Types of Residential Real Estate Investment with Michael Sico
A Synopsis of Four Proven Ways to Make Money From Residential Lands and Properties
One of the most tried and true ways to increase personal wealth is by investing in residential real estate. Despite a few hiccups in the housing market every so often — most notably the sub-prime mortgage crisis of 2007–2010 — there is no more consistent and dependable source of income than owning residential lands and properties. But for those looking to make their first foray into the world of real estate, the sheer complexity of the marketplace can be daunting.
Investment success requires diligence, hard work, and a familiarity with the inner-workings of the industry. So, where does one begin? What is the most important information for an uninitiated, would-be real estate investor to know? As with any other complicated subject, a good place to start is with the basics. In this case, the basics are the different forms such investment can take. In that spirit, Michael Sico provides the following is a synopsis of four proven avenues to make money by investing in residential real estate, presented as a handy reference guide.
Michael Sico is a partner and the Chief Financial Officer at Michael John’s Developers L.L.C., in Franklin, New Jersey, where he oversees financial and accounting matters.
Long-Term Residential Rentals
“The classic method of making financial gains through real estate is by purchasing residential properties and renting them out to individuals or families” states Sico. “Many first-time investors in real estate start their careers in this manner.” The advantages include steady, reliable income from renters while retaining ownership of multiple homes whose value is all-but guaranteed to increase substantially, over time. There are also significant tax breaks associated with owning long-term residential rental units, such as the ability to write off structural upgrades and building repairs, which in turn serve to increase a property’s value.
The disadvantages of investing in long-term residential rentals include certain legal exposures that apply to only to landlords, and, for many people, a prohibitively expensive startup cost. Beyond that, there is also the issue of screening and dealing with tenants, which can be pleasant, but can also be incredibly frustrating. Finances permitting, this potential downside can be mitigated, by hiring a building superintendent or property manager.
Short-Term Residential Rentals
“In the last decade or so, maintaining a residence or numerous residences and renting them out on a short-term basis has made impressive gains in popularity” states Sico. “Bolstered by online marketplaces like AirBNB, Vrbo, or Flipkey, renting out residential properties for short periods of time can, in many instances, amount to a greater monthly income than renting properties out long-term.” Occupants are charged by the day rather than by the month, which can add up to a lot of money very quickly. There are; however, some trade-offs to this arrangement, the main one being unpredictability. Whereas the owners of long-term rental housing fill their units with people who generally stay and pay rent for years and sometimes decades at a time, owners of short-term rental housing are at the mercy of transient vacationers and people passing through town on business. The income can be inconsistent. Another drawback in renting out property on a short-term basis is the amount of cleaning involved. The responsibility for keeping a short-term rental property sanitary and presentable falls on the owner rather than the renter, which is in contrast to long-term renters who, at least in theory, pick up after themselves. Finances permitting, this downside can be mitigated by employing the services of professional cleaners.
In recent years, purchasing a downscale or neglected property in order to make much-needed repairs and improvements and re-sell it at a higher price (known colloquially as ‘flipping a house’) has become an increasingly prevalent way to invest in real estate. Thanks in large part to television programs like ‘Fixer Upper’ and ‘Flip This House’, more and more would-be real estate investors see it as a viable way to enter the marketplace. The relatively low initial investment is quite attractive to those wishing to begin their career in property ownership, and, if done correctly, a large profit can be made off a single transaction. On the other side of things, though, there is an unbelievable amount of hard work involved in flipping a house through every stage of the process. First, a proper candidate house must be identified. Many factors including geographic location, condition of the surrounding neighborhood, and the property’s asking price must be carefully considered. Then there are the logistics, costs, and physical labor involved with the renovations themselves.
Finally, there is the oftentimes arduous process of selling the final product for the desired amount. Depending on the condition of the house at the time of purchase, the whole process can take months at a time, and sometimes more than a year. So, although there are many opportunities out there to make a substantial amount of money by flipping a house, it is not a project for the faint of heart.
Real Estate Investment Trusts
For those who wish to invest their money in the real estate market but not spend their time and effort dealing with the actual properties, real estate investment trusts (REITs) are an excellent option. Investing with an REIT means effectively buying shares in a corporation that owns a large amount of real estate and distributes virtually all of its income as dividends. It is a hands-off and hassle-free approach to owning real estate that still provides healthy returns. However, investing in REITs is not without its dangers. REITs always run the risk of their properties becoming vacant for significant lengths of time, at which point the loss in income is absorbed by all investors — and not always equally. There are some tax complications, as well. Further, it should be mentioned that entities purporting to be legitimate REITs have, in the past, been used by unscrupulous characters to run complex fraud schemes, or otherwise swindle their investors. So, as with any other investment, thorough research ought to be conducted before handing over a single dollar.
Of course, there is vastly more to residential real estate investment than is dealt with in this blog post. The above list is meant only as an overview of four proven methods for turning a profit by venturing into the housing market. With time, tenacity, hard work, and a healthy dose of luck, any would-be real estate investor can parlay a series of wise property investments into a rewarding and profitable career.