Maybe you've heard that your friend is interested in investing in real estate. They want to test the waters with buying a residential property, do some renovations, and then rent it out to tenants so that they can collect monthly cash-flow (Cha-ching!!!). You're curious and want to know more....
But what is residential real estate anyway?
Residential Real Estate is defined as any property used for residential purposes. Examples include single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences with fewer than five individual units.
Typically, you hear the term single-family, duplex, tri-plex, and four-family. These are all types of residential real estate. The number of residential real estate properties dwarf the number of multifamily properties (5 or more units), which is one of the reason why it's easier to find and purchase a residential property.
For example, in Hamilton County, Ohio there are 225,869 residential real estate properties compared to 1,147 apartment buildings (in this case 20+ units). Note: Hamilton County Auditor groups 4 unit properties in with the APARTMENT, 4-19, which make up 5,727 properties.
Why invest in real estate?
Now that we defined residential real estate, why should you invest in it? Generally speaking, real estate appreciates over time. Take a look at the chart (Figure 1) below showing the median sales price of houses sold in the United States over the last 58 years. That's over a 17x increase on your investment! Now, different parts of the country may show lower returns and others show higher returns, but that's not a bad yield on your investment.
Figure 1, Median Sales Price of Houses Sold for the United States (1963 - 2021)
Another reason why investing in real estate is so beneficial is the reduced risk. The chart (Figure 2) below shows the rental vacancy rate for the United States for the past 65 years. The peak vacancy rate was about 11% during the Great Recession around 2010. So, that means that on average, during the worst vacancy period in the last 65 years, you could could still have 89% of your tenants paying rent. Purchasing in the right areas, screening tenants properly, and having strong property management can further mitigate risk and keep occupancy high.
Figure 2, Rental Vacancy Rate for the United States (1956 - 2021)
In Conclusion...
Real estate is classified as an alternative asset. This means that it's not categorized as a stock or bond. Real estate, outside of REITs (Real Estate Investment Trusts), are typically illiquid - meaning you can't sell them as easily as your stocks or bonds. Because of the illiquidity, the price fluctuation that occurs with stocks typically doesn't impact real estate as much. Because of this you have a little more time to react to buying and selling and making informed decisions to build your wealth.
For more information about real estate investing check out our resources page and be sure to check out our future blogs.
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