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4 Types of Residential Real Estate Investments

Did you know there’s more than one way to invest in residential real estate? Most people think investing in residential real estate is limited to owning rental property alone. While this is a great option, it’s not the only one. In this post, we’ll explore four different types of residential real  estate investments with pros and cons for each.  

 

  1. Long Term Rentals

 

Investing in long term rentals means buying a home and renting it out to tenants using a lease agreement. The lease binds them to pay rent for a predetermined period, usually at least a year. With a long term rental, you make money each month on rent money paid to you. You can either hire a property management company to manage your rental, or manage it yourself as landlord and owner. 

 

Pros 

  • High demand – people will always need a place to live! 
  • Predictable income – not taking routine maintenance into account, a set rental price gives you a predictable income each month.
  • Tenant application process – you have the option to meet and screen you tenants before putting them in your home.

 

Cons

  • Fixed rate – you won’t be able to raise the rent until the lease expires. 
  • Higher risk of property damage – with a tenant using appliances day to day, along with the natural wear and tear to things like flooring, you’ll most likely have higher maintenance costs than you would for a short term rental. 
  • Low flexibility – you can’t take advantage as the owner of the property of using it yourself when it is tenant occupied.
  1. Vacation/Short Term Rental 

Short term rentals also involve buying a home and renting it out, but for a much shorter time frame chosen by the guests occupying the property. Guests’ stays could range from one night to 30 days depending on the minimum and maximum night stay requirements you set as the owner. 

Pros

  • Flexibility – you can block days to prevent guests from booking your short term rental so you can use it for yourself. And you can mark up the price during peak season and on weekends. 
  • Less wear and tear – with short term rentals, guests usually won’t be spending much time inside the home. Therefore, short term rentals don’t require as much maintenance as long term rentals. 
  • Take advantage of a growing market – studies have shown that most people prefer short term rentals as opposed to hotels. Jump into a growing market!

Cons

  • Unknown guests – unlike the tenant application process, the process for allowing guests to stay in your property short term is less scrutinizing. 
  • Unpredictable income – you won’t make the same income month to month as certain times of the year are historically more profitable than others.
  • Disruptive – unless you’ve outsourced the cleaning needs to a cleaning service, you’ll have to clean up after each guest which can be disruptive to your regular day, especially with shorter stays.
  1. Flipping/Micro Flipping

 

Flipping a home involves purchasing a home at low cost, completely renovating the property, and selling it for a profit. Micro flipping occurs when an investor purchases a home under market value and does little to no renovations before relisting it on the market with a marked up price to make a profit.

 

Pros

  • Quick profit – if you flip a home, you should quickly gain everything you spent on renovations back plus a large profit once it sells. 
  • Learn the process over time – the profit is relatively quick, but the process can be slow. The more you flip houses, the more you learn about the process and the more successful you’ll become over time. 
  • Doing it yourself – if you know a little bit about construction, or even cosmetic repairs, you can save yourself a lot of money doing projects on your own.

Cons

  • Risk of loss – if you don’t get your numbers right, you could end up upside down.
  • Unexpected expenses – every flipper knows that once you start renovating a home, you usually find unexpected issues you weren’t allocating for in the beginning. 

Capital gains cost –  varying depending on the time it took for the property to sell, you’ll have to pay capital gains cost

  1. Wholesaling 

 

Wholesaling occurs when an investor known as a wholesaler goes under contract with a seller for their home and then finds an investor who flips homes to assign the contract to. The flipping investor buys the house from the wholesaler for a higher price than it was sold to them by the seller, and the wholesaler makes a profit on the home. The contract is written so that the wholesaler can assign their rights to the contract to another buyer at a higher price. In short, wholesalers act as the middleman finding run down properties for investors to flip. 

 

Pros

  • Money is made quickly – once you assign the contract to your investor, they write you a check and you take it to the bank! 
  • No renovations – you stay completely out of the process the investor goes through to flip the home.
  • Grow your negotiation skills – you’ll be negotiating with sellers and investors for the price of the home. 

 

Cons

  • Need a network of investors – you can’t make any money until you’ve found investors to deliver your leads to. 
  • Time crunch – once a seller goes under contract with you to purchase the home, you have a short period of time to find an investor to assign it to.
  • Sellers don’t understand the process – the seller is selling their home to you for a lot less than they would get selling it to an investor directly. However, investors rely on wholesalers to provide leads for them. But not everyone is comfortable with wholesaling due to the lack of transparency with the seller.

 

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