Investing in real estate is a smart way to use your money: properties tend to gain value over time, you can have a steady stream of passive income, and you can start earning even if you have not fully paid for the property. However, income from rental property is not entirely passive: you do have to put in some work to maximize your earnings, and this work is of a very specialized nature.
In many cases, investing in property management will save money and increase income in the long term, more than paying for itself in the process.
Types of investment properties and their management
There are three main types of investment properties: vacant land, commercial property, and residential property. They all have their pros and cons, and some require expert management much more so than others. The rate of return varies depending on many factors, which a professional may help you understand better.
This type of investment property is the riskiest to invest in since it takes skill and experience to identify a property with real potential to increase its value. And even then, you will not perceive rental income – vacant properties must be developed before you can start making money from them, and property development is an industry in and of itself. If you choose to go this way when investing in real estate, make sure you seek professional advice and do your due diligence.
Commercial property is defined as anywhere business operations take place: we could be talking about offices, retail spaces, productive spaces such as factories and workshops, and even storage spaces.
Commercial real estate has several advantages when it comes to generating passive income: rent is higher than residential property, tenancies tend to last longer, and in many cases, you are not responsible for maintenance of the property. Commercial property tends to be rented out as an “empty shell” (think of what empty spaces look like in shopping malls versus what the shops look like), and at the end of the tenancy, it is your renter’s responsibility to return the space to its original state.
There are several downsides to commercial real estate, and a big one is that the value of the property is directly linked to its rental income. This means that if you lower the rent to entice new tenants, you are effectively lowering your property value. Managing a commercial property takes knowledge and experience, and while it can be very profitable you will want a property manager to assist you.
Novice real estate investors should start their portfolio with residential property. It’s the one with the lowest risk and easiest for a non-expert to manage. But even so, the choice of property is vital, and you might want to enlist a professional to help you find properties with the highest chance of success.
When purchasing a residential property you need to consider a number of factors that will determine how easy it is to rent (and keep rented) and what its overall value will be, should you decide to sell it down the road.
Some of the factors to consider when investing in residential real estate are:
- Location: is it near good schools? In a college town? Close to tourist attractions? Convenient for convention centers or close to airports or train stations?
- Local community: what are the crime rates? What are the tax rates? Many cities discourage rental conversion by charging fees and requiring lots of paperwork – do not buy a property until you are sure you will be able to rent it in the manner you want to. Are there any future development plans in the community that will affect the rentability of your property?
- Rental market: what are the average rental prices? What percentage of properties are vacant? Are there many listings for available properties? High availability means you may have to reduce your prices, while few listings mean there will be more demand.
Having considered all of this information, you will be ready to choose the right investment property to begin your real estate portfolio and start making passive income. If you are new to investment properties, we will further recommend you start with a single-family home or condo since these types of properties tend to attract long-term renters and the maintenance is straightforward.
There is one more thing to consider, and it is investing in real estate intended for short-term rentals, Airbnb-style. In this case, you are not seeking long-term tenants, and good schools in the neighborhood will not make a big difference to your income. If you want to invest in real estate planning to use it in this way, the location, neighboring attractions, and local amenities are what matter the most, as well as providing a top-notch guest experience.
Short-term rentals earn comparatively more than long-term rentals, but they require additional work: keeping the property clean and attractive, with a well-stocked kitchen and trendy decor. You will have to be in touch with your renters, and treat them like hotel guests. If these things sound like a headache, leave the short-term rental market to others, or hire a property manager to take care of it for you.