Residential properties are the most common type of investment properties and are the best way to make money and guarantee financial independence in the long term. There are numerous types of residential properties including single-family homes, multi-family homes, condos, townhouses, etc. Residential real estate investors can invest in them either for the long term or the short term.
We can see why residential properties are popular in the real estate market, but why are they the best ways of making money, and how can one actually make money through them? Keep reading to find out!
Why Residential Properties Are the Best Way to Make Money in Real Estate
This is the number one reason why most people choose to invest in residential properties. With the right location and the right tenant, real estate investors can be securing passive income for many years before they decide to sell the real estate property for a profit. While earning rental income every month, the residential real estate investor is also building real estate appreciation on residential properties, meaning that the value of the real estate investments increases with each passing day.
Another great perk of investing in residential properties is that a residential real estate investor is entitled to tax breaks for property depreciation, real estate property insurance, maintenance repairs, travel expenses, legal fees, and investment property taxes. The government also offers lower tax rates for those investing in long-term real estate investments. These real estate tax advantages are a huge incentive for many real estate investors to buy residential properties.
As mentioned earlier, the best gain you get from real estate residential properties is the accumulation of long-term appreciation. Essentially, appreciation increases the value of the investment property, which allows the residential real estate investor to sell it in the future for much more than the original purchase price.
Comparing to other investments like commercial real estate or the stock market, residential properties are safe real estate investments and, if done right, almost risk-free! For real estate investors who are not too keen on taking risks and want to guarantee a high rate of returns on the investment, residential real estate investing makes the most sense.
4 Ways to Make Money from Residential Properties
Make Money from Residential Properties: Rent Out Your Residential Property
This is the most common way of making money from residential properties – purchasing real estate investments for the sole purpose of renting them out for profit (buy-to-rent). People always need a place to live, and if they can’t buy their own real estate property, they’ll rent one. This means that the main source of income comes from the property’s rent.
You don’t feel comfortable renting your residential property completely? That’s alright! You can simply rent part of it like a room, the basement, the garage, or even – if you have enough space and live in a place where this is legal – add a separate rental unit to your residential property.
Of course, in order to make a positive cash flow from renting out residential properties, you have to maintain the real estate property well and to take few things into consideration, most importantly the location of the real estate investments and target tenants. These two factors help ensure that the residential property stays occupied and generates positive cash flow. For example, if you own a residential property in a school district area, you should invest in single-family homes, and your target tenants would be families. Likewise, if you purchase an apartment building in a college town, you should focus on attracting college students.
A residential real estate investor doesn’t have to purchase residential properties to rent them; in some states, you are allowed to rent a real estate property and then rent it out to someone else for profit (rent-to-rent). However, before doing this, make sure that your lease allows it!
Make Money from Residential Properties: Airbnb Your Residential Property
When residential real estate investors rent out residential properties, it doesn’t necessarily mean that it must be for a long term. Airbnb is a website that lets property owners list their properties for tenants – mostly travelers – for a short time period.
Despite them being relatively new, Airbnb rentals are becoming one of the most common and profitable types of residential real estate investing. This is due to the rising number of travelers looking for places to stay for shorter times with flexible prices.
The best part of Airbnb rentals is that residential real estate investors can rent out their residential properties whenever they want! They can even rent them out for a night, guaranteeing an extra income without the stress of becoming a landlord.
We should note: Before you rent out residential properties on Airbnb, make sure it’s legal in your state or city.
Make Money from Residential Properties: Rent-to-Own
This option – also known as a lease option or a lease to own agreement – gives residential real estate investors the ability to make a deal with a prospective buyer in which the buyer can rent real estate investments for a set time period (typically 1-3 years) before actually buying the residential property. This means owners of residential properties enjoy a guaranteed monthly income (which is higher than in traditional rentals!).
This way of making money in real estate brings many benefits for the residential real estate investor. First of all, the tenant is obliged to pay an “option money fee”, which is non-refundable. This fee allows residential properties investors to make a profit when the tenant first moves in the investment property. In addition, it gives them some security in case the agreement is broken or buyers change their mind.
Another benefit of this approach of renting out residential properties is that they guarantee that the residential investment property won’t be vacant for the set time period in the lease agreement. Moreover, this approach ensures residential real estate investors that the investment property will be sold. Rent-to-own is less risky: tenants aren’t going to damage residential properties they’re renting since they’ll be their new homes eventually. In addition, depending on the lease, tenants are responsible for repairs and maintenance costs, which further gives the residential real estate investor a sense of security and opportunity to make money.
Finally, when selling rent-to-own residential properties after the set time period, hiring a real estate agent is not required, which eliminates the extra fee that residential real estate investors would otherwise have to pay to the agent.
Make Money from Residential Properties: Fix-and-Flip
Fix-and-flips are a great way for making money quickly through residential properties. Fix-and-flips are residential properties that are in the real estate market for a low price due to foreclosure, short-sale, or being in a bad condition, and they need plenty of reparations and renovation. Residential real estate investors buy these at a low price, fix or renovate them, and sell them at a higher price. However, you must keep in mind that for making money through fix-and-flip real estate investments, the selling price of the real estate property must be higher than the original purchase price plus the costs of renovating it.
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Additional Tips to Make Money from Residential Properties
Invest in Locations With High Employment Growth
We’re sure you have heard the fact that location is the most important factor for the success of real estate investments dozens of times. Residential properties generating positive cash flow are located in a growing real estate market with positive economic conditions. These locations allow the residential real estate investor to charge higher rents since demand is high. Successful real estate investors making money in real estate are those who recognize the best locations to invest in by evaluating the real estate market conditions in addition to conducting real estate property analysis.
Choose Positive Cash Flow Properties
To ensure making money from residential properties, you need to invest in positive cash flow properties. Mashvisor allows a residential real estate investor to find the best positive cash flow residential properties. With Mashvisor’s investment property calculator, you can calculate your positive cash flow returns by taking into account all the expenses and costs of the investment property.
Click here to analyze different residential properties in the US real estate market!
Choose Tenants Wisely
As we’ve mentioned before, finding the right tenants for your residential properties is just as important as finding the right location. Good tenants are those who pay rent on time and don’t cause damage to the residential investment property. Selecting the wrong tenants can harm your potential profit. Residential real estate investors should conduct a tenant screening process including checking credit, getting criminal history, and asking for references.
Make Money from Residential Properties: Conclusion
Most real estate investors are attracted to residential properties due to the lower risks and higher returns associated with them. In this blog, we’ve only explored some of the many ways for making money in real estate through these properties. Before investing in a residential property, make sure you do your homework and conduct a real estate market analysis to find the best properties out there with positive cash flow.