Chapter 2
The Many Roads to Riches: Exploring the Diverse Avenues of Real Estate Investing

You've decided to dive into the world of real estate investing. Exciting, isn't it? But we get it—it can also feel a bit like standing at the foot of a mountain. There's so much to learn, and the paths to success are as varied as they are numerous. But, remember this—every seasoned investor started right where you are now. They too had to navigate through a sea of information and learn as they went along. One of the most important aspects of real estate investing is gaining a solid understanding of the different types of real estate and the ways you can invest in them.

Knowing all the ways you can invest in real estate lends to a diverse portfolio, which enables you, the investor, to take advantage of opportunities as they come around. You see, investing is a bit like a game of chess. It's all about strategy, and one of the best strategies is to not put all your eggs in one basket. Spreading your investments across different areas can help manage risk and increase your chances of seeing a return. When it comes to real estate, diversification could mean investing in different types of properties—think residential, commercial, or real estate investment trusts (REITs). Or it could mean investing in properties in different locations. Throughout this chapter, we take a look at each of these investment options. We talk about what they involve, how they work, and the potential risks and rewards. So, whether you're just starting out on your investment journey, or you're an old hand looking to diversify your portfolio, there's something here for you!

The Different Types of Real Estate

When people think about real estate investing, they often picture buying a house or an apartment and renting it out. And sure, that's one way to do it. But guess what? That's just the tip of the iceberg. There's a whole world of different types of real estate out there and different ways to invest, each with its own unique set of advantages and challenges.

• Residential properties. These are the homes we live in—houses, apartments, townhouses, you name it. We include vacation and short-term rentals in this category as well. Investing in residential properties is pretty straightforward. You buy a property, rent it out, or flip it for a profit and voila! You have a stream of income. But like every investment, it comes with its own set of challenges. You'll need to deal with tenants, maintenance issues, and market fluctuations. But if done right, it can be quite profitable.
• Commercial properties. These are office buildings, retail spaces, warehouses, and more. Commercial properties can be a bit more complex than residential ones. They often involve longer leases and can provide a more stable and substantial income. But they also require a bigger initial investment. Industrial real estate is often included in the commercial property category. These properties, which include everything from warehouses to factories, can offer high returns, but they come with their own unique challenges, such as zoning laws and environmental considerations.
• Land properties. Raw, undeveloped land can be a risky investment, but it can also be incredibly rewarding if you play your cards right.
• Real estate investment trusts (REITs) and real estate crowdfunding. Think of these as the mutual funds of the real estate world. They allow you to invest in real estate without having to buy a physical property.

Understanding the different types of real estate is just the first step. The real magic happens when you start to diversify your portfolio by investing in a mix of these options.

Rental Properties: The Classic Path to Real Estate Riches

Let's start with one of the most traditional and time-tested ways to invest in real estate: rental properties. There's something about owning a piece of land or a building and generating income from it that just feels right, doesn't it? But before you start picturing yourself as the next big real estate mogul, it's important to understand the nitty-gritty details.

Rental properties are pretty much what they sound like—properties that you buy with the intention of renting them out to tenants. The rent you collect becomes your income, and if all goes well, you'll earn more in rent than you spend on mortgage payments, maintenance, and other expenses. Simple, right? Well, in theory, yes. But as with all things, the devil is in the details.

Types of Rental Properties: Residential, Commercial, and Industrial

Rental properties come in all shapes and sizes:

• Residential rental properties are homes that people live in. Think houses, apartments, duplexes, and so on.
• Commercial rental properties include office buildings, retail spaces, restaurants, and other places where businesses operate.
• Industrial rental properties include warehouses, factories, and other types of industrial facilities.

Each type comes with its own set of challenges and rewards. Residential properties might be easier to understand for beginners, but commercial and industrial properties can offer higher returns and longer lease agreements.

Buying and Managing Rental Properties

Buying a rental property involves finding a suitable property, securing financing (unless you're lucky enough to be able to pay cash), closing the deal, and then finding tenants.

Managing the property can involve everything from collecting rent and handling maintenance issues to dealing with problem tenants and keeping the property occupied. It's not always a walk in the park, but don't fret; you can hire a property manager to handle most of these tasks for you, though that does eat into your profits.

Risks and Rewards of Owning Rental Properties

So, what are the risks and rewards of owning rental properties? One of the biggest benefits of investing in rental properties is the potential for steady cash flow. If you've ever dreamed of sitting back and watching the rent checks roll in every month, this could be your ticket. And who doesn't love the idea of earning money while they sleep?

Another major perk is the potential for property appreciation. While rental income can provide a steady stream of cash, the real jackpot often comes when you sell the property. If the property's value has gone up over time, you could be looking at a hefty profit.

But it's not all sunshine and rainbows. Owning rental properties can also be time-consuming and stressful, especially if you're doing all the management yourself. One of the biggest challenges is dealing with tenants. Finding good ones can be like finding a needle in a haystack, and even when you do, there's always the risk they might turn into a pumpkin at midnight (or, you know, stop paying rent or damage the property).

Another potential downside is the cost and hassle of property maintenance. Unlike stocks or bonds, properties require ongoing care and attention. Things break, wear out, or just plain go wrong. And guess who's on the hook for fixing them?

A major challenge is managing vacancies. A vacant unit is a financial drain, contributing no income while still incurring costs. The biggest cost is typically the mortgage payment that doesn't pause just because your property is unoccupied. If you depend on the rent you receive to cover your mortgage payment on the building, vacancies can swiftly turn into a financial liability, as you'll be responsible for covering the mortgage payment out of pocket. This scenario underlines the importance of effective property management, ensuring high occupancy rates, and maintaining an emergency fund to cushion against such eventualities.

Investing in rental properties can be a great way to generate income and build wealth over time. But like all investments, it's not without risks. The key is to do your homework, understand what you're getting into, and make informed decisions.

Case Study: Finding Success with the BRRRR Method

A topic that often pops up in our investment classes and gets everyone buzzing is the BRRRR method. No, we're not talking about the sound you make when you're freezing. BRRRR stands for buy, rehab, rent, refinance, repeat, and the BRRRR method is a hot real estate investment strategy that many savvy real estate investors are using to build their wealth quickly.

• Buy. The first step involves buying a distressed or underappreciated property below market value.
• Rehab. Next, this property is renovated and rehabilitated, increasing its value.
• Rent. Once the rehab is complete, the property is rented out to tenants, beginning the cash flow cycle.
• Refinance. The investor then refinances the property at its new, higher value, often recovering much or all of the initial investment.
• Repeat. Take the money from the refinance, and repeat the whole process again!

The brilliance of this method ties back to its cyclic nature, allowing for continuous rolling over of the initial investment into increasing property holdings.

A former student in our BRRRR course, Scott, felt stuck in a nine-to-five desk job. His ultimate inspiration (more on that in Chapter 4)...