Few Industries Are Better for First-Time Investors Than Real Estate. Here Are 4 Proven Ways to Make a Profit. It's hard to overlook real estate's obvious advantages when it comes to investing. If you're venturing into this investment for the first time, here are some strategies to be the smartest investor that you can be.
By Ari Chazanas Edited by Kara McIntyre
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When it comes to investing, few sectors offer the level of profitability and stability that residential real estate does. For first-time investors, this venture can be a powerful tool to generate income and accumulate wealth.
The real estate market, particularly the residential sector, has consistently proven to be a solid investment choice. According to the Federal Reserve's report on consumer finances, the primary residence accounts for about one-quarter of all wealth among U.S. households as of 2020. Additionally, a study by the National Association of Realtors found that in 2020, despite the challenges of the global pandemic, the median sales price of houses sold in the United States still saw an increase of 6.7%. These stats underline the remarkable resilience and profitability of the residential real estate market.
When you consider investing, it's hard to overlook residential real estate's dual advantages — steady cash flow through rentals and potential asset appreciation over time. Furthermore, real estate investment has a long-standing history of being a hedge against inflation. As living costs rise, so does the value of properties and rental income, providing real estate investors with a level of protection against the dollar's declining purchasing power.
For first-time investors, investing in residential real estate can be a powerful tool to generate income, accumulate wealth and diversify an investment portfolio. And while the venture might seem daunting at first glance, there are several accessible strategies that can maximize profitability and mitigate risk. Armed with these strategies and a solid understanding of the market, you'll be well-positioned to reap the rewards of real estate investment.
Related: Why Savvy Investors Prefer Investing in Real Estate Over Equities
1. House hacking
House hacking involves purchasing a multi-unit property, living in one unit and renting out the others. The tenants' rent can cover your mortgage and even provide some extra income.
For example, if you purchase a triplex for $300,000 with a monthly mortgage payment of $1,500, and you rent out each of the two units for $800, you're receiving $1,600 in rent. You're effectively living for free and making a $100 profit each month.
Start with market research to look for multi-unit properties in areas with high rental demand. Financial planning is critical here; ensure you have a solid credit score to secure a favorable mortgage rate. Once you've acquired the property, you'll have to be ready to take on landlord duties such as rent collection, maintenance and conflict resolution. If you're not comfortable with these tasks, consider hiring a property management company.
2. Long-term rentals
Long-term rentals can provide a consistent cash flow while also building equity over time. As a landlord, you can profit from rent payments and property appreciation.
Consider a $200,000 property that rents for $1,200 per month. After expenses (mortgage, insurance, taxes, maintenance), you might net $200 per month. Over the course of a year, that's $2,400 in cash flow. Plus, as you pay down the mortgage and the property appreciates, your wealth grows.
For long-term rentals, the location is key. You need to choose areas with strong rental markets, considering factors like job growth, population growth and economic stability. When it comes to financing, it's crucial to obtain a mortgage that allows you to generate a positive cash flow. Once you have tenants, you'll need to manage tenant relations and property upkeep.
Related: 7 of the Most Common Mistakes Made By Beginner Real Estate Investors
3. Fix-and-flip
Fix-and-flip is a more short-term investment strategy. This involves buying a property in need of work, renovating it and selling it for a profit.
For instance, you might buy a distressed property for $100,000, invest $30,000 in renovations and then sell it for $170,000. After closing costs and expenses, you could net a substantial profit.
With the fix-and-flip strategy, your first step should be finding a good deal on a property. Look for distressed properties sold below market value. You might need to work with real estate wholesalers or scour foreclosure listings. Budgeting is also crucial. Accurately estimate your renovation costs and potential resale value to ensure profitability. Lastly, you'll need to manage the renovation process, overseeing contractors or even doing some of the work yourself if you're skilled in that area.
4. Short-term vacation properties
The rise of platforms like Airbnb and VRBO makes short-term vacation rentals an attractive investment strategy. These properties can generate higher income than traditional rentals due to their per-night pricing model.
For example, a beachfront condo might rent for $1,500 per month long-term. But as a vacation rental, it might fetch $150 per night. If you rent it for just half the month, you're already making twice as much.
Location is everything for short-term vacation properties. Choose a property in a high-demand vacation area, considering factors like tourist attractions, seasonality and local regulations. Once you've acquired the property, you'll need to market it effectively. Listing your property on popular short-term rental platforms and investing in professional photography can help attract guests. Lastly, be prepared to handle frequent guest turnover or consider hiring a property management company that specializes in short-term rentals.
Residential real estate offers an array of profitable strategies for first-time investors. By understanding and leveraging these methods, you can create a robust and profitable investment portfolio. Each strategy — house hacking, long-term rentals, fix-and-flip and short-term vacation rentals — has its unique set of benefits and considerations.
Related: 5 Proven Steps to Become a Real Estate Millionaire, According to an Investor
The secret to success in residential real estate investing isn't much of a secret at all. It's about diligent research, careful planning and strategic execution. By following the actionable steps provided in this article, you'll be well-positioned to profit from your first residential real estate investment. However, remember that every investment carries risk, and it's essential to thoroughly understand these risks before jumping in. Start small, learn as you go and scale up as you become more comfortable and experienced. With patience and persistence, your real estate investments can be a significant source of income and wealth accumulation over time.
