I have often been asked by people wanting to get into real estate investing for advice about the types of properties they should invest in. There are so many different kinds of real estate investment types, from single family homes, to farms to industrial parks and there is nothing wholly right or wrong with investing in these various types of real estate. Each has advantages and disadvantages. But in my experience, residential real estate is the easiest to get into and the learning curve is the shortest. So for the new investor, I recommend residential real estate investment properties and that is what I am going to discuss in this post.
There are three types of residential investment properties. All three can be great investments. Just be aware of the advantages and disadvantages of each type before investing. Let’s go through each one.
Single Family Homes – Single family homes are properties with just one dwelling unit in them. They can be detached homes on acre lots, town homes, even condos fall into this category. Single family homes can be great investments. One of the best features of single family homes is that they generally are the only properties you can sell on the retail market. You often therefore can get a higher sales price when you sell than you would with other type of residential properties.
In today’s market there are many, many homes out there that are priced right and will generate positive cash flow. In fact, right now they are the cheapest I think they are going to be for a long time. Even thought prices have declined, rents have not. Properties in desirable neighborhoods can bring good rents and very stable tenants.
New investors can also get some very favorable financing for single family investment properties right now. Rates are currently amazingly low. Investors with W-2 (regular job) income and a good credit score can get up to 10 investor loans with low fixed rates financed over 30 years, just like you can with an owner occupied house. So both pricing and loan rates make this type of investment property very attractive. (Here is a tip. If you are married be sure to put these loans in only one spouse’s name. That way you can get 20 loans, 10 in each spouse’s name.)
In many areas however, the prices of single family homes are far higher than the rental income they will produce can cover. In other words, unless you are paying in cash for an expensive home or have a large down payment, the amount you will have to finance will not create positive cash flow. Be careful buying in pricier neighborhoods.
A downside to single family homes is the fact that when your tenant moves out, your house is vacant and producing no income. You need to move quickly to get your property re-rented. Vacancy is a cash flow killer! For example, if your monthly cash flow is $150 per month on a home that rents for $900 per month and it remains vacant for a full month, you have just lost 6 months of cash flow profit. Plus, when they are empty, they are more prone to theft and vandalism.
Duplexes, Triplexes and Four-plexes – These are the two, three and four unit properties or smaller multi-unit properties. These also make great first time real estate investments. The main advantage here with these multi-unit properties is that they will still produce income when one unit becomes vacant.
Another advantage for the newer investor, you can often get the same types of loans mentioned above with single family homes. This is because Freddie Mac and Fannie Mae, the buyers of these loans, treat these multi-unit properties the same way they treat single family homes.
These smaller multi-unit buildings can still possibly be sold to owner occupants. So the market for these properties is a little stronger than it is for others. They can often be sold to someone like me perhaps. When I was beginning my investing career, I wanted to generate some extra income so I bought a duplex and lived in one side while I rented out the other.
Apartment Buildings – Apartment buildings are properties that contain five units or more. These types of properties can really be income producers. However, they can also be real drains if they are mismanaged.
Management of these types of properties has to be strong or they can quickly get out of hand. Tenant issues and faulty maintenance can quickly add up to a negative cash flow situation. You might think you can hand this type of property over to a property management company. But if you do not know how to manage your property or manage the property management company, you will end up on the short end of the stick every time.
Financing these properties is also much harder. Say goodbye to 30 year loans that you can get with the above properties. To purchase these types of investments, you will most likely need to go to a local bank and get an officer’s line of credit or commercial loan. These loans have significantly higher rates and much shorter terms. Often terms of 5 years or less. In this way they are very much like commercial or industrial properties.
Selling these properties is also much harder than with other types of residential investment properties. Think about it. Who is going to buy these types of properties? Certainly not a retail buyer, but another investor who is going to be looking at the same cash flow numbers you were when you bought the property. In other words that investor will be looking for a deal just like you were.
What should you buy if you are just starting out?
I would suggest starting with a duplex, triplex or four-plex. You can generally get decent, long term financing. They will produce income with multiple units as opposed to sitting vacant. The resale market is fairly good for these types of properties. These three factors help reduce the risk for you first time investors. If these types of properties are not available where you live, then go for single-family homes in stable neighborhoods for many of the same reasons. Whatever you decide to do, do get into real estate investing today. Make it a goal to buy one or two investment properties this year. The combination of low prices and low rate may not be seen again for a long, long time.
What are the best areas at this time for rentals? My husband and I would like to invest asap.
Hi Mary,
Thanks for writing!
Knowing exactly where to invest is difficult to say without knowing your particular circumstances. But here is a couple of pointers to get you started.
If you are just starting out I would recommend that you invest close to your home. Investing close to your home will minimize hassles later on, and trust me you are going to want to keep hassles to a minimum. One way investing close to home does this is by reducing your travel time to and from the property. You will also be more likely to check on things if the property is close by. Also, by being close you are more familiar with the neighborhood in terms of property values, rental rates and other neighborhood characteristics and that reduces your learning curve.
If it is not possible or feasible to invest near your home, I would pick one specific area or neighborhood to invest in, as opposed to investing all over town. Look for neighborhoods that are stable and where property values and rental rates allow for positive cash flow.
Either way, once you decide on a certain neighborhood, get to know that neighborhood like the back of your hand. So you can move quickly when a deal comes along, and so you can price your rentals accordingly when they become vacant.
Hope that helps. If you are in Memphis come see us at MIG. If not, find a local REIA group and join up.
Kevin