Many people look at buying a home as an investment. Many new homeowners count on their property values to rise and create wealth, through sheer virtue of owning a home. With property values relatively flat during the past year, potential homeowners see buying a property as a bad investment and don’t buy. Unfortunately, this is a short-sighted view that is going to cost them money.  

When you buy a property, you’re not just making money on appreciation. You’re also building equity in your home. As you make payments on your home loan or mortgage, you’re paying down your mortgage. Essentially, as you pay down your mortgage, that money becomes equity in your home. For example, if you own a $150,000 home, and you pay down your mortgage to $100,000, you’ve got $50,000 in equity on your home.

People who are considering buying a home but wait to buy also miss out on the opportunity to build equity. If a potential homeowner decides to rent until the market recovers, and the market doesn’t show solid signs of growth for another three years, that homeowner will miss out on three years of equity building.

Based on current interest rates, buying immediately will net a homeowner almost $10,000 in equity on a $150,000 loan over the three year period; in 10 years, a homeowner who buys immediately will have over $30,000 in equity. A homeowner who waits 3 years to buy will only have around $16,000 in equity in 10 years – approximately half the equity as a homeowner who buys today.

That assumes zero appreciation in 10 years. Realistically, with appreciation at a historic value of six percent, the homeowner who purchased immediately would gain another $122,000 in appreciation over 10 years, while the homeowner who waits to purchase would only gain $78,000 in appreciation – almost $50,000 less than the homeowner who purchases immediately. Combine equity and appreciation, and a homeowner who waits three years to buy could miss a potential $66,000 over the course of ten years.

Buying a home is a sound wealth-building strategy. Utilize it. Don’t wait and cost yourself money.

Rental income is a great source of cash, and can boost your borrowing power and your income. Many property owners find that once they start making rental income, they buy additional properties to boost their income; it’s that effective. When you’re looking at a single family home, you can still find ways to make rental income. If a house-sharing situation doesn’t appeal to you, consider converting a part of your property to make money from your home.  

Conversion Possibilities

An in-law apartment, granny flat or other type of non-traditional rental unit can be a great way to add rental income to your home. Whether you’re looking to make money from a single-family home that you already own, or whether you’re considering buying and a single-family is all you can afford, a property conversion can help you boost your income and make money from your home.

The easiest type of property conversion involves a multi-story home with amenities on multiple floors. If you’ve got a two-story home and have bathrooms on both floors, it might not be a huge stretch to convert to two units and have a ready-made rental property. When doing a property conversion, the things you’ll need to look at are bathrooms, kitchens, entrances, bedrooms and living space.

If your two-story home has a bathroom, kitchen, dining room and living room on the first floor, you might be able to convert the dining room to a bedroom and have yourself a rental unit. Then you’d need to add a kitchen and a separate entrance to the second floor, or build out the existing staircase to make it accessible from the outside. Depending on the home, this type of conversion can be surprisingly cost effective.

Check Your Local Zoning

Before you buy a property with a conversion in mind, check local zoning and building laws. Make sure you can comply with local laws. Some areas don’t permit this type of conversion to a multi-family unit, and others have strict building codes that may make this type of conversion quite expensive.

Non-Traditional Homes can Generate Wealth

Few homeowners think to themselves “I want to buy a duplex” or a fourplex with the idea of generating cash. It’s not the traditional view of homeownership, and most home buyers have other plans. However, buying a multi-family property that generates revenue can make a big difference in your income strategy and your net worth. With a long view in mind, non-traditional homes are a great way to generate wealth.

Consider a four-family home. You and your family live in one unit, and you can rent out the other three units. You then have a source of rental income, which is typically higher than the mortgage, generating excess income for you each month; in some cases, enough to pay your share of the rent, too.

Additionally, in something like a fourplex, the units can appreciate individually, boosting your net worth. If each of the properties appreciates by four percent, you’ll earn far more than if a single property appreciates by four percent.

Overall, buying a fourplex versus a single family home can increase your net worth by as much as $100,000 – or more – in as little as five years. You can literally triple your cash investment when you consider a multi-unit home, or other non-traditional housing. Then you can buy your “American dream” home with more money down, or a higher net worth; or you may decide to keep generating cash through real estate as a long-term financial strategy.

Residential real estate is a great investment option for a variety of reasons. Real estate in general is a stable investment that historically always appreciates, and typically provides a better return on investment than any other low-risk investment option. They’re also easier to manage than other investment types. Beyond the hype, though, what are the real financial benefits of residential real estate investing?  

Residential Properties Appreciate

One of the biggest benefits of investing in residential real estate is that it appreciates in value. Residential real estate can provide a double-digit return on investment, and tends to appreciate more the longer you hold it. In some high-development areas, property values can appreciate as much as 100% if you buy in the right place at the right time. More commonly, real estate values appreciate five to nine percent per year, depending on where you live.

During the last 40 years, real estate values had an average national appreciation rate of 5.4 percent, but appreciation was 9 percent in some states, and higher in some high-appreciating local markets. While real estate appreciation does vary, it tends to be higher than other traditional low-risk investments, and it can yield amazing returns if you buy in the right place at the right time.

Residential Real Estate Provides Cash Flow

When you invest in residential real estate as a rental property, you also have the benefits of cash flow and equity. Unlike a home, which is a drain on the finances every month, residential rental properties actually produce income every month. You’ll need to use a portion of that income to pay the mortgage, taxes and insurance, and you’ll have to put some aside for maintenance and upkeep, but rental properties can still provide a modest cash flow; which can increase as you add more properties. Residential real estate can also provide a source of equity if you ever need a bigger loan for improvements, buying new properties or other financial needs.

Real estate investments are some of the best investments you can make in today’s volatile market. Stocks are unpredictable, and real estate can return a far higher profit than traditional savings and retirement accounts. The right real estate investment also generates cash flow on an ongoing basis. If you’re thinking about real estate investment, residential properties are some of the best possible investments.  

Residential Property is Easy to Understand

Residential property is the easiest for many first-time investors to understand, because it’s something they’re familiar with. You’ve probably bought real estate; maybe multiple times; and you understand what is desirable in a house and neighborhood. It’s easy to spot potential problems in residential real estate, and you can form a fairly accurate idea of what the property is worth and what you can charge for rent. In short, residential real estate is the ultimate investment vehicle for the real estate novice.

Residential Real Estate is Easy to Manage

When you invest in residential real estate, in most cases, you become a landlord. While being a landlord does require some familiarity with local landlord laws, rent control laws and renters’ rights, being a landlord requires many of the same skills as being a homeowner.

You’ll have to provide maintenance and upkeep for the home, and you may be called upon to hire professionals for emergency service, such as plumbing or other repairs. These are the same things you encounter when owning a home, though, so most landlords find the learning curve relatively simple.

To be sure you’re in compliance with local and state laws, it’s a good idea to consult a local real estate lawyer before you buy a residential investment property. Once the property is established, however, and you’ve familiarized yourself with ongoing laws, rental properties are easy to maintain and represent a great investment opportunity with both immediate and long-term benefits.

When you buy your home, you’re not just buying a place to live; you’re making an investment in the real estate market. There’s good news for homeowners: real estate is one of the best investments you can make, providing a good solid return on investment with low risk. The best real estate investment strategies involve real estate as a long-term investment, so think about how long you want to own your home before you count your investment dollars.  

Real Estate Provides Solid Investment Returns

Very few investment opportunities provide the same returns as real estate. Depending on when you buy and sell, you can easily get a double-digit return on your real estate purchase, and real estate is a safe investment. The only other investments that are likely to net you such a high return are high-risk investments, typically in the stock market, where most people wouldn’t want to gamble hundreds of thousands of dollars. If you’re an average family with a modest income, real estate is literally the best investment you can make without risking everything.

Real Estate is a Long-Term Investment

Real estate isn’t a quick turnaround proposition. While real estate can provide early returns if you’re lucky enough to buy in a good market, the majority of real estate investment returns occur after a long period of time in the property. If you’re buying a “starter” house and plan to move in just a couple of years, that home isn’t an investment. You’ll be paying mostly interest that early in the mortgage, and you’ll be lucky to earn a few thousand dollars in equity. If the property doesn’t appreciate, you might not make any money on the quick turnaround.

Where real estate really shines is when you’re looking at 10 years or more. Over such a long period of time, real estate prices historically appreciate, even with fluctuations in the market. You’ve also earned a good amount of equity in 10 years, making it a good return if you do sell your home at that point. Stay in your home until you pay it off, and it’s one of the best investments you can make.

When you buy a home, you’re making an investment in real estate. As an investment vehicle, though, real estate is quite attractive, so you may decide to buy additional properties. You may choose to administer your properties as a landlord, and this can generate revenue and provide a good investment opportunity. But real estate investing also has hidden pitfalls, and this type of investing isn’t for everyone.  

Real Estate Investing Takes Time

The process of finding a property, negotiating a price, putting together the paperwork and closing on the property takes time. You could spend weeks, or more likely months, acquiring each of your investment properties. If you don’t have the time to devote to this venture, or you don’t enjoy the challenge of finding a good deal, negotiating a great rate and proceeding successfully to closing, then you won’t enjoy real estate as an investment vehicle.

If you plan to administer your properties as a landlord, that also requires a time investment. As a landlord, you must find tenants, keep the building clean and in good repair and administer the paperwork and occasional problems that come along with tenants. As a landlord, you might get a call in the middle of the night to fix a plumbing problem, and you can’t just ignore it and go back to sleep.

Real Estate Requires a Financial Commitment

Real estate is a good investment vehicle, but you should also be saving in tax-deductible retirement accounts to ensure your long-term financial health. If buying real estate and administering properties prevents you from saving in a retirement account, you may not be ready for real estate investment. Most properties also require out-of-pocket expenses, particularly in the early years, which can also hamper your ability to save in retirement funds. Real estate investment should be a supplement to savings and tax-deductible retirement funds; not an alternative.