Investing in residential real estate is one of the smartest forms of investing. While some think commercial real estate is the best place to put their money, residential investing is both easier to get into and has a more stable tenant base. Granted both types of real estate have their benefits and difficulties, if you are considering entering into the real estate market, here is what you need to know.
The Investment Potential of Residential Real Estate
Residential real estate is a $29 trillion market as an asset class, with the commercial sector adding $10 trillion. Investing in this market can have many advantages when compared to other forms of investing. One of the best reasons being the steady flow of income that a residential property can produce. This passive income makes for a large incentive that helps drive investors into the residential sector where they can either invest in one building or build up funds to invest in multiple locations. When looking to reap the greatest profit, the location should be a forefront consideration when choosing a residential property. Urban areas or college towns tend to have a higher margin for profit as the demand for rentals is always high.
Another benefit of investing in residential real estate is the financial security and tax benefits that can come with it. While the steady flow of passive income is nice for setting yourself up comfortably on its own, tax exemptions are also something to consider. For example, rental income is not subjected to a self-employment tax. The government also offers specialized tax breaks designed around property maintenance, depreciation, and legal fees. In addition to that, long term investments may also benefit from a lower tax rate.
Furthermore, investing in rental properties, especially multifamily complexes, can allow you to take advantage of multiple sources of rental income at once. Complexes like this also ensure that you always have rental income even between move-ins as it’s unlike that all apartments to be empty at the same time.
Investing in residential real estate has a lot of potential overall when compared to investments made in commercial properties. To reap all of these benefits, it’s important to know exactly what to look for that makes a property valuable.
What Makes a Residential Property Valuable?
To make the most out of residential investing it’s important to consider the factors that attribute to appreciation. Increasing demand for homes in an area will contribute to a boost in value both for investors and for those looking to buy for their own use. Locations like this are often urban and located in neighborhoods that are situated near offices, entertainment centers, and schools. Locations like this are considered ‘market drivers’ because they are situated in an area that offers both desirability and convenience.
Another factor is to consider the age and condition of the property. This ties into the 70% rule which stipulates that you should never pay more than 70% of the after-repair value. For instance, if you purchase a property with an after-repair value of $200,000 and the repairs cost $50,000, you should pay no more than $90,000 for the property. That makes your total investment cost roughly $140,000 and an estimated profit of $60,000. While there is room to bend this rule, in the end, how much you spend will depend on how confident you are in the estimated costs of repair and the overall profit you’re comfortable making.
The size of the property is also something to consider, as larger properties that have general appeal will be able to be rented for higher prices. This also goes for apartments, as those with more living space can appeal to larger families and thus go for more.
The cost of managing the property is something else to consider. For instance, water heating accounts for nearly 18% of a property’s energy use. Consider how much of the utilities you will be providing, and how much water, electricity, and trash will cost you.
These are some of the driving factors behind what determines residential property value and they are factors to keep in mind when choosing your properties.
How to Find Renters for Your Vacant Properties
Online listings are your best bet when it comes to drawing in new tenants. While sites such as Zillow and Trulia can increase your audience, you can also use social media to your advantage. Facebook, the largest social media outlet today with more than 2 billion users every month, can also offer you the exposure you need to bring in new renters.
Facebook ads work especially well for real estate because they are inherently visual. This allows you to highlight the best features of your home that will pique interest and bring in more rental candidates. To use Facebook to your advantage consider these points:
- Your Local Market
The Facebook Ad Manager allows you to set your ads to only target a specific city or zip code. Large scale exposure can gain your property more views. However, unless they’re planning on moving to the area, views from 1000 miles away are largely useless. Narrowing your field so that the ads only appear to potential renters in the area will help you find serious candidates that are more likely to take an interest.
- Tailored to Your Audience
Ads targeted towards millennials will be different than those targeted towards older generations. Think about the types of renters you’re looking for: new families, older couples, or singles, as well as the income level you wish to target. For instance, advertising your apartments in the city that are worth $2,000+ a month wouldn’t be targeted towards low-income families. Taking this into consideration when designing your ad can help you reach the right type of renters.
A psychological study conducted by Harvard Business School showed just how powerful psychology can be in adds. For their study, they showed groups a normal advertisement for discounts and another that hinted at sophistication. The latter received more clicks overall. When interviewed, participants revealed something interesting. They said that they know Facebook ads are targeted towards them; however, those that they click on are the ones that they believe show that they have sophisticated taste. Ads like this are seen as complementary, making them more welcomed than standard advertisements. Emphasizing the luxury and sophistication of your rental property ads can have a similar effect and result in more clicks.
Residential properties are one of the smartest ways to enter into and invest in real estate. However, to make the most out of your investments you need to know what makes these properties valuable. After you have acquired residential properties, proper marketing will further improve your chances of bringing in high-paying tenants. Platforms like Facebook are perfect for running ads and gaining exposure for your properties.
Regardless of if you’re new to real estate or if you’ve owned properties for decades, keep these tips in mind. They can help you further build your portfolio and solidify your investments into a stable and secure source of income.