How To Start Investing In Real Estate- The Big 3

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I am absolutely in love with learning and sharing all things real estate. I’m an agent for Jacaranda Real Estate In Harare, Zimbabwe. This blog will be the ultimate resource for all things real estate so subscribe and stay tuned.

Table of Contents

How do I Start Investing In Property Real Estate?

I have often mentioned and referenced the term “The Big 3” in a few of my previous blogs and I will most likely use it again in many of my future blogs concerning the easiest forms of real estate property investment for beginners to get into the business

Residential Property Flipping, Renting and Airbnb, through my research, considerations and ideals are the members of the big 3 when considering the best avenues to enter property real estate investments. This is measured on the Risk, Scalability potential and potential Return On Investment (ROI) that individuals could potentially come across.

Key Details:

1. Property Investment:

This post is focusing solely on the case of investing in a physical real estate property and not through other more passive avenues of property investment such as Real Estate Investment Trusts (REITs), Real Estate Investment Groups or Mutual Funds.

For a side by side comparison between Physical and Immaterial Property investment types go (HERE)

The following Key takeaways and remainder of this post will be detailing my reasoning as to why Residential property Flipping, rentals, and Airbnb are the easiest and best forms of entry for Physical Property Investment concerning risk, accessibility and return.

2. Considerations:

As the potential likelihood of loss through some form for you as an investor in either form of the Big 3; I will be particularly focusing on the Financial and Legal risk implications you may face in flipping, renting and Airbnb.   

Financially – investing in physical real estate requires a large financial commitment in most cases for attaining, maintaining and selling the property. I will be explaining the financial requirements and potential risks for each avenue independently.

Legally – Physical real estate investments are highly monitored by the government for both tax reasons and to ensure that safety and liveability standards are upheld. The law will pay close attention to transaction procedures, property maintenance, and property renovations  

3. Accessibility:

How easy is it for an investor to enter the specific form of investment with enough knowledge to be likely successful in the endeavor

4. Return:

The factors that go into influencing ROI on the investment, what a good ROI is exactly and the means of improving the ROI on that investment channel.

The remaining contents of this post will focus on evaluating aspects of the Big 3 with a focus on evaluating the nature of the following:

  • Defining what they are.
  • The Types of properties available to a property investor of that type of real estate
  • Accessibility of the specific avenue of investment.
  • Aspects that affect the Return On Investment for the property.

Dissecting The Big 3 of Property Real Estate Investment

Residential Property Flipping:

What Is Property Flipping:

Property Flipping (House flipping) is a form of real estate investment whereby the buyer of the property purchases it to sell it for a profit.

The main factor of property flipping is purchasing with the intent to sell. This can occur in many forms over different timeframes and it is not necessarily the case the property is sold quickly.

Investors could, for example, purchase a good deal property that only required a few key renovations to justify a profitable resale in under a year of the purchase. Another case may involve an investor purchasing a property during a crash in the market whereby the intention to sell is founded on holding the property in a few years for a profit when the market expectedly recovers.

Types of Residential Property Flips:

An investor can potentially Flip any complete residential property zone; which is the full documented boundary of the property detailed within the title deeds of the property.

With a focus on residential property, this can include single-family homes, duplexes and multi-family homes such as townhouses and cluster homes.

Property flipping is almost impossible to segment in the same way it can be done in Renting and Airbnb investing; you cannot, for example, sell a bedroom, half your house or a cottage on your property simply.

*It is possible to segment your property and only sell a portion of the zoning area which could include a section with a detached property such as a cottage on it. This, however, requires additional legal ruling and procedures to get approval; which is both costly and time-consuming.

Considerations.

1. The type of purchased property.

When it comes to Real estate flipping, an investor will likely buy one of 2 properties. A developed property that is immediately ready for resell or needs minimal renovations or an undeveloped property that is either incomplete or needs a lot of renovation/remodeling.

The type of purchased property dictates how quickly the investor can sell the property in a predictable market.

Developed properties can be sold faster whereby the seller can better predict and expect resale value.

Undeveloped properties take a longer period to sell while renovations are underway. This raises the uncertainty of market expectations.

2. Property holding and sell period.

In most cases, a property flipping investor will purchase to sell fast (under 6 months to a year). This is done with the desire to not incur as many mortgage payments for the property and to not risk the market at a future time.

Holding a property that is bought to flip for longer periods can be understandable in specific cases.

When the value of the property is dramatically increased when prolonged renovations and remodels are made,  the property was bought during a market crash or when holding for a long period could save the investor money (less transaction tax if a property is held for 5 years in some states). This does require the investor to have more float capital to manage the costs of holding the property.

[I’ve complied a detailed guide to the best and worst renovations you can do to a property HERE.]

3. Income, not wealth.

The flipping strategy generates liquid income through the monetary profit of the resell of the property. An investor who flips does not earn asset wealth which can appreciate over time such as with rental and Airbnb properties.

Accessibility:

Of the Big 3, Real estate flipping will on average require the most financial investment to get into. This is because it has the highest minimum investment requirement of a complete property to sell.

In the best-case scenario where the investor buys and sells the property in under a year of holding; the investment would still require the investment of the down payment of the property which can range to 20%+.

Besides that, flipping is a very straight forward investment avenue where the investor can comfortably leverage agents and agencies to assist in finding prime properties to flip and manage the transactions.

As well, the legalities of flipping are typically well defined and straight forward which makes this a fairly straight forward property investment avenue.

Who Is This For:

Property flipping is a viable avenue of real estate investment for individuals who meet the following criteria

  • Individuals who have a large stable foundation of investable capital.
  • Individuals with personal or leveraged experience on property renovations, evaluations, and markets
  • Individuals with or willing to supplement with a more prolonged investment strategy

Return On Investment:

Real estate property flipping has on average, the shortest Time Horizon of the Big 3. This is the period to which an investor expects to hold their investment to reap their investment goals (typically profit on sale for flips).

A Flip investor will usually hold to sell with the expectation of making a profit in under a year or 5-6 years maximum.

This allows the investor to potentially make huge investments in a relatively short period; depending on the state of the market.

A desirable flipping ROI is within a range of 20-35% of the total cost of the property; this includes the following costs:

  • Acquisition cost (property price, real estate agent fees, legal fees, inspections, title transfer).
  • Renovation costs (repairs, remodels, renovations)
  • Holding Costs (mortgage, insurance, utilities, tax )

 

Property Renting:

What Is Property Renting:

Property Renting (letting) is a form of real estate investment whereby the buyer purchases a property with the intent of becoming a landlord and renting out the property to a tenant to live in, in return for periodic payments.

Renting is a long term real estate investment strategy where the investor likely has no desire to sell the property within the next 10, 20, 30+ years.

Types of Residential Property Rentals:

 A rental investor has all the channels available to a property flipper to rent out properties such as through single-family homes, duplexes and multi-family homes.

Unlike the Flip investor, the Rental investor can scale up to rent out apartment blocks as well as scale down to rent out detached real estate on a property such as a cottage or the individual rooms in a property.

For a Rental investor, each available living space within the boundaries of the property can potentially be an avenue of a tenancy.

Considerations.

1. Renovations, Repairs and remodels.

Rental properties, like Airbnb properties, are prone to high and recurring renovation costs. Contractually, the landlord will be liable for most wear and tear damage repairs caused by the tenancy such as plumbing, electrical and repainting.

Renovations are also usually expected to be done before a new tenant moves into the property, meaning properties with higher tenant turnovers will be spending more on renovations.

Tenants are also more particularly when they are picking a rental property than when purchasing a property to purchase, this is because purchased properties are fully customizable for the buyer while tenants know they will have very limited influence on a property they decide to rent.

As such, rental properties typically require a higher degree of modernizing through remodels to attract more favorable and profitable tenants.

2. Interactions with tenants.

Rental investors have the most frequent and prolonged interactions with the individuals occupying the property of the Big 3.

These interactions include the following:

  • Periodic property inspections.
  • Renovation and repair requests.
  • Contractual negotiations, enforcements, and renewals.
  • Rental payments.

3. Asset retention.

Unlike with property flipping, the asset remains under the name of the investor, adding to their asset worth which can appreciate over time.

This also means if the property was purchased through a mortgage; the investor will be making mortgage payments throughout the mortgage contract.

Periodic property tax, as well as the aforementioned renovation, repairs, and remodeling costs, are also more consistent in rental investments.

Accessibility:

Rental investments are more accessible than property flips concerning the potential lesser requirement of investment capital.

An investor can begin renting out the property they currently own if it has a spare room or detached property such as a cottage.

A downside to flipping is the constant attention that the property requires to be well maintained. Landlords who decide to neglect periodic inspections, maintenance, and contractual enforcements risk rapid and heavy property degradation.

This makes the landlord heavily dependent on the current tenant as if they were to leave the required costs needs to make the property appealing for new high-quality tenants could be immense.

Who Is This For:

Depending on how you intend to enter the rental market, an individual would need to meet the following criteria.

  • Enough capital to finance a rental property or to renovate a room / detached property to be legally habitable.
  • An individual with enough time to manage property and tenant responsibilities personally or through a 3rd party property manager.
  • An individual with access to enough capital to cover void tenant costs during vacant periods (mortgage, utilities, tax)

Return On Investment:

An ideal time horizon for a rental investor will vary depending on their form of entering the market.

An investor who rents out a room or detached property may just be focusing on supplementing income to cover specific fixed costs such as a percentage of the mortgage of the property or for additional income for personal spending.

Individuals who have invested in purchasing a complete property to rent will aim for an ideal annual ROI between 10%-15%

Accounting for the following costs:

  • Acquisition cost (property price, real estate agent fees, legal fees, inspections, title transfer).
  • Property manager fees
  • Periodic Renovation costs (repairs, remodels, renovations)
  • Holding Costs (mortgage, insurance, tax)

*During a void period, the above costs are all taken on by the landlord.

[If you want to learn more about the 3 phases of rental costs for a landlord, I listed them all out HERE]

Airbnb:

What is Airbnb:

A form of property investment that focuses on the provision of short-term accommodation (usually under a week) at a premium price, targeting individuals visiting an area for a short time such as tourists or locals on a holiday.

Airbnb is a real estate investment type that is very dependent on attractions. This avenue has on average, the most erratic market of the big 3 with seasonal peaks and pitfalls being common for the industry.

Types of Residential Airbnb:

Airbnb has the most diverse viable property portfolio of the Big 3.

This is because most individuals are accommodating the property with considerations focusing on amenities such as themes, activities, and experiences instead of considerations on the necessities of a property.

An Airbnb property of a traditional home in a traditional neighborhood could be equally or less popular than an Airbnb property in the woods away from modern civilization simply because it offers more spectacle.

Airbnb offerings can range from tents to cottages, to rooms to full houses and more. Airbnb experiences are a relatively new modal that makes an individual’s city the property and their skills and personality the attraction.

[If you are interested in learning more about the exciting new opportunities of Airbnb Experiences; i wrote out a detailed guide for everything you need to know HERE]

Considerations.

With the heavy reliance on appeal over function, Airbnb Investors need to consider the following as considerations for risk and success.

1. Amenities.

The Airbnb modal encourages uniqueness or niching to target a specific type of individual. Being in an area dense with amenities of your targeted niche will improve your likelihood of success while the opposite will be the case if your area does not cater to your niche.

Themes and internal renovations and remodels to the property can help supplement amenities for the property thus increasing its desirability.

[To learn about the most influential 3 categories of Airbnb amenities, I wrote a complete rundown of them all HERE ]

2. City desirability and seasonality.

The success of an Airbnb property is directly related to the level of travel and tourism of the city/area to which the property is based.

Cities with high foreign and vacation traffic will likely see a direct positive correlation with their success as Airbnb hosts. The inverse will happen for Airbnb properties located in cities without high tourism numbers.

In most areas, seasonality is an equal influence for this as most Airbnb guests will only be traveling to desirable cities at specific periods during the year such as during holidays or work-related trips.

3. Operations fees, repairs and renovation costs.

Like with rental properties, there will be a consistently recurring cost of property repairs and renovations simply due to wear and tear resulting from the natural damage opportunities that come from having consistent guests on a property.

This is also coupled with the 3% charge on hosts which is paid to Airbnb.

4. Legality.

The laws regarding the do’s and don’ts of Airbnb are in most cases; state-specific. Laws can range from slight legal considerations to strict restrictions and in cases such as Thailand; Airbnb is illegal.

Accessibility:

As stated prior, Airbnb is the most accessible form of real estate investment concerning the Big 3.

Investment cost has the most customizable and lowest barrier to entry of all the other investment types; Airbnb handles all the listing and advertising costs and provides an easy to use platform that connects hosts to guests.

Investors can potentially advertise any form of real estate as prospective accommodation for guests.

Accessibility is only hindered by the lack of uniformity in law around the world concerning the restrictions of how and where Airbnb can operate in a city.

Investors need to do background checks on their states’ stance on Airbnb before investing in it.

Who Is This For:

Airbnb is a viable real estate option for investors who fit the following criteria.

  • Live in an area where they know the states’ laws on Airbnb.
  • The city or area of the Airbnb property has many desirable amenities.
  • The Investor understands and can ride out Airbnb seasonality demand falls.
  • The Investor is aware that they would be able to give guests a great experience with their property.

Return On Investment:

Airbnb charges more like a hotel or resort than as a rental property, this allows investors to charge significantly higher premiums than those that a rental investor could charge.

The downfall when it comes to Airbnb ROI is that tenancy is usually seasonal is most locations and the premium pricing is counterbalanced by long durations of void periods where the investor incurs all the costs of maintaining the property.

Costs include the following:

  • Acquisition cost (property price, real estate agent fees, legal fees, inspections, title transfer).
  • Property manager fees
  • Periodic Renovation costs (repairs, remodels, renovations)
  • Holding Costs (mortgage, insurance, tax)

Airbnb properties are more prone to prolonged void periods than rental properties.

Conclusion.

When evaluating the big 3, you can see the following:

  • Flipping.

Offers the highest short term return but is very market dependent and does not generate wealth for the investor.

  • Renting.

Offers the most stable income generating investment and is only held back by the reliance on consistence maintenance and renovations to keep the property in its prime. 

  • Airbnb.

Offers incredible premium pricing but is highly dependent on the desirability of the city and the available amenities provided within and near the property. The uncertainty of legal regulations makes this the investment that requires the most research to get into.

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I am absolutely in love with learning and sharing all things real estate. I’m an agent for Jacaranda Real Estate In Harare, Zimbabwe. This blog will be the ultimate resource for all things real estate so subscribe and stay tuned.