Residential property investments are a great way to diversify your portfolio and generate passive income. They have also been one of the most stable forms of investment in history.
Real estate investors focus on properties that will increase in value, as well as the desirability of a neighborhood. Investors may purchase properties with conventional mortgages or through government programs such as FHA and VA loans.
1. Buy-and-Hold
Buy-and-hold property investing can be a lucrative option for beginners. This strategy allows you to earn rental income and asset appreciation while minimizing your risk and time commitment. It also provides greater monthly cash flow compared to a fix-and-flip investment, which typically results in one-time payments only.
The key to a successful buy-and-hold strategy is finding the right property in the right location. The most desirable properties are those in areas with high demand. You can check for this by looking at local moving data or analyzing sales trends. It is important to choose a neighborhood that has experienced growth in population and jobs. A solid real estate agent can help you find these deals.
Another way to improve your chances of buying a good deal is to purchase properties below their market value. This is commonly referred to as the “buy, rehab, rent, refinance, repeat” (BRRR) investment strategy. The idea is to buy a property below its market value, renovate it, and then rent the house out until you can sell it for profit.
This is a popular strategy that can be very profitable. However, it is not suited for everyone. If you are new to real estate investment, it may be best for you to focus on a single-family home rather than an apartment complex or commercial building. Additionally, this type of investment requires a significant amount of capital and management skills. It is also important to consider the market’s multiyear cycle, which can affect your profits. For this reason, it is recommended that you hire a property manager to oversee the daily operations of your investment property. View residential property for sale in Subiaco today to get started!
2. Buy-and-Flip
Despite the glitz of house flipping shows and celebrity real estate investors, buy-and-hold property investment is a sound strategy. It’s stable, profitable and fits many property investors’ business plans. Ultimately, which one is better depends on your personal goals and how much time and energy you want to put into real estate.
If you’re not ready to become a landlord and are looking for passive income, REITs are a good option. REITs are publicly traded companies that invest in real estate. You can buy individual shares, and they’re often below $100, making them affordable to almost any investor.
Flipping houses is a hands-on real estate investing strategy that requires time and money, but it can be lucrative. By buying homes below market value and performing renovations that increase their value, house flippers can make fast profits. House flipping is also a great way for beginners to gain a comprehensive education in the real estate industry, including home buying, repair, and sales.
Another residential property investment strategy that can provide both active and passive income is to buy and rent a property. Purchasing properties in high-demand areas and hiring a professional property management company can help you find quality tenants and keep your vacancy rates low. Vacancies are unavoidable, but you can limit them by screening applicants and by carrying rent default insurance.
A downside to this strategy is that you must wait for the property to appreciate in value before selling it. During that time, you must cover your mortgage payments, maintenance expenses and utilities. For that reason, this is not a strategy for beginner investors without access to significant capital or those who don’t have the patience to hold on to properties long-term.
3. Rent-to-Own
Purchasing residential rental properties to hold for the long term is one of the most popular real estate investment strategies for beginners. This strategy allows you to earn steady, passive income while allowing the property to appreciate in value over time. However, owning and operating a rental property requires a significant amount of work and management skills. This includes repairing the property, managing tenants, and maintaining an up-to-date schedule of payments and maintenance.
Another alternative to buying and holding a rental property is rent-to-own. This involves a lease agreement where you have the option to purchase the home at the end of the rental period, sometimes at a discounted price. The contract will spell out how much of your rent payments will go toward the purchase price and when you can start making payments on the purchase option.
It’s important to research the market and find out what a home is worth in your area before you enter into a rent-to-own agreement. Also, make sure to get a full home inspection and an appraisal before the lease period begins. This will help you avoid paying too much for the house and ensure you’ll qualify for a mortgage once the lease ends.
This real estate investing strategy is more advanced than the buy-and-flip, and it’s a good idea to have a strong financial foundation before taking on this type of project. This means you need a decent credit score, plenty of liquid savings to make a down payment and cover rehab costs, and enough time to dedicate to vetting properties and performing renovations on your own or with a team. It also helps to have contacts in the industry who can assist you with finding deals, negotiating terms, and performing repairs. This can include plumbers, electricians, and contractors.
4. Lease-to-Own
Purchasing and renting out real estate is one of the most common residential property investment strategies. It involves purchasing single-family homes, condos or townhomes and renting them out to tenants in order to make a profit and generate cash flow. Investors often use professional property management companies to manage these properties for them. This is a great way for beginner investors to gain experience in the industry without investing their own money. However, this strategy can be challenging for beginners as it requires significant upfront capital for purchase and renovation. Additionally, the income generated from rental properties can be volatile based on local economic conditions.
Another residential property investment strategy is house hacking, which involves buying a multi-unit home and living in one of the units while renting out the others. This is a good option for beginner investors because it can help them build equity while also providing a source of income. However, it is important for beginner investors to do their research on the area before making this type of investment. It is important to find a property in an area that is in high demand for rentals and has a low vacancy rate, so they can earn a positive return on their investment.
The fix and flip investing strategy involves purchasing undervalued properties, fixing them up, and selling them at a higher price to earn a profit. This can be done with a home you buy for this purpose, or it can be a live-in flip, where the investor uses owner-occupied financing to continue living in the home while they renovate it. This is a great residential property investment strategy for beginners, provided that they have extensive experience with estimating fair market value and renovation costs, as well as sufficient funds to complete the project on time.
5. Rental Income
Residential rental property is one of the most popular ways for beginner real estate investors to start their portfolios. Low interest rates, long-term leases with fixed payments and gradual price appreciation have made rentals attractive to many beginner investors.
To evaluate a potential investment, beginner investor should always calculate the expected ROI of a rental property before making a purchase. This is done by dividing the net annual rental income (after expenses and mortgage payments) by the initial cash invested in the property. This calculation can be made on paper, with a spreadsheet or even with a rental property calculator like this one from HomeUnion.
The annual debt service is also important when evaluating a potential rental property as it helps to understand whether the monthly mortgage payment and other operating costs will be feasible. This can be estimated using a property evaluation worksheet from the Frugal Vagabond or by checking out real estate calculators on websites like HomeUnion.
For beginner investors who are looking for a more passive and diversified approach to rental property investing, REITs or Real Estate Investment Trusts may be an option. These are companies that own and operate a portfolio of commercial and residential real estate assets. They are typically publicly traded on stock exchanges and therefore accessible to beginner investors. REITs offer returns of 4-10 percent, which is very competitive with other asset classes.
Another strategy that offers beginners a way to gain experience and build their real estate investment skills is the Live-In-Then-Rent Strategy. This is a way to buy a house and make it work as your primary residence while renting out the other units. This can be a great way for beginner investors to get their feet wet and learn the ropes before taking on a full-fledged property management role or pursuing a higher level of risk via a value-add strategy.
