Uganda, Kampala | Real Muloodi News | In Part 1 of this series, we discussed how to get started in real estate investment with a limited amount of capital. In this next instalment, we will explore different types real estate investments to turn a profit.
There are eight primary strategies for generating real estate income. Whether you can earn a passive income (from the money you invest) or an active income (from the work you do), depends on which strategy you implement.
Types of Real Estate Investment
Long-Term Residential Rentals
Investing in residential rental properties is one of the most common and traditional methods for making a passive income in real estate.
When considering long-term residential rentals, a great location is the most important thing to look for. This is even more important than the current state of the property (although you need to consider this too). However, the location is the major factor that determines how much your real estate asset will increase in value with time. It will also determine how quickly you will let the property to tenants.
You may pick up a run-down home in a great location at a discounted rate. But you should consider the gross returns, i.e., the rent received minus your costs/expenses. Expenses include things like renovations, maintenance, service charges, taxes, etc. The more run-down the property, the higher your costs. Avoid properties that require a lot of expensive maintenance, and try to look for ones that only require cosmetic fixes.
If there’s positive cash flow in a residential rental, then it could be a great investment. However, if you are looking at long-term appreciation in property value, then you may not need this right away. For more tips, read our article: Buy-to-Let Investment: Home Buying Tips and Advice.
Vacation Rentals/Short-Stay Rentals
Companies such as Airbnb. VRBO and Expedia have brought the short-term rental market into the mainstream. It is now easier than ever for investors to capitalise on local demand for temporary and vacation rental accommodation, rather than getting tied into long-term leases.
When looking for a vacation rental, you want to focus on high-trafficked tourist areas to provide the highest return on your investment.
Short-stay rentals are a mix of active and passive income; they do require more work than long-term rentals in terms of cleaning and upkeep, unless you hire a property manager to do this for you. In either case, it is critical to satisfy everyone staying in the properties you manage by going above and beyond. Read How One Family Converted a Shipping Container into a Dream Home and Short-Term Rental.
The fix-and-flip culture is booming. This is a more active real estate investment, where the profits result from the work you put into it.
While you can make a lot of money through home-renovation flips, in the beginning, it may be challenging. If you don’t have the expertise to choose the correct house, you may find yourself on the losing end.
Go for the ugliest properties in the finest neighbourhoods, advises Matt Larson, an American real estate investor who has flipped over 2,000 properties. That’s where the money is.
You need to determine how much will the home be worth once you have invested in fixes and repairs. Making money on a home remodelling flip can be lucrative if you can accurately determine the underlying expenses and potential value. For this, a strong relationship with a general contractor is invaluable.
John and Julie Wakefield, a husband-and-wife flipping duo with hundreds of flips, caution against taking on more than you can handle. They advise that as a real estate investor, the ability to solve issues creatively is just as important as your ability to crunch figures.
In Part 3 of this series, we continue to explore different kinds of real estate investments to turn a profit.
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