Thanks to the rise of the sharing economy, short-term renting of New Orleans residential properties produces returns as high as 20 percent.
Whether you want to flip houses, own short-term rentals, or buy into a publicly-traded real estate investment trust, you can make money by investing into real estate.
Real estate investment can generate additional income and help diversify your existing investment portfolio. There are different business models and strategies you can follow, each with its own set of pros and cons. Knowing your options, running from low to high maintenance — and the difference between buying, holding, and trading — is a good start.
Real Estate Investing Options
Renting out part of your home short-term requires zero investment if you already own the property and live there, and no long-term commitment. If you use a site like Airbnb or HomeAway, you’ll get limited protection against damages and at least some pre-screening of potential renters. It’s also important that you understand the current short-term rental laws, the latest of which were enacted in March 2023.
Investing in real estate investment trusts (REITs) works similarly to using mutual funds, allowing you to invest in commercial real estate through brokers. REITs are companies that own commercial real estate; some but not all are publicly traded and tend to pay high dividends.
House flipping (fixing up and reselling properties) is a common way to invest in real estate, but it’s not without risks. It comes with the expectation that you’ll move the property fast enough to avoid paying a mortgage on it. You can also kill your profit margin if you underestimate the rehab costs or overestimate the sale price.
House hacking lets investors buy a property with up to four units and still qualify for a residential loan. You can live on the property and rent out the other units, and either be a hands-on landlord or use a third-party service to manage your property.
Passive Commercial Real Estate Investing vs. Single-Family Rentals
Buying one or more single-family houses is one of the most common ways to invest in real estate and one of the most familiar ones to novice investors. Some real estate experts, however, view it more as operating a small business than making a real estate investment. Due to its hands-on nature, owning rental properties comes with its own set of challenges, including unforeseen capital costs, market dependency, and lack of sustainable cash flow, among others.
In contrast to owning single-family rentals, passive commercial real estate investing is viewed as a more diversified and balanced approach to real estate investing. In most scenarios, the investor is a limited partner with a commercial real estate operating company, so direct involvement in the operations is neither required nor expected.
The reasons to choose passive commercial real estate investing include:
- Reliability of projecting the property’s performance. Passive real estate investing follows a different business model compared to single-family rentals, where asset value correlates to net operating income, regardless of how the market is performing.
- Risk mitigation by partnering with professionals, and capped liability. Passive investing in commercial real estate is not a solitary affair like being a landlord of the single-family rentals. Often, you team up with investing pros with proven track records. And because the investor is a limited partner, the investor’s liability is capped at the investment amount.
- Diversification of asset portfolio. The investor chooses what and where they invest — there’s great flexibility in selecting the type of asset and the level of involvement.
Start Small
If you’re just starting out, learn the ropes first while starting small. Don’t use all your money, and commit as little as possible, he says, while you build up a network of contacts and learn how to renovate and operate properties. This works if you have a cash flow from your other business or a job, and want to try investing part-time.
Learning the real estate market where the gears can shift rapidly could be confusing, even if you have access to a wealth of online resources and maybe even a mentor you can trust. You want to find an investment that would require a reasonable amount of time and money on your part, and provide the maximum amount of profit while minimizing risk. That’s where an experienced real estate professional can become an invaluable resource. Contact a Satsuma Realtor to discuss your real estate investment goals and available opportunities in the New Orleans market.