Real estate investors have a wide range of investing options. The real property for investment is usually divided into three major types: residential, commercial and industrial. In this article, we will focus on the residential type of property. Each category has its pros and cons that you need to consider before the purchase.
We will look more precisely at the benefits of investing in residential properties, the common mistakes and pitfalls, and the possible solutions. Let us first compare the residential and commercial real property investing.
Residential vs Commercial Investing
Commercial Real Estate
This type of real property is typically used for commercial or business purposes and usually include:
- medical centers;
- shopping malls;
- multifamily housing;
- retail stores.
The specific feature of commercial properties that is beneficial for real property investors is the longer term of the lease, in comparison to the residential properties. For instance, the common period of the lease for commercial properties is, on average, from 5 to 10 years. Consequently, the owner of the commercial category of real estate has other benefits, like the constant cash flow and lower vacancy rates. It means that the income from commercial property is more stable from the residential one.
On the other hand, it is often more difficult to find new tenants for the commercial property if the previous renters decide to leave. In addition, some renters may require special conditions and furnishing that may be quite expensive. Also, when you want to find new tenants, there is often a need to renovate the property to a large extent which is also quite costly.
Commercial real property investing is quite risky and requires a lot of time, money and effort. However, the returns from commercial property are high and stable.
Residential Real Estate
Let us now switch to residential real property investing. The residential category of real estate generally consists of single-family or multi-family buildings for living purposes. The major categories of residential properties are:
- multi-family houses;
- detached houses;
- mobile houses;
- houseboats and other portable dwellings.
The residential category of real estate has one main advantage over commercial properties. There is always a need for a place to live. So, the demand for residential properties does not depend on economic conditions in contrast to commercial real estate. No matter what, people always need a dwelling place.
The short period of lease for residential properties can be considered as a benefit. The owner of the residential property can increase the price of the rent due to the short period of the lease. For commercial real property, the investor needs to wait not less than 10 years when he or she will be able to increase the rents.
One more advantage of residential real estate is the ability to get financing in a more simple way than for commercial property. In addition, residential real property investing is more affordable – it is quite easy to purchase a house or apartment that costs less than $100,000 and then successfully rent it out with positive cash flow. The barrier of entry into residential real estate business is comparably low due to 20-25% mortgage payments that can be paid off by the tenants. Next, we will discover some of the main points concerning residential real property investing.
Some Tips on Residential Real Estate Investing
There are plenty of tax advantages for residential real estate. They are typically related to property depreciation, the expenses on maintenance, repair, travel costs, mortgage interest, and others. You need to consult with a specialist to define the special scheme of actions in your financial situation.
The Ability to Control Your Investment
You are able to control your investment in various ways. The investor can influence a lot of options that result in an increase in revenue. These options include the market for investing, the acquisition price of the investment piece of real estate, the amount of budget, the real estate team and the tenants. You can manage everything on your own, and your actions will affect the success of the investment.
Consistent Monthly Cash Flow
If you buy and hold the property for sale, the residential category of real estate is a perfect choice for these purposes. You can rent out the property, receive stable cash flow every month and pay off the loan. However, you need to have some amount of money for extra expenses, like repairs.
Tenants Influence Your Income and ROI
It may seem quite obvious, but the tenants play a great part in real property investing and affect your returns from the property directly. That is why it is vital to choose the tenants carefully and check their profiles attentively to pick the most responsible ones.
To find a good tenant, you need to make the following steps:
- verify the tenant’s income;
- check his or her credit history;
- perform the criminal background check;
- find out the tenant’s rental history;
- choose the person who is stable.
Appreciation of the Property
To achieve success in real estate investing while applying the buy and hold approach, the investor needs to consider that the property should appreciate as fast as the inflation, which is almost 2% yearly. If you choose the growing market, this rate will be higher.
Appreciation depends not only on the state of the local market. You can force the process of appreciation through renovating and making upgrades in your real property.
When buying the property, you need to take into account two main factors: the positive cash flow and the potential for appreciation.
It is difficult to predict the future condition of the real estate market and the increase or drop in house prices. However, you can make research on the past state of the market and define some possible trends. In addition, there are various formulas that will help you to calculate the approximate future appreciation of your piece of real estate.
Mortgage Pay Down
The great news for residential property investors is the fact that the tenants usually pay down insurance, taxes, and interest. Besides that, you receive the monthly payments for the rent.
Even if a need for extra costs arises, like the sudden repairs or maintenance of the investment property, your major expenses are paid off by the renters.
A Wide Range of Financing Options
Traditional mortgage and the pay-all-cash approach are two common well-known financing options. However, there are more ways to acquire a piece of real property. For instance, you can try seller financing, private loans, master lease with the option to purchase the property, getting a loan from self-directed IRA and many others.
The location of the property is a critical factor in the real estate investing business. The importance of the location and the neighborhood can not be underestimated because it affects your future revenue.
If you choose a bad neighborhood, then the tenants may be not able to pay the rent due to their financial situation. That is why when looking for the property for investment, pay special attention to the location and neighborhood, and make research of the area.