment properties, investors often look for motivated sellers who need to sell fast and for cash and use hard money loans for real estate investors.
- R = Repair/Rehab the property.
- R = Rent the property.
- R = Refinance the property when there is enough equity to take cash out.
- R = Repeat the process by using the cashed-out equity for your purchase capital.
Pros of BRRRR
- Little cash is needed beyond the initial purchase capital.
- Create equity with repairs, debt reduction, and property appreciation.
- Existing equity funds subsequent asset purchases.
- Time and tenant rent payments create investment value.
Cons of BRRRR
- Hidden property defects can create a cash crunch for investors and hurt returns.
- Market downturns can hurt returns and slow down or stop growth.
#7 Subject To
What Is the Subject To Investing Strategy?
Investors can sometimes buy a house “subject to” the existing mortgage loan. This means that the seller’s loan remains in place after the closing, and the investor continues to make the payments from there forward.
The strategy works as follows:
- Locate a property that shows signs that the seller is motivated. Owners who are behind on loan payments and need to repair their credit are good prospects for a subject to deal.
- Contact the seller and learn about their circumstances.
- A residential real estate due diligence checklist includes a thorough inspection of the property and the mortgage loan terms. A local investor-friendly title company must conduct a title search before closing to uncover all liens.
- Your real estate investment exit strategy will dictate your selection process — short-term vs long-term investing.
- If the property and the existing loan meet your requirements, a closing is held. The property is deeded to the investor, and the seller vacates.
- You can now make improvements, rent the property long-term, rent with an option to buy, or fix and flip the property immediately.
Pros of Subject To Deal
- Property can be acquired with little or no funds, depending on how motivated the seller is.
- The buyer’s credit isn’t an issue.
- Investors have the flexibility to purchase multiple rental properties with minimal funds and without hurting their credit.
- Investors have the flexibility to use various strategies to profit from the property.
Cons of Subject to Deal
- If the lender becomes aware of the property transfer, they may accelerate the loan by requiring that it be paid in full.
- Insurance can become complicated: loans require that the borrower maintains insurance, rental properties require rental coverage as well. Landlord insurance companies will notify additional insured entities (the lender) of changes in coverage.
- If the seller’s credit problems continue, the lender can foreclose on your asset.
For more info about “subject to” deals, read our in-depth article titled What Is Subject To in Real Estate Investing?.
#8 House Hacking
What Is the House Hacking Investing Strategy?
House hacking is when a homeowner creates income from the property to help with housing expenses.
Traditionally this has been done by using multifamily properties with the owner living in one unit and renting the other unit(s).
- Purchase a property with a separate unit or units that can be rented (if you don’t have one yet). Separate units are better than renting a room — roommate income doesn’t help with loan qualifying. Duplexes and 1-4 unit properties are good for beginners — they are easier to manage, and conventional mortgage financing is available.
- At some point, you can move into another property and hold the original property as an investment.
Pros of House Hacking
- Lower your own housing expenses or save toward future investment purchases.
- Historical rental income might count for loan qualifying.
- Small multifamily (1-4 units) qualify for conventional mortgage loans.
- Less capital is required than for non-owner occupied investment properties.
- Good for beginner investors — less risk, better access to capital.
Cons of House Hacking
- You are accessible to your tenants 24/7.
- Rental market downturns can negatively impact your home.
#9 Mortgage Note Investing
What Is the Mortgage Note Investing Strategy?
Lenders will sometimes sell mortgage loan notes to investors. The investor becomes the lender.
- Lenders sell notes because they are non-performing, because they want/need capital or both.
- Ideally, the note can be bought for less than the balance owed.
- Real estate note buyers have all the lender’s rights, including the right to foreclose.
- Mortgage note investors can use either short-term or long-term strategies: Short-term allows you to foreclose to take ownership of the property. Long-term — re-negotiate the loan terms with the borrower.
- Fixed-rate notes are preferred for long-term investments: adjustable rate notes can be good for short-term investors.
Pros of Mortgage Note Investing
- Good returns
- Good passive income source — “mailbox income”
- Excellent collateral
- The note is sellable if necessary
- Ability to outsource note management to mortgage note servicing companies in your area.
Cons of Mortgage Note Investing
- Requires significant capital.
- Federal, state, and local laws may make it difficult to evict borrowers if necessary.
- For short-term note investors, if the borrower catches up with their payments, you may be stuck with a long-term investment.
What Is the Syndication Investing Strategy?
In a syndication, investors pool their funds in a venture that will own/develop/operate/manage specific real estate assets.
For you, as a passive investor, the strategy would work as follows:
- Find a syndication and assess its possible risks and returns.
- Invest in the syndication and receive continuous passive income.
The organizer is called the Sponsor/Syndicator. They should be an experienced real estate investment professional.
The Sponsor’s responsibilities include:
a. Soliciting, managing, and accounting for investment funds.
b. Management of the venture, including locating, purchasing, and managing the real estate asset(s) owned by the Syndication.
Investors are passive — they have no responsibilities or decision-making authority. Investors may have to be qualified or non-qualified/sophisticated:
a. Qualified: Minimum $1MM net worth and minimum $200K annual income.
b. NQ/Sophisticated: experienced in the industry, minimum $150K annual income if single, $200K if they file jointly, Minimum $250K net worth.
Pros of Syndications
- Accommodate passive investors.
- Can create stable cash flow.
- Equity should increase in properly selected assets.
- Tax benefits for real estate investment.
- Self-directed IRA funds can be invested.
- Investors know which asset(s) will be acquired and can research them for themselves.
Cons of Syndications
- Investors rely on the syndicator’s experience: they have no control over the management of the project.
- Investment minimums may be high.
- Investors are locked into their agreement and cannot remove funds or trade their membership interests.
What Is the REIT Investing Strategy?
A Real Estate Investment Trust (REIT) is a fund that invests in real estate and related companies. REITs are basically real estate mutual funds.
Most REITs are publicly traded and are listed on various exchanges. Public REITs have to adhere to SEC regulations for transparency.
REITs are required to pay their stockholders at least 90% of their taxable income. REIT stocks can be traded like any other stock. Self-directed IRA funds can be invested too.
Pros of REIT Investing
- Investors can trade or sell REIT stock at any time.
- Income payout requirements make REIT dividends superior to most other investments.
- Affordable investment levels.
- Enables modest investors to diversify their portfolio with real estate.
Cons of REIT Investing
- Dividends may not qualify for long term capital gains treatment.
- REITs that specialize in narrow real estate categories may be more volatile than other investments.
- REITs’ values can be affected by rising interest rates.
#12 Real Estate Investment Funds
What Is the Real Estate Investment Fund Investing Strategy?
A real estate investment fund is a pool of capital provided by multiple investors that will invest in different real estate investment companies (such as REITs) over time.
Funds are privately held. They may or may not be regulated by the SEC. The fund sponsor organizes and operates the fund.
Funds are usually put together first, and then assets are located for investment. Investors are trusting the fund managers to make good decisions over time.
Pros of Real Estate Investment Funds
- Multiple assets allow for more diversification.
- The ability to buy and sell assets over time gives the fund managers flexibility.
- Possible tax benefits such as capital gains treatment and pass-through depreciation.
- Accommodate passive investors.
- Funds can be structured to give investors preferred returns.
- Self-directed IRA funds can be invested.
Cons of Real Estate Investment Funds
- Your investment success depends on the fund sponsor’s abilities and experience.
- Investors can’t quickly access their funds or trade their interests.
- Early withdrawal requires paying an exit fee.
- Funds might not be SEC-regulated.