If there’s one thing we all wish for, it’s having enough money to live comfortably. Usually, to reach this dream, you work hard, save up and hope that will see you through retirement. However, there is another path to take, one that many Australians have already started on, and that’s continued passive income through investment.
One passive income investment you can make is residential real estate, it can provide additional income for years to come and give you financial independence, even when you retire.
Investing in residential real estate is low risk and comes with benefits like tax deductions and the freedom to be your own boss.
Residential real estate investments are low risk because they aren’t drastically affected by economic changes (and they have been shown to quickly bounce back in times of crisis). Typically, property value appreciates with time, allowing you to earn a consistent source of income from monthly lease payments or rent-to-own agreements.
As with any investment there are many considerations to take into account to know if an income stream is right for you. That’s why it’s essential to thoroughly research the benefits and risk to fully understand how investing in real estate works, before signing on.
What makes residential and commercial real estate different?
The key difference between residential and commercial real estate is the property use.
Residential properties are primarily used as housing for individuals, couples, or families. Because these properties serve as a person’s “home” for years, there is an emotional connection to them.
Commercial properties, on the other hand, are used for business and income-generating activities. These include shopping malls, warehouses, hospitals, hotels, and office spaces.
Therefore, commercial properties require more involvement from the investor and need a larger overhead.
Both commercial and residential investments can earn a substantial income through sale or lease payments, however, they do differ in initial investment and stability during economic changes.
To invest in commercial property, you’ll need a lot more starting capital than residential property investment. Because residential properties are only used for households and not business operations, they require less money for equipment, fittings, renovation, and maintenance. Residential property investors also typically have shorter vacancy periods between tenants.
Residential properties have proven to be more stable during economic downturns. Normally, when there are negative impacts to the economy, commercial properties like retail outlets and small businesses are the first to close down, while the demand for residential dwellings aren’t as significantly affected by setbacks.
This can give residential property investors peace of mind with fewer risks and more predictable outcomes compared to other investment types, including commercial real estate.
5 reasons to invest in residential real estate
When choosing where to invest your money for the best passive income results, it pays to weigh up the benefits the investment can return. Here are five reasons why residential real estate is a great investment.
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It appreciates over time
The value of residential properties tends to appreciate through the years. When this happens, you can expect to receive a higher resale price should you consider selling your property in the future.
If you’re earning lease payments from tenants, you can increase prices to adjust with the growing rate of your property, allowing you to earn more in the process.
It is important to note that no investment comes without risk. Not all residential properties increase exponentially, and factors like location and property conditions can significantly affect appreciation value. If your property is severely damaged or is situated in a less-than-ideal location, then the value might not change or even decrease from its original purchasing price.
To avoid this and maximise the value of your property, it’s important that you keep it clean, well-maintained, and up-to-date on all safety and security measures.
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You build equity
The downside to investing in residential real estate is the cost of paying off your mortgage loan. Although this can be stressful, especially with the added interest on payments, meeting and exceeding your repayment obligations increases your home equity.
Home equity is the balance you get when you subtract your property’s current market value with its purchasing price. This amount grows as you continue to pay off your mortgage, up to the property’s principal value.
When your home equity increases, so does your wealth or net worth. In time, you will be able to cash in on this amount when you sell your property at a higher price, or you can use your equity to invest in subsequent residential properties and earn a larger income annually.
Whichever way you choose, it’s a win-win situation to build on your home equity.
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You receive tax benefits
Investing in residential real estate gives you access to tax exemptions like self-employment tax. Even though your rental income is taxable, you can deduct any expenses you paid for:
- Maintenance repairs
- Home renovation and utilities
- Association payments
- Managerial fees
- Insurance
Interest incurred can also be claimed by the property owners, according to the Australian Taxation Office.
These benefits allow you to extract a higher home equity amount. It also opens the door for you to purchase more properties and grow your business portfolio.
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You earn steady income
Residential property owners earn through the monthly rent or lease payments of their tenants. Depending on their contracts, this amount can be paid at the beginning or at the end of every month–thereby, providing steady income for the property owner throughout the year.
You can also anticipate long-term financial security as the demand for residential properties doesn’t seem to be slowing down anytime soon. As reported by news.com.au, housing prices have increased, proving that the market is doing well and people are still interested in buying residential properties.
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You’re your own boss
Investing in residential property allows you the opportunity to be your own boss. From there you have ultimate control over how to manage your investment.
Residential property investors are able to:
- Choose what properties to invest in
- Decide how much money to invest
- Sell, lease or rent
- Set their own asking price and lease fees
- Opt to renovate or restore to increase property value
You even get to work on your own schedule and manage how involved you are in your property’s day-to-day operations–whether you do it yourself or hire a property manager, real estate agent, or third party services to take care of the property for you.
Being able to choose from any residential property on the market gives you amazing flexibility into the type of property, its location, and its price. You can even predict what type of person will be renting the property, and get a say in the tenants you take on.
With low barriers of entry for investing in real estate, you can easily find the right property for you.
A competitive market analysis (CMA) report can give you a detailed look at residential property listings in your desired area. You can also contact real estate agents to talk about current markets and receive professional expertise on available properties.
To tap into the many benefits from investing in residential real estate you only need a little courage and the right advice to be well on your way to owning and managing your own property and earning passive income.
If you need any additional help on investing in a residential property, give us a call, we’d be happy to walk you through the steps and assess your suitability.