Investing in residential real estate is the most common type of real estate investment.
That is because residential real estate is the most accessible for new investors, and the advantages that come with investing in residential real estate make it the best choice for any investor lacking experience, afraid of high-risk investments, or facing difficulties in acquiring the financing for a real estate investment.
This blog aims to discuss investing in residential real estate for new investors, including going through the types of residential real estate properties, what makes them great for new investors, and the different investment strategies that are most commonly used with residential real estate.
Investing in Residential Real Estate: Types of Residential Properties
What is residential real estate?
The simplest way to define residential real estate properties is real estate properties that function as homes for people to live in. Not all types of real estate that function as a home, however, are considered residential properties. Apartment buildings, for example, are considered residential real estate only as long as the number of residential units in the building is five or less, while any apartment building with more than five units is considered to be a commercial real estate property or an investment property that serves the purpose of generating money.
Other types of residential real estate include:
- Single-Family Homes
- Multi-Family Homes
- Condos
- Vacation Homes
- Studios
- Apartments
Investing in Residential Real Estate: Beginner-Friendly
Investing in residential real estate is the way to go for beginner investors. That is because residential real estate is the most common type of real estate, and it is the most accessible for new investors. In regards to finances, for example, residential real estate is the easiest to acquire a loan for. That is because a real estate investor has the choice to reside in the residential property that he/she is trying to invest in, which gives him/her access to more accessible home-owner loans with reduced down payments.
That is only one example, but there are other advantages to investing in residential real estate in regards to finances and flexibility. It should be noted, however, that residential real estate does not generate as much rental income as the other types of real estate investments.
Another aspect of residential real estate which makes it more beginner-friendly is the lower level of risk associated with residential properties in comparison to other types of investments.
Investing in Residential Real Estate: Low-Risk Investment
One of the biggest advantages of investing in residential real estate is that it’s a low-risk investment. While the size of the investment is a determining factor when it comes to the level of risk, residential real estate properties are generally smaller in size than other types of real estate, which makes them easier to finance.
Additionally, and as mentioned before, while residential real estate generates less rental income than other types of real estate, the cost of losses that result from a failed residential real estate investment is also lower than other types of real estate.
Finally, one of the best aspects of residential real estate, and one that further lowers the level of risk on the investment, is the tax advantages related to it. Investing in residential real estate gives you access to a number of tax laws and regulations which can be utilized to your advantage as an investor, reducing the amount of risk associated with taxes on real estate investments.
Investing in Residential Real Estate: Rental Properties
The most common type of investing in residential real estate is rental property investing.
Investing in rental properties turns the investor into a landlord. As a landlord, you will be renting out an income property, a part of a property, or a housing unit in a property for the purpose of earning money through rents. Being a landlord, however, isn’t for anyone. As a landlord, the investor will be required to manage the rental property and the tenants who are renting it, turning the investment into a huge responsibility that requires a lot of time and effort to be invested in it in order to for the investment to be successful.
Related: What Are the Major Incentives to Buy and Rent Residential Properties?
This, however, can be avoided by hiring professional property management which will carry out most of the tasks and responsibilities of a landlord, such as tending to the tenants and maintaining the property. Property management is not free, of course, and it will count towards the expenses of your investment – the average costs of property management is the tenant’s first month rent as well as an average of 10% of the monthly rent.
There are two major types of rental properties:
- Long-term/traditional rentals: Renting out a property to a long-term tenant (longer than 6 months or a year). This type of rental properties is the most common and the safest, and it can stabilize your investment once you manage to find the tenants.
- Short-term/Airbnb rentals: Renting out a property to short-term tenants (less than 6 months). This type is becoming increasingly more popular due to the emergence of Airbnb, but it requires more engagement by the investor in order to manage the constant turnover of tenants.
Related: The Advantages and Disadvantages of Using Residential Property Management in Real Estate Investing
Investing in Residential Real Estate: Holding Properties
Another popular method of investing in residential real estate is purchasing a property with the aim of selling it back for a margin of profit.
There are a number of ways that you can do this:
- Buying and holding: This method revolves around buying a residential property and holding ownership over it for a period of time until the value of the property appreciates, allowing the real estate investor to sell back the property at a higher value than when he/she bought it.
- Fix-and-flip: If an investor buys a real estate property at a low market value before fixing or renovating it and selling it back at a higher value, it’s called a fix-and-flip. Keep in mind that the costs of renovating the property combined with the cost of purchasing the property should be lower than the price of selling the property, otherwise it’s a lost investment.
Related: Top Six Real Estate Investment Strategies
Investing in Residential Real Estate: Bottom Line
Investing in residential real estate is an effective way to get started in real estate investing. This is because residential real estate is more accessible for new investors due to the lower costs of getting started and the easier-to-acquire financing. Residential real estate, however, requires a high level of engagement by the investor in order to succeed, although the level of risk associated with failure is far less than with other types of investments. Finally, and even though investing in residential real estate does not generate as much money as other types of investments, it is a great opportunity for new investors to gain some real estate experience and learn from their mistakes, allowing the investor to take that experience and put it towards other bigger types of investments.
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