A Beginner’s Guide To Residential Real Estate

Real estate investment is one of the five basic asset classes investors should include in their portfolios. This type of investment is perceived as highly profitable because of the various multiple streams of income these tangible assets can provide.  

Of the three main real estate segments, the residential sector, which focuses on buying and selling properties like condominiums, apartments, single-family homes, and the like, has been steadily increasing in value.  In fact, as of 2021, this sector was valued at more than USD$33.8 trillion. 

As the trend of urbanization continues to grow and with more interest pouring into this real estate segment, this may be the sign for you to start investing in this market.

To help you prepare for this investing journey, here’s a beginner’s guide to residential real estate. 

 

Why Invest In Real Estate?

Real estate investment remains one of the most favored financial instruments in the financial market for the following reasons:

 

  • Asset Appreciation

The top-of-mind benefit of real estate investing is asset appreciation. Historically, real estate prices tend to go up over time, creating the perfect opportunity for investors to sell their real estate assets.  Aside from earning through selling assets, rent collection is another income stream investors can enjoy. 

 

A Beginner’s Guide To Residential Real Estate
 
  • Inflation Hedging

Real estate investment is a financial instrument that gives investors inflation hedging advantages.  Inflation hedging is when assets are used to protect from an anticipated drop in a currency’s value.  Real estate is an instrument typically used as an inflation hedge as real estate value either maintains or increases over time compared to other assets. 

To illustrate, try to look at instances where inflation is high.  During those times, the prices of commodities and rent also go up. Hence, the increase in rent means more cash flow for real estate investors.  This instance is an example of how investors are compensated during inflation.  

  • The Power Of Leverage

Another reason to invest in residential real estate is to benefit from ‘gearing.’ Financial leverage or ‘gearing’ is a strategy wherein one borrows funds to buy an asset like a row of apartments to create an income forecasted to be greater than the amount borrowed.

An example of how this works in real estate investing is when residential property development corporations borrow money to fund their projects, which will be a source of profit for them when they sell the units they built.

 

A Beginner’s Guide To Residential Real Estate

 

  • Portfolio Diversification

‘Don’t put all your eggs in one basket’ is one way to summarize portfolio diversification. An investor typically seeks a diversified portfolio to balance the risks and maintain long-term profitability.  Real estate investing can lower a portfolio’s volatility and provide a higher return per unit of risk. Thus, investors like to invest in this type of financial instrument. 

 

How To Earn From Residential Real Estate Investments

Now that the reasons why people invest in residential real estate are fleshed out, here are ways one can earn from these types of assets.

  • As A Property Owner

Becoming a property owner creates doors of opportunities for more cash flow.  These income-generating activities include: 

 -Rentals

One of the typical ways to profit from residential real estate investing is through rentals. Collecting rent is a basic way to gain from this type of investment.  This type of activity, however, isn’t entirely a passive income stream.  Leasing out properties is a hands-on business unless you hire someone else to take care of repair and maintenance and rent collection. ]

-Selling

Another way one can benefit from residential real estate investing is through capital appreciation.  As mentioned above, real estate values are likely to increase over time, and as a property owner, you can capitalize on this when you sell your property.  

  • As A Flipper

Chances are you’ve heard of reality shows that feature house flipping. Flippers are real estate investors who intend to profit from the assets they buy in a shorter time frame than the typical buy-and-hold landlords.  

If you’ve managed to catch those reality shows on TV, you may have encountered the repair-and-update flippers.  They buy a property, renovate it quickly, and then sell it at a price that exceeds the purchase price and cost of renovations. 

The other type of flipper, on the other hand, is the hold-and-resell flipper.  These types of investors buy property in a booming market, hold the asset for a few months, then sell it at a profit.  

When done right, property flipping can be a highly lucrative opportunity for those looking into short-term real estate investing.

 

Conclusion

Residential real estate is perhaps the most important investment a person can make. Most people save or even borrow money to buy real property so they can profit through selling or leasing it to others.  But it’s important to remember that residential real estate isn’t always about monetary gain. You can also enjoy yourself and live securely in a house you can call your own.

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