Of all the ways to invest and grow your wealth, why choose real estate?

There are a lot of different ways you can invest in real estate and all of them have the potential to be profitable. I believe that residential real estate, particularly single-family rentals, is one of the best investments you can make.

It is believed by some that investing in residential real estate may be more beneficial than other options such as stocks, bonds, flipping, commercial investing, or REITs.

The Covid 19 pandemic has shown us that life can be very unpredictable. We have seen a lot of damage to commercial and retail real estate over the last year or so. There have been some big ups and downs in the stock market, and there has been a strange war between Reddit and hedge fund short sellers. This has made us question how stable the stock market really is.

With the current economic situation, many people are unsure about what will happen in the future. investing in residential real estate can be a safe and solid investment because it is a physical asset that can be sold or rented out for income. Additionally, the value of real estate usually increases over time, so it can be a good long-term investment.

What does it mean to call an investment safe?

Let’s start by defining what a “safe” investment is. When you’re investing, there’s always a balance between risk and reward. The more risk you’re willing to take on, the higher the potential reward should be. The goal is to figure out how much risk you’re comfortable with and make decisions accordingly.

We use the term “safe investment” to describe an investment with a reasonably high chance of the initial investment being returned. I am looking to make money on my initial investment, not just receive it back.

The reason I love median-priced, single-family homes is that I can reasonably expect to make a profit on them within 7-10 years. They are in high demand and relatively safe.

They also meet four criteria that define a safe investment to me:

1. A long history of success
2. Risk that can be mitigated
3. Stable and reliable
4. Good returns for its level of managed risk

While some investments are considered “safe,” they do not provide the returns necessary for building real wealth and achieving financial freedom.

While investing in real estate may be seen as riskier than other methods, it can be made safe through due diligence and having a clear strategy.

Why is investing in SFRs a solid choice for wealth-building?

Investing in single-family rentals

If you’re looking to invest in a single-family rental, you’re likely pursuing a buy-and-hold strategy to acquire and rent out a detached home. This can be a great way to generate passive income and build equity.

The process can vary in some ways, and often depends on whether or not you pursue these investments alone or with the help of a turnkey provider. In general, though, the process follows these four steps:

1. Acquire
2. Renovate
3. Rent
4. Repeat!

An investor will gradually buy multiple rental properties in different areas as their portfolio increases, which spread out risk by creating a more diverse portfolio.

The diversification occurs based on the number of properties you hold and where they are located. This way, you can minimize the financial impact of rental vacancy, major repairs, market downturns, and natural disasters.

You can build your wealth in two ways: cash flow and equity. Some investors will tell you to focus on just one of them, but both contribute to your overall wealth. To maximize the equity in your home, pay off its mortgage. You can use your cash flow to do this over time by essentially using someone else’s money to pay for the home.

After a mortgage has been paid, the property owner has more money to spend each month. If the property is sold, the owner will receive the money from the sale minus the amount still owed on the mortgage. If the property is held for at least five years, the owner is more likely to see the benefits of increased cash flow, equity, and appreciation.

This investment strategy has some advantages over other real estate investments for a few reasons, which we’re outlining for you below.

The advantages of buy-and-hold rental investments

Stable assets

Real estate is different from stocks and REITs because you’re buying a physical asset. The property and land will always have some value. Even if its value decreases, these decreases are usually temporary.

Additionally, real estate investment are reliable in that they appreciates over time and is an effective measure against inflation. As opposed to other investments which may falter during inflation due to the dollar’s decreased value, real estate values maintain their footing.

Diversifying one’s portfolio by investing in real estate instead of other types of investments like stocks helps to mitigate the risks inherent in depending on the stock market. The stability of real estate values provides a buffer against the potential drastic ups and downs of the stock market.

Leverage

While leverage can be a good thing, it can also be a bad thing if the market value of the property falls below the amount of the loan. Real estate has the advantage of leverage, meaning you can use someone else’s money to finance a purchase. In most cases, the lender will be a bank. While leveraging can be beneficial, it can also be detrimental if the market value of the property falls below the amount of the loan.

If you want to buy a $100,000 property, you would need a $20,000 down payment. This means that you are borrowing $80,000. The goal is to pay this off over time, with interest. However, some investors use their monthly cash flow from their rental properties to pay off their mortgages instead.

If you investing in something, you don’t have to spend as much of your own money to make it happen. This means that you can more quickly and effectively grow your portfolio by buying properties for less money.

Exit strategies

An exit strategy is a must for every investment. Buy-and-hold investors have the advantage of being able to wait. A flip or stock sale might have a certain time window within which you must sell in order to get the most out of your investment.

Investors who follow the buy-and-hold strategy do not rely on selling their investment to make money. They wait until the conditions are right to sell, during which time the investment increases in value. In general, the longer you wait, the more you stand to gain.

Overall, single-family real estate is simpler to sell due to the number of potential buyers. Commercial and multifamily properties have a smaller potential customer base, while nearly everyone is in the market for an SFR at some point. There are three primary types of buyers for SFRs: a typical homebuyer, another investor, or a company. Because SFRs are always in demand and more stable during crises, they are simpler to sell.

A buy-and-hold investor also has the option to defer capital gains taxes by performing a 1031 Exchange. This is a strategy that allows you to trade your property for one that is like-kind. Investors use the strategy to refine their portfolios, increase diversification, and save significantly on what would otherwise be a heavy tax burden.

Managing risk in real estate investing

While there are some positive aspects to this type of investing, the fact is that investing in real estate, even for long-term investors, is notwithout risk. Here are the biggest contributing factors to risk in investing in rental properties:

High vacancies

When you’re investing in real estate, the most expensive time is usually when the property is vacant. This means you’re paying for the mortgage, upkeep, and management of the property, but not earning any income from it. Vacancies are inevitable, but you can minimize the risk by providing a quality property and good management. This includes vetting the residents carefully.

This makes it more likely that residents will renew their lease, which prevents turnover. Even when you have a vacancy, it’s important to have a good team that can fill it quickly with a high-quality resident in order to maintain your cash flow.

Negative cash flow

Negative cash flow is often—though not always—an investor’s nightmare. In real estate, this can happen for a few reasons, including:

• High vacancy rates
• Excessive overhead costs
• Not competitively priced
• Poor market or location choice

If you find yourself with negative cash flow month after month, it may be time to reassess your investment.

Even though some investors know that a negative cash flow investment may not be profitable in the short term, they are willing to take on the risk because they expect to make a lot of money when they sell the property. Other investors intentionally make their investments break-even or slightly negative so that they can pay off the mortgage quickly and own the property outright. These investors are usually experienced and know what they are doing.

In other words, being careful from the beginning can help avoid negative cash flow.

Problem residents

There is no more classic rivalry than that of a landlord and their tenant. While this should not be the case—after all, we should be helping each other—it is a common stereotype. The problem of “problem” tenants, like many risks in real estate investment, can be solved through due diligence.

Resident might be considered a problem if they often don’t pay on time, intentionally damage property, or ignore responsibilities outlined in their lease.

The value of screening prospective tenants is immeasurable. Many investors rely on their management team to handle this process so that they can avoid the potential stresses that come with being a landlord. Having a quality property manager is essential to maintaining a well-kept property that will garner a high appreciation.

Lack of due diligence

For real estate investors, due diligence means researching a property before making an offer. This includes running your numbers, looking at the right indicators, having a thorough and proper inspection of the property, analyzing the market, and working with the right people.

You need to hire an experienced, high-quality property management team to preserve the quality of your investment and the wealth that comes with it. You need people beside you that you can trust to do the best job possible.

Investors in real estate are taking a risk when they avoid looking at the specifics and realities of their current or future investments.