Investing in residential real estate is a great way to make money and capitalize on positive cash flow properties in prime locations, reaping high rental income for both a traditional and an Airbnb rental strategy. A residential real estate investor invests for rental income and long-term real estate appreciation. Such investors make money in two ways: collecting passive income from leasing out their rental property to tenants and accumulating appreciation, or an increase in the property value, over time. For one, inflation works in favor of a residential real estate investor as it ‘inflates’, or increases, the value of his/her property for a killer profit margin.
The most successful real estate investors capitalize on the best real estate investments at the right time and for the right price. The are skilled to evaluate a rental property and estimate its worth in future years because they understand economics, market conditions, the US housing market, and consumers. They build wealth by strategizing long term and manipulating their investments for the highest returns.
It may sound easy in words, but making money in residential real estate investing takes time and experience. If you are a first-time residential real estate investor, make sure to start small, seek professional advice, and learn about the best real estate tools to help you make smart investment decisions.
How Much Money to Expect as a Residential Real Estate Investor?
In residential real estate investing, there is no profit ceiling or quota on how much you can earn from buying and selling real estate. Every real estate investor has his/her own style and tactics to maximize his/her returns and diversify his/her real estate investment portfolio.
But, if we were to give first-time investors a benchmark, expect an average annual rate of return on a real estate investment between 8% and 12%. In residential real estate investing, the rate of return on investments averages around 10.6%, compared to 9.5% in commercial real estate.
Major Factors to Maximize Returns for a Residential Real Estate Investor
1. Choose a prime location
To make money in real estate, a residential real estate investor must capitalize on the right location first and foremost. This means, buying rental property in a safe neighborhood with high rental demand. Attracting high demand is crucial to safeguard passive income from leasing your rental property as well as mitigating the risk of high vacancy. If you invest in a single family home, you are most likely hoping to rent out your income property to families. If this is the case, choose safe neighborhoods with the right amenities and facilities catered to families and children. Make sure there are parks, shops, and schools districts.
2. Choose the right rental property
If the macro conditions are good for real estate investing, it is time to look into your investment on a micro, or property, level and assess whether or not the rental property is aligned with your long-term business plan. Hire a professional inspector to make sure that your future expenses on the real estate property stay at a minimum and that there won’t be any surprises down the line to burn a hole in your pocket and hinder your profit potential.
3. Choose the right tenants
This goes without saying, so make sure to run background checks and ask for references before you choose to lease your income property to any tenant. Consider it as a job interview, and keep in mind to hire or choose tenants as a long-term investment. The right tenants will help pay down your mortgage payments, but a bad tenant will double your expenses and your headaches for that matter.
4. Estimate the ROI using Mashvisor’s investment property calculator
If you want to do one thing right and guarantee a profitable real estate investment, make sure to use Mashvisor’s investment property calculator to assess your ROI and estimate key financial indicators on any rental property (traditional or Airbnb) across the US real estate market.
5. Measure key financial metrics
To know whether or not an investment will be profitable, a residential real estate investor uses Mashvisor’s investment property calculator to compute the following metrics:
- Rental income
- Cash flow
- Cash on cash return
- Cap rate
- Occupancy rate
- Monthly expenses
6. Do not delay (major and minor) repairs
This is crucial to maintaining your property in the most optimal condition and in turn increasing its value over time. Do not delay major or minor repairs, and always make sure to enhance your income property’s appeal from the inside and out. A good looking investment property can make all the difference and give you the competitive advantage you need to maximize your returns and beat your competition.
7. Stay on a steep learning curve and always keep up with housing market trends
Another no brainer! Always stay on a steep learning curve to learn about the industry and keep yourself informed about the ever changing trends and variations in the economy and the housing market. To make informed investment decisions, you must understand the housing market dynamics, and grasp key principles to capitalize on the right investment opportunities and build wealth in real estate.
Basic Real Estate Benchmarks
1. The 1% rule
This rule is important for a residential real estate investor as it states that landlords should shoot for a monthly rental income of approximately 1% of the original purchase property price. Anything less is considered a bad investment altogether.
2. The 50% rule
Another rule for a residential real estate investor states that a sound real estate investment on a house must have operating expenses and vacancy amount to no more than 50% of the monthly rental income.
For a residential real estate investor, it is of utmost importance to have a business plan and be very clear on how to increase your returns and diversify your real estate investment portfolio for great gains. To invest for high cash flow returns and real estate appreciation requires due diligence and being familiar with the economic and market trends. You must be a chameleon in adapting your investment strategy respective to current market trends in order to make money in real estate.
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