Alex, the newest member of my real estate investors’ group, doesn’t say much yet, but every now and then he will ask a question that shows he is paying close attention and is eager to learn all he can about real estate. This week he opened up a little more and spoke about the options he was considering for his first investment.
He was looking at a range of potential investment opportunities—Real Estate Investment Trusts (REITs), commercial properties, and residential income property—as he wanted some investment security. The questions of how these investments compare struck a chord with me because I worked through them myself when I was getting started. So, I shared my perspective with him: residential real estate investing is the most appealing choice for investment, but it takes some support getting started. Here’s why.
Residential Income Property vs. Commercial and REIT Opportunities
There are many factors to consider when deciding on a real estate investment vehicle—the size of the initial outlay, your appetite for risk, and expected returns, for example. As a beginning investor, you will do best by choosing your investments strategically, balancing your portfolio to reduce risk from changes in the market. Let’s look at how well three of the most popular real estate investment choices fit a beginning investor.
A Real Estate Investment Trust is a company that invests in a portfolio of real estate holdings and sells shares, usually publicly. You can buy them from a broker, who can advise you on the best choice of REIT for your investment goals, in terms of income flow, risk and appreciation. Shares in a REIT are much like a stock package. You select them, receive income from them, and decide when to sell—that’s it. REITs can provide a truly passive income.
You might consider that a benefit, but along with the pros there are cons for investing in a REIT. If you want to have any control over your real estate investment or hands-on involvement with your holdings, for instance, you need to look somewhere else. Because REIT shares are traded on an exchange, they fluctuate in value. This fluctuation can be much more volatile than other real estate investment options like buying commercial or residential income property. You’d better trust your broker if you plan on buying REITs.
Commercial real estate is a broad concept that includes large apartment buildings, factories and warehouses, offices, and retail spaces all at once. There are differences between each of these categories but, seen as a whole, we can say that their biggest advantage is the income flow and tax benefits. If you own the property through an LLC, you may only pay personal income tax on the income from the property and take depreciation deductions. Often, a single commercial property will have multiple tenants. This reduces the risk to your income flow—if one tenant leaves, you still have numerous others paying rent, making it easier to weather a vacancy.
For investors, the biggest drawbacks of commercial real estate are the cost and complexity. Commercial properties are often very large and very expensive, often making them untouchable by individual investors. As a beginning investor, you may find a commercial property to buy, but even a small strip mall or a suburban office complex will cost as much as several single-family residences (SFR), and finding financing will be harder than for SFR too. Banks are choosy about issuing commercial mortgages and require high down payments, as a rule.
But, that’s not where the costs of owning commercial real estate end. Commercial properties are usually highly complex to operate. Lots of tenants mean lots of management issues, as well as complex HVAC, electrical and security systems to maintain. That’s why, commercial properties are usually professionally managed, which can take a big bite out of your income flow. And, if the asset does not perform to expectations, you will be left holding the bag of debt.
Residential Income Property
Buying SFRs as residential income property offers a lot of flexibility. Since your portfolio consists of individual properties, each one is a separate project with its own financing and income flow. This distributes risk since your money is not tied up in a single investment. You can choose the level of hands-on involvement you will have in your properties. You may want a management company to screen tenants and collect rents for you, while you do your own maintenance, for example.
SFRs are also the easiest type of investment property to finance. Besides the fact that you will have numerous small transactions instead of a small number of large ones, as in the case of commercial real estate, banks will finance house purchases with homeowner’s mortgages, even though they are investment properties. Those mortgages have much more manageable conditions than a commercial mortgage. At the same time, you will receive the same tax advantages as a commercial property owner.
But, residential real estate investing can be a challenging field to enter. Successful investment requires that you first find a potential investment property—and competition can be fierce. Then, you’ll need to know how to estimate renovation and operating costs, balance those against rental income, and only then even make an offer. Those are not easy tasks when you’re a beginner. To get a secure start investing in SFRs and build a rental property portfolio, you need someone to teach you Real Estate Investing 101.
Without a secure method to handle the challenges of residential income property, it is little more than blind guessing, and unlikely to be any more successful than that. Many people try their hands at it and fail. With the appropriate support, however, you can start investing with confidence. Fortunately, you can find the support you need.
Invest in Residential Income Property with Support
When I told Alex all of this, his curiosity was piqued and he wanted to know how I got my start as a professional real estate investor. That’s when I told him about HomeVestors®. I became an independently owned and operated HomeVestors® franchisee over a decade ago when I decided to focus my investment energies on building a residential income property portfolio to provide security in my retirement.
Compared to REITs and commercial property, it was easier to get started—especially with the training and hands-on support I receive from my seasoned Development Agent and other local HomeVestors franchisees. I don’t worry about getting qualified leads on opportunities anymore, thanks to HomeVestors’ nationally-recognized “We Buy Ugly Houses®” marketing campaign. And, if I ever have a question about how to evaluate a property, I have the resources to get an answer based on tried-and-true experience from more seasoned professional real estate franchisees. It’s the perfect balance of having support on hand and being in control of my investments.
You, too, can tap into decades of experience and combined knowledge to get a start in real estate investing by calling HomeVestors today.
Each franchise office is independently owned and operated.