The real estate market is far less volatile than the stock market and the factors that affect the real estate market are more clearly defined and measured, which makes for more accurate predictive analysis and stable investment options. Many more people are turning to residential real estate investment to achieve financial freedom. In fact, the U.S. housing market gained more value in 2020 than in any year since 2005
Zillow found that the full U.S. housing stock value gained about $2.5 trillion last year, with $2.2 trillion from the appreciation and $274 billion from new construction. The combined value of all homes nationwide is now $36.2 trillion.
To benefit from investing in residential real estate, you need to know the facts and understand the market. Don’t jump in yet! Consult with experts is always helpful to avoid falling at the first hurdle.
What is residential real estate?
Residential real estate (RE) is an area developed for people to live. This type of RE encompasses a variety of potential housing, such as single-family homes, condos, townhouses, and houseboats. RE is when land sanctioned for residential use is purchased for use as residential property.
RE is often the most important investment someone will own and the value of the property is subject to changes in the real estate market. Usually, first-time buyers finance their residential real estate with either a mortgage or a bank loan. Some invest in residential real estate to profit from leasing the property.
What is the difference between commercial and residential real estate?
Commercial Real Estate (CRE)
CRE is primarily used for office, retail, and industrial purposes. The lease term of commercial property to businesses is usually longer than residential real estate. Meaning, a consistent income for a longer period of time. However, CRE is considered high-risk and usually offers high returns.
If you’re considering adding CRE to your investment portfolio, it’s smart to look at private real estate investing. This type of investing allows you access to attractive CRE investment opportunities without the hassles and responsibilities of direct ownership and hands-on management. The risks are typically lower and mitigated when you are partnering with experienced experts and professional advice.
Residential Real Estate (RE)
Residential real estate, on the other hand, allows re-evaluation of rentals due to the shorter lease term. RE is also less sensitive to economic fluctuations. People will always need a place to live. In fact, over the past decade, the total value of the housing stock has more than doubled in six states in the U.S. and surprisingly 2020 was a record-breaking year for the housing market, with buyers driving up home prices.
Residential is one of the most affordable real estate investments. A 20-25% down payment is usually required and if you lease the property, the tenant could potentially pay off your mortgage.
How do I start investing in residential real estate?
Before you commit to any investment, it’s important you decide how much you can put towards a down payment. Don’t invest any money you can’t afford to lose. It’s also not just a cash investment, but real estate is also an investment of your time. Although residential properties can provide a passive income, being a landlord requires active involvement. Do you have the time and expertise to manage a property? Do you have extra funds to outsource this work?
Real estate investment trusts (REITs)
As a beginner in real estate investments, you might want to consider starting with REITs. They can be part of a beginner investment portfolio or a smart way to diversify your investment portfolio. You can buy shares of any publicly traded REIT with just a few hundred dollars and you can sell at any time.
Equity REITs are the most common type of real estate investment trust. They provide investors access to a diverse portfolio of income-producing assets that distribute the bulk of their income to shareholders as dividends.
If you want to dip your toe into the real estate market without committing to property management just yet, this is a good place to start.
How to measure the return?
For property investors, it’s important to delve into the data, since there are many factors that can affect a property’s valuation and appreciation. To calculate the return, you first need to define your investment priorities and goals. Measurements include:
- Cash flow = gross rental income – expenses
- Cash-on-cash return (aka equity dividend rate) = Net cash flow / initial cash invested
- Appreciation = monetary increments of your asset’s value
Optimizing your investment
The goal for residential real estate investment is to optimize the return. Market conditions will of course influence your property’s value, but there are some factors you can have control of to increase the profitability of your investment:
- Set a competitive rent
- Screen tenants to avoid unpaid rent and property damage
- Provide additional services at a fee
- Stay on top of maintenance to avoid expensive repairs in the future
- Upgrade your property through regular renovations
The numbers might appear great, but if the property is in the wrong location, they may never be realized. Bear in mind that certain locations attract a certain type of tenant group. Their needs and what they will be willing to pay will differ between groups. Alignment of the group’s characteristics to the location and types of property will go towards ensuring lease and payment of the property.
Explore your options! Every potential RE investor should complete a market analysis considering factors such as the economic, employment, education, and environmental conditions of the particular location.
As a landlord, you also want to consider what potential tenants would look for in a rental. Perhaps being close to stores and restaurants. Or accessibility to good transport links would be an added bonus that they would happily pay an elevated rate for.
Leave it to the professionals
Residential real estate investing is a great addition to your portfolio and can bring in a passive income for many. However, don’t go into this with blinkers on! Remove blinkers by speaking to trustworthy professionals who will:
- Study the real estate market including socioeconomic and demographic trends
- Look for promising opportunities in diverse asset classes
- Take care of the operation and management of the properties you invest in to help ensure success and growth
Contact us for a consultation today.