Investing in real estate has historically been advantageous with a consistent cash flow, strong historical returns, tax benefits and a low correlation with public markets. Real estate investment can benefit not only the sophisticated investor with hundreds of properties, but also the individual looking to grow their assets and begin their investment journey.
For those looking to own a residential property and generate income from that specific property, there are other options such as multifamily home ownership, short-term rentals and flipping properties.
1. Multifamily home ownership. This investment opportunity is where the owner can live in one portion of the home and rent out the rest of the space. It’s beneficial to individuals looking to start investing in real estate, as it provides a home to the individual coupled with a steady stream of income from the rental units, covering at least the mortgage payments and costs of home ownership.
The investor can also transition a multifamily home into a full investment property once the owner is ready to move out of their unit and rent out the home. Keep in mind that this investment option puts landlord responsibilities on the homeowner. The owner must be cognizant of the state laws and requirements governing landlords and tenants to ensure compliance.
2. Short-term rental. This option has become increasingly popular in recent years with the popularity of websites such as Airbnb, VRBO and the like.
The ease of listing and booking rental properties through online sources have expanded a market where both experienced real estate investors and those looking to start investing in real estate are getting involved. This option has very high potential and a risk of very low lows.
A property can be booked every day of the year, or a property can stand vacant for that time. The truth usually lies somewhere in the middle, especially in a location that is driven by a seasonal market.
Investors should consider the current and potential landscape of the local laws regarding short-term rentals before proceeding. Many cities and towns have adopted or are considering regulations governing short-term rentals; some municipalities have even banned them.
3. Flipping homes. Flipping a home allows one to purchase the property, make improvements and resell the property (hopefully at a profit), ideally in a short amount of time to minimize carrying costs.
There are many risks that should be considered, including the condition of the home and the housing market.
Oftentimes, properties are bought out of foreclosure or in poor condition since investors are looking to obtain these types of properties at the lowest cost. Buying a home with unforeseen issues at the time of purchase can delay renovations and increase costs.
The housing market also plays a part, since the investor would want to get the finished property back on the market and sold as quickly as possible in order to limit carrying costs.
The housing market has posed even more of a challenge to flippers as of late, creating a boundary to entry due to the higher prices of homes and increased interest rates.
Regardless of the type of real estate investment one chooses, there are rewards and risks to weigh for each. Investing in real estate, though, opens up the property owner to different kinds of liability — namely those risks that come with home ownership, landlord responsibilities, and construction on a property.
When an investor is considering real estate opportunities, they should keep in mind ways to limit their potential liability — such as owning the property as a limited liability company rather than as an individual — and seek the counsel of a real estate attorney, who can help assess and mitigate risk.
Brianna Burns is an associate corporate attorney in the Real Estate Practice Group, where she advises individuals and businesses on real estate transactions, including purchasing, sales, leasing, and title work. She can be reached at brianna.burns@mclane.com.
The housing market has posed even more of a challenge to flippers as of late, creating a boundary to entry due to the higher prices of homes and increased interest rates.
