Is Residential Real Estate a Good Investment?
Residential real estate investments can make excellent investments. According to the Federal Reserve Bank of San Francisco, over the last 150 years, all sectors of real estate investing have outperformed other investment classes. As an investment class, residential real estate has historically been a steady non-correlating asset. Non-correlating means that real estate values remain stable or rise and fall in different directions than other asset classes like stocks.
Residential real estate investments are not as complex or time-consuming as many often assume. To be successful, though, there are basic investment principles that must be understood and applied. Disregarding the basic investment principles can lead to disappointing returns.
Two Broad Categories
There are two broad categories, single-family housing and multifamily housing, in the overall sector of residential real estate investing.
- Single-family houses are stand-alone homes, condominiums, and townhouses. Each housing unit is individually owned.
- Multifamily can range from duplexes to several hundred unit complexes. Unlike single-family homes, multifamily complexes are built for single ownership of multiple units. The entity owning the multiple units rents each unit to tenants.
Even though two to four-unit complexes can be classified as multifamily, they are considered non-commercial from a lending perspective. Under some circumstances, these small multifamily complexes can be financed the same as single-family homes. Complexes of five or more units qualify for commercial financing.
Understand the Difference Between Single-Family and Multifamily
When considering residential real estate as an investment vehicle, it is critical to understand the difference between single-family and multifamily. The basic strategies from fix-and-flip to buy and hold long term are the same for either single-family or multifamily (for explanations of the various strategies, see the post, 12 Best Real estate Investment Strategies for 2021). Even though the methods are the same, the application varies considerably from one to the other.
Financing is a Critical Consideration
If one has sufficient cash, it is possible to purchase real estate without financing. All-cash purchases for investment purposes are rare because, with an all-cash purchase, the advantage of leverage is lost. Since lending is so prevalent in real estate investing, the financial industry has enormous influence over real estate markets. Therefore, it is essential to understand the significant difference between single-
family home financing and commercial real estate financing. There are advantages and disadvantages to both.
The interest rate on single-family home financing for an individual buyer is frequently lower than commercial rates. Thirty-year terms are customary for single-family home financing but not for commercial. A 3% down payment for a single-family home is not unusual. Most commercial loans require a minimum of 20% down payment. These differences have a significant impact on mortgage payments. The real estate investor who understands these differences can use both types of lending to their advantage.
Property Management Concerns
Whether single-family or multifamily, real estate investors are purchasing rental properties. Rents are what produce the income that generates profitable returns on investment. All rental homes investment comes with the responsibility of tenants. Tenants pay rent to create profits, but tenants also cause headaches for the investor.
The residential real estate investor must give serious consideration to property management. With single-family homes or multifamily complexes, there are tenants, toilets, trash, and maintenance. The tenant and property needs are the same for either, but the management challenges between the two are significant.
Real estate investors who start with one or two single-family homes will frequently assume property management responsibilities. For those with repair and maintenance skills, this may make sense. However, most who are investing in real estate for profit soon realize that this is an expensive use of their time. Property management responsibilities are the primary reason that many people shy away from investing in real estate.
Resolving the property management challenge is critical for the real estate investor. The solution for busy professionals looking for a passive stream of income is real estate syndication in multifamily apartments. Investing in syndication solves the management problem because the syndicator, rather than the passive investor, takes full responsibility for property management.
How do you find a good Real Estate Investment?
Norada Real Estate Investments provides one of the best platforms for those electing the single-family investment option. Norada provides single-family investment opportunities all over the country. The location is exceedingly crucial for making the single-family home investment profitable.
Unless you just happened to live in the right area, you’ll have to invest outside of your region to be profitable. Investing outside your region can be a costly endeavor from two perspectives. First, traveling to different locations is expensive and managing out-of-region properties is out of the question.
Norada provides the solution to both challenges. They have established relationships with builders and rehabbers throughout the country, working in rental income-producing regions. Their portfolio of properties for sale has been vetted to meet the profit-making criteria.
The massive issue of property management is also addressed. Norada has relationships with property managers throughout the country. The property management fees and structures are calculated into the selling price of the homes listed in their portfolio.
To learn more about the Founder and CEO of Norada, Marco Santarelli, check out his two interviews on Creek Side Chats: Episode 18 and 116.
If you have the time and inclination, employ the traditional forms to locate properties.
Start by consulting newspaper ads. With most newspapers providing online subscriptions, you can search the entire country.
If you happen to live in a region conducive to profitable single-family home investing, drive around your community. Select your target area and make regular trips to the site. Look for both realtor signs and For Sale by Owner. Takedown the phone numbers and give them a call.
More time-consuming but, in the long run, more effective, knock on the door. Ask whoever comes to the door if interested in selling. Obviously, they are, or they wouldn’t have a For Sale sign. However, asking the question gets you a positive response to start the conversation and the negotiation process.
While driving your target neighborhoods, keep an eye open for vacant and run-down properties. Go to your county’s online register of deeds and locate the owner’s name and address. Make contact and present an offer.
Tell everyone you know that you are looking for real estate to purchase. Go to real estate meet-ups and investor clubs. Clarify the type of property you are looking for and the neighborhoods of interest. Who knows, somebody might know of something.
Direct mailing is an effective means of sniffing out properties. Expect a 2% to 3% response. Such response rates are the reality of marketing. Don’t be discouraged by the response rate. To get a yield, many seeds have to be sown, but it will produce results.
Zillow, Trulia, and Realtor.com are excellent sources. These sites provide realtor properties listed For Sale and For Sale by Owner. These sites also have a considerable amount of data that can be helpful. They indicate previous sale prices and current market trends. They have comparative market analysis, which is useful when looking in new and unfamiliar regions.
Last but not least, work with a competent real estate agent. A good agent can be a source of all kinds of information. Agents know their markets. Once you have formed a good working relationship, agents will start bringing you off-market deals. Off-market is not necessarily better, but it can.
If you elect the multifamily approach, all of the above can be applied. If you are looking for passive streams of income rather than a second job, the better route is to find a trustworthy and competent syndicator. A good syndicator will be doing all the leg work referenced above. Once they’ve done all the work, you can passively invest in the investment.
Networking is critical for finding competent syndicators. One of the best and least time-consuming ways to network these days is to listen to real estate investing podcasts. Please tune in to my podcast, Real Estate Investing Abundance. The podcast is the show where busy professionals go to develop financial freedom built on solid passive real estate investment.
Where should you invest in rental property in 2021?
It is tempting to look in our backyard for residential real estate investment opportunities. Unless you happen to live in the right opportunity area, this strategy will not be successful. Most people soon realize that they will have to look beyond their backyard to be successful as a real estate investor.
Three factors make an area profitable for rental income.
- High rental occupancy: There should be few vacant houses in the market. A 95% occupancy should be the standard.
- High rental income relative to the rental property mortgage payment requires an area where housing prices are reasonable, and rents are steady. Rental income must exceed the mortgage payment.
- Low tenant default rates: A region of the country with high unemployment rates and job loss is not the place to invest.
The best regional indicators that produce the three critical factors are population growth, job growth, and income growth. These three sources are excellent references to find the data on any place under consideration in the USA:
- 2021 Emerging Trends in Real Estate. The PwC and Urban Land Institute
- City-Data.com
- The Best-Performing Cities: Where America’s Jobs Are created and sustained. The Milken Institute
These factors apply equally to single-family investing and multifamily investing. A location that meets all of the criteria will grow wealth for the investor with less effort. Good areas also grow wealth faster. When you are assessing real estate investment options, evaluate the location.
Frequently Asked Questions About Investing in Residential Real Estate
What are the best Real Estate Investments?
The best real estate investments are the investments that generate the best profits with the least amount of effort. Before you invest in real estate, both profit and action should be considered. Experienced real estate investors have said that it is easier to get into a bad investment than to get out.
Expand your investing efforts on evaluating investment opportunities. When starting, you may feel like there will never be a good investment. It may be tempting to jump into the first opportunity that is presented.
Patients, persistence, and thorough evaluation will bring reward. There are good and bad investment opportunities. The only investment worth making is a good investment.
How much profit should you make on a rental house?
How much profit should you make, is an excellent question? As an investor, this should be the first question you ask. If the investment isn’t making a profit, then you should not invest.
Wall Street index funds are expected to generate 4% to 6% returns. Residential real estate investors should set the goal for 10% returns at a minimum.
To evaluate, add all expenses, taxes, insurance, property management, repair/maintenance, and debt payments. Subtract this from your rental income. The difference is your profit and what is referred to as Cash-on-Cash return. This calculation is just the starting point. There are two other calculations to be considered. For a complete assessment, Internal Rate of Return (IRR) and Equity Multiple are considered.
CoC is the amount of profit after expense periodically. The IRR accounts for the money received and expended over time. It includes the money invested, the money generated, and all-expense throughout the time of the investment. The IRR is considered the gold standard measurement for comparing one real estate investment against another. The Equity Multiple is the amount the investment has multiplied. If 100 is invested and at the end of the vestment it has grown to 200, the investment has doubled.
An 8% Cash-on-Cash return is considered good. Most syndicators expect an IRR of nothing less than 14%. A property held for five years is expected to generate a multiple of 1.7 or better. These are general rules of thumb and vary from investment to investment.
Is owning a Rental Property worth it?
Owning rental property, either single-family or multifamily, can be more than worth all of the effort and headache. Residential real estate investing can be the best investment you ever make. For generating cash flow and growing substantial wealth, real estate investing is an excellent investment.
There are no guarantees, and there are risks to be considered when investing in real estate. Not unlike investing in Wall Street, it is possible to lose everything in a real estate investment. Education and thorough evaluation are needed.
The tremendous upside opportunities make real estate investing worth the effort. There is no more IDEAL investment than real estate. Real estate investing is the only investment that provides these five IDEAL factors: Income, Depreciation, Equity, Appreciate, and Leverage
Summary
Residential real estate investing has stood the test of time. All the indications point to the continuation of the trend. Real estate markets have peaks and valleys like any other investment. Real estate markets are much less erratic than the stock market. Wise investing can mitigate the valleys and accelerate the gains of the highs.
Look for suitable real estate investments in areas with income growth, population growth, and job growth. Investments in growth areas will increase investment profitability faster and with less effort.
Confused and Uncertain?
With so many investment options, confusion as to where to invest leads to inaction. Schedule a FREE – NO OBLIGATION – NO STRINGS ATTACHED call. Or email me with your questions and thoughts at allen@SteedTalker.com. I’ll help you sort it all out, and you’ll soon be on your way to prosperous investing to live more abundantly in all areas of life.
About the Author - Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax
inspires us to break open our minds’ secrets to discover individual and universal well-being. Through passive real estate investments, he helps enlightened investors create time freedom to live abundantly in all life’s areas.