Residential investing is likely the most common way to invest in real estate. This is when an investor buys a single-family home, duplex, or multi-family building, and either flips it for profit or holds it as a rental property.
The purchase of this kind of real estate may be done with the use of financing or cash.
When people invest in residential real estate, they are typically purchasing a property to use it in one of four ways:
Long term rentals
In this situation, investors purchase a property such as a house, duplex, or apartment building that they rent out to tenants to live long term. This allows investors to maintain a steady cash flow and pay for expenses as the property appreciates in value.
The tenants are tied to a monthly rent payment (a lease) to live there, and the investor is the responsible landlord. The investor has the option of being the landlord themselves or hiring a property maintenance service to act on their behalf. Typically, tenants sign long-term rental agreements usually set for a year or longer.
Short term rentals
Vacation properties are ideal for this kind of real estate investment. Often, the investor will purchase a cottage, chalet, or vacation home in a highly desirable location and rent the property out on a weekly or monthly basis for guests.
This type of investment is ideal for vacation hot spots where the property will be in high demand. Again, the investor can manage the property themselves or hire a property maintenance service to take care of it for
When investing in rental properties, it’s also important to consider the tax implications. Because these properties generate income and are not considered a “primary residence”, owners should be aware of specific tax ramifications in their area. In addition, when investors sell these rentals, there will be a capital gains tax to pay on the sale.
Make sure to check your state, provincial, and federal guidelines to learn more.
The idea of house flipping is to buy a lower-priced fixer-upper property below market value and invest the time, energy, and money into renovating the property before selling it at a premium.
Provided the property’s purchase price reflects the amount of work that needs to be put into the structure (and allows for a profit), it can be a good way to invest in real estate.
This method of house flipping only works when you can sell at a profit, which would be the sale price less purchase price and renovation costs. The profit on the sale is taxable income.
Purchasing new construction is an option people consider during hot markets. Typically, the down payment on the property is required far in advance before the house is ready to inhabit.
Many investors purchase these new sales and resell them at fair market value when the home has been constructed and ready to inhabit. The idea is that the house’s fair market value would have appreciated from the time the down payment was placed to the time the home was ready to inhabit.
This income would be considered taxable.