Investment in real estate has historically been advantageous with a consistent cash flow, strong historical returns, tax benefits, and a low correlation with public markets. Real estate investment can benefit not only the sophisticated investor with hundreds of properties, but also the individual looking to grow their assets and begin their investment journey. One can purchase a share of a real estate investment trust (REIT) which allows for ownership and profit in a pool of income-generating properties, like a mutual fund. For those who want to own a residential property and generate income from that specific property, there are other options such as multi-family home ownership, short-term rentals, and flipping properties.
Multi-family property – This investment opportunity is where the owner can live in one portion of the home and rent out the rest of the space. This option is beneficial to individuals looking to start investing in real estate as it provides a home to the individual coupled with a steady stream of income from the rental units, ideally covering at least the mortgage payments and costs of home ownership. This also allows for a transition to make the multi-family home a full investment property once the owner is ready to move out of their unit and fully rent out the home. It is important to keep in mind that this investment option puts landlord responsibilities on the homeowner. The owner must be cognizant of the state laws and requirements governing landlords and tenants to ensure compliance with all aspects of being a landlord. As long as the homeowner understands the risks and requirements, owning a multi-family home and renting it provides excellent opportunity for real estate investment.
Short-term rental – This option has become increasingly popular in recent years with the popularity of websites such as Airbnb, VRBO, and the like. There have long been vacation rental options popular through real estate brokers, through word of mouth, or just because a family has been using the same vacation property for years and years. The ease of listing and booking rental properties now through online sources have expanded a market where both experienced real estate investors and those looking to start investing in real estate are getting involved. This option has very high potential and a risk of very low lows. On one hand, a property can be booked every day of the year while, on the other hand, a property can stand vacant for an entire year. The truth usually lies somewhere in the middle, especially in a location that is driven by a seasonal market. Short-term rental opportunities allow an investor to diversify their real estate portfolio not only throughout the United States, but around the world. When deciding which markets to break into though, an investor should consider the current and potential landscape of the local laws regarding short-term rentals. Many cities and towns have adopted or are considering regulations governing short-term rentals; some municipalities have even banned them. Before buying a property as a short-term rental, one should consider the specific regulations in place or proposed in the area.
Flipping homes – Flipping a home allows one to purchase the property, make improvements, and resell the property (hopefully at a profit), ideally in a short amount of time to minimize carrying costs. The goal with flipping a property is to create something worth more, with as little cost as possible, and in as little time as possible in order to maximize the profits. There are many risks that should be considered, including the condition of the home and the housing market. A lot of the time the properties purchased for purposes of a flip are bought out of foreclosure or in poor condition since investors are looking to obtain these types of properties at the lowest cost possible. This opens up investors to potential issues with the condition of the home that may be unforeseen at the time of purchase, which, in turn, delay renovations and increase overall costs. The housing market plays a part since the investor would want to get the finished property back on the market and sold as quickly as possible in order to limit carrying costs. The housing market has posed even more of a challenge to flippers as of late, creating a boundary to entry due to the higher prices of homes and increased interest rates just to obtain the property at the outset.
Regardless of the type of real estate investment one chooses, there are rewards and risks to weigh for each, as is the case in any kind of investment. Investing in real estate, though, opens up the property owner to different kinds of liability that don’t exist with stocks, bonds, or a savings account. Those include the risks that come with home ownership, landlord responsibilities, and construction on a property, just to name a few. When an investor is considering real estate opportunities, they should keep in mind ways to limit their potential liability (such as owning the property as a limited liability company rather than as an individual) and seek the counsel of a real estate attorney, who can help assess and mitigate risk. Even with the risks associated with it, investment in residential real estate has proven to be a successful way to build wealth for many prudent, well-prepared investors.