This Pennsylvania trio bought a $100K abandoned school and turned it into a 31-unit apartment building — here's how to invest in residential real estate without all the heavy lifting

Housing supply shortage

According to multiple media reports, there are simply not enough homes being built to keep pace with the U.S. population.

Between 2012 and 2022, the number of single-family housing starts trailed the number of household formations by 6.5 million units, according to Realtor.com.

And that shortage also applies to the existing home inventory. Just last week, Realtor.com reported a "bleak lack of inventory" for prospective homebuyers earlier this month with the number of new listings down 7.1% compared to a year ago and overall inventory of both new and old listings down by 5.1%.

This housing shortage is expected to persist in the years ahead. This is why the conversion of commercial properties such as schools and offices into residential units is highly attractive.

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Passive income

Given that Bowtie High has 31 units occupied at between $1,400 and $1,600 a month, the property generates more than $500,000 in annual rent. That implies a gross return of around 15% on the trio’s total investment of more than $3 million. That’s an incredible return, but it took months of sweat and tears to get there.

Fortunately, investors can generate passive income from real estate using online platforms and avoid the hassle of real estate development and renovation.

Residential real estate investment trusts (REITs) like Camden Property Trust (NYSE:CPT) and Mid-America Apartment Communities, Inc. (NYSE:MAA) offer dividend yields of 3.7% to 3.8%.

That’s not as lucrative as the Bowtie High project but involves significantly less work and risk. For the average investor looking to put money to work and generate a steady passive income, REITs are certainly attractive for almost any investor.

Tax incentives

Wig, Colucci and Spanovich qualified for tax credits because they were renovating a historic building that had been abandoned for over 10 years. The state of Pennsylvania and the federal government both offer various incentives for this type of project.

The team decided to double-down on this strategy by reusing some of the old doors, hard wood and bookshelves from the former school to furnish their new apartment complex. Reclaimed vintage furniture adds more character to the building.

Historic restoration isn’t the only way to secure tax credits for real estate investments. Government programs such as Opportunity Zones and the Residential Clean Energy Credit can also help you lower the cost of your renovation project.