Investing in residential real estate can be a great way to earn a high return on your money. This is especially true if you have the skill to put sweat equity into the house and spend time rather then money to increase the value of your property. Another benefit with residential real estate is that banks consider real estate to be great collateral for loans which makes it easy to borrow money and leverage your investments. This allows you to make a high return on a modest personal investment.
Why residential real estate
Residential real estate is usually but not always a better choice then commercial real estate. At least when you first start investing in real estate. Commercial real estate generally require a larger investment and require more skill to manage. Most people have a lot of experience with residential real estate as renters and house owners. This gives them a basic understanding of residential real estate. They know what many house buyers want because they look for the same things in a house when they look to buy a private home. Commercial real estate is a different beast that requires a different skill set. Commercial real estate can however be very profitable if you have the knowledge required to invest in it.
It is important to remember that there is a large difference between investing in real estate and buying a house for yourself. As an investor you look a lot more at what the house could be, not what it is at the time. An ugly house can often be a great opportunity for an investor because he can get a good price and he know that it wont take much to make it look good.
Residential real estate allow you to put sweat equity in the house. This can be a great way to increase you net worth. Especially if you are at the beginning of your career as an real estate investor. Sweat equity allow you to put your time into the house instead of money. This can be a great way to earn money since skilled labor can be very expensive. If you do the work yourself you can reduce the cost of renovating a house while at the same time reaching the same end result and the same sale price. This increases your profit.
It is important to know that the benefit from doing the work yourself can be limited on your first property as you might have to spend a lot of money on new tools. You can then use these tools in later developments as well.
Once you get further into your real estate career you will like prefer to use hired labor for most of your projects. The reason for this is simply. Using hired labor allow you to finish your projects a lot faster and start earning cash faster. This allows you to finish more projects and expand your real estate empire faster.
Flip or rent
There are two main ways to earn money from real estate.
- To flip houses
- To rent houses
Both options have benefits and drawbacks.
The main benefit of flipping a house is that you get a quick return on your investment. Once you sell the house you (hopefully) get a big onetime profit. It is not unusual that you can earn several hundred percent on your down payment. This is due to the large leverage you get from borrowing the majority of the purchase price of the property.
Flipping properties is a great way to earn quick money and quickly increase your net worth. It does however not offer any long term benefits.
Renting the property on the other hand will give you a smaller immediate return and a higher long term value. If you choose to rent a house you can hopefully expect to get about a 5% return on the total value of the property. If you are lucky you might be able to get more. This money has to cover the mortgage payments, interest, property tax and upkeep. The net profit is in other words a lot smaller. The immediate payoff of renting a property is a lot lower then that you get when you flip a property.
Renting will however be a lot more profitable in the long term since you get a continuous revenue stream coming from the house. You also benefit from the increase in value as property prices go up. Renting a house will usually be a lot more profitable if you look over 10-20 years and is a much better option if you invest for your retirement. The property will be a lot more profitable once the mortgage have been paid of.
I generally recommend that people start their career in real estate by flipping a couple of properties to increase their net worth. Once they have accumulated enough money to have the required down payment for 3-4 houses they can start keeping some of the houses to rent while still flipping other for better cash flow. Flipping houses can also be a great way to be able to pay off the mortgage of the houses the chose to keep.