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Residential rentals can provide a good introduction to real estate investing. Before you jump in, it is important to carefully evaluate your long term goals, tolerance for risk, and timeline. These will all help you design the best legal structure to hold and protect your investment. Here are some common strategies used by residential real estate investors.
Passive investing may be the best way to get started in residential real estate for many people. Although many people confuse "passive" income with just having multiple channels of income, a passive investment means that someone else takes on the risk and operates the real estate in exchange for your investment. While they will charge an asset management fee and may be entitled to a greater percentage of the profit, for many people this is a very safe and easy way to get involved in Real Estate
Tip: Explore Residential Real Estate Investment Trusts, which are securities that trade on stock exchanges. REITS are like a mutual fund with real property and many are very cost effective and an easy way to diversify your investment - without the need for an attorney or complicated structures to get started.
If you want to purchase individual assets, buy and hold is a time-honored strategy that involves purchasing a property and holding on to it for the long term. This approach typically allows for equity growth through appreciation and can provide a steady source of rental income.
Tip: This kind of investment is usually meant for long term ownership. If you are investing with others, consider how you will resolve issues that may come up over time, and the tax implications of long term capital gains.
Investors seeking to enhance the worth of a property might opt for value-add investments. This involves purchasing properties that require updates or improvements that, once completed, can substantially increase their value and the rent they command.
Tip: Consider how you will handle the need for capital for renovations - will you be able to secure a bank loan, or will one partner help with financing capital improvements? How will that be addressed in your operating documents? Do you have access to a reliable contractor who understands the permitting process in Hawaii?
Many new investors are misled into thinking this is a very simple and fail-safe way to invest, and are drawn in by seemingly fast returns. This strategy involves building a portfolio of rental properties, and using a cash out refinance or even a home equity line of credit to fund additional purchases. This strategy is essentially a mini-hedge fund by betting against interest rates. If done carelessly, this is a financial house of cards.
Tip: If you conclude, after careful consideration, that you can tolerate the level of risk, consider standard forms of asset protection and be certain to have strong compliance and review procedures set up by experienced legal counsel to help prevent mishaps.
An agreement of sale is a long term sale contract, where the buyer has possession of the property and makes payments towards the purchase price. After a set period, if all of the payments are made according to the agreement, the buyer will be the title holder of the property. Although buyers can get around standard lender requirements, the buyer is left to deal with anything that may happen to the seller that affects the property during the term of the agreement, such as if seller dies, declares bankruptcy, or a tax lien is attached to the real estate.
Tip: The agreement of sale document should be carefully reviewed - like with any long-term agreement - to try and minimize common pitfalls and risk.
Residential real estate investing offers various strategies to suit different investment goals and risk tolerances. From passive investing to more hands-on approaches like buy and hold or value-add investments, each strategy comes with its own set of benefits and challenges. Careful planning, due diligence, and, where necessary, professional advice are crucial to maximize returns and mitigate risks. By understanding the nuances of each investment option, you can make informed decisions that align with your financial goals and help build a solid real estate portfolio.