Picking Your Investment Property – Real Estate Investing – Part 4 This is Part 4 in my Real Estate Investing Series. You may wish to start with the earlier Parts:
All Real Estate is Local:
All Real Estate Investing is local. You have heard that there are three key things in Real Estate: “Location, Location, Location!” I will give some advice in here that may not apply to your specific location. For example: I do not like Condo’s as an investment property, but in San Francisco, New York, other urban or tourist sites a condo may be a good investments. I will cover Location in Part 5.
What are your Investment Goals?
What are your Investment Goals? Generally you will have one or more of three main goals in Investing in Real Estate. Those Goals will be Long Term Capital Gains, Short Term Capital Gain (flipping) and Annual Return on Investment. Your exact goal may be a mixture of these goals. Your goals should be influenced by your tax and other financial/social situations too.
What Type of Investment Property:
What type of Investment Property should you get? Unless you have a lot of experience or other direction, start investing with 1-4 unit residential properties. This means a single family home, duplex, triplex or a four-plex. There are lending advantages for starting with properties that contain only 1-4 living units. It will also be easier to manage for a beginner. You may go to my web site and get Free Property Management Tools for 1-4 residential unit properties.
• Most Condos have rules and it can be far more restrictive than single family home living. If you tenant breaks them you will be held responsible, not the tenant; this can include financial penalties. Of course you can pass them on to the tenant, but this can be difficult.
• You will have to pay HOA fees, usually monthly. This money will not ad to your equity and will decrease your liquidity. Remember Maintain Your Leverage! Real Estate Investing – Part 3.
• In general condos do not appreciate as well as single family homes. They are generally not in as high demand as Single Family Homes.
• Some condo associations place restrictions on rentals. You may not be able to rent your condo out at some point.
However, if you have limited funds to invest a Condo may be your best choice. The association will handle much of the maintenance.
If you are getting started and want to start with the basic single family home I suggest getting a three bedroom, two bathroom home, with a garage and preferably single story. A home of this size and style will be in demand now and in the future, for both short term and long term investments. It is large enough for a family buying its first home and yet small enough for someone single. Retired people or people with disabilities are always looking for single story homes. If a home does not have at least two bathrooms and a garage it is considered economically obsolete. In short people expect at least two bathrooms and a garage. Remember the preference and market worth may vary in different market areas.
You may wish to look for larger and nicer homes for an investment property. This is fine, but if you are looking for returns on your rent consider the rental market. Generally the bigger and nicer the home the more trouble you will have getting the right sort of tenant to pay the sorts of rents you will want. In this area there is probably a strong demand for four bedroom and three bathroom homes on the rental market. If you have a large luxury home the amount of rent you can get based a unit price (price per SF) will tend to go down. Also people that can afford to rent a home of this size may also be people that can afford to buy, so they may not provide a stable tenant. I had a client who was considering a larger home and I pointed out for what he wanted to put out he could get two smaller homes and obtain larger gross rents.
If you can find a good Multi-unit property with 2-4 units, either a duplex, two homes on one lot or more; this is the type of property that can provide excellent returns. In this area most of these properties are in older areas as most new neighborhoods are not zoned for these types of properties. However, there are some homes in Brentwood 10 to 20 years old that have detached studios over the garage. Some large lots also contain in-law units or detached studios.
Unless the rents can justify it you are not shopping for high end amenities or upgrades. Generally speaking as a rental property you want nice livable, but standard fixtures. If buying to sell or flip you may consider adding certain upgrades that will have an immediate appeal and positive price return. Most charts and articles I see state that any upgrades or remodels will only provide a marginal price increase, not justifying the expense. In many cases this may be true, but often times the homes will be purchased as fixer uppers needing the work anyway. Depending on what is being replaced or installed higher quality may cost the same (or even less) in labor, while adding only marginally to the overall cost; but will have very nice appeal on the rental or resale market. Some higher quality materials will also have a longer life, saving money in the long run on the rentals. In Maintain Your Leverage! Real Estate Investing – Part 3 we talked about keeping repairs cost effective. Watch the pricing on material and shop around. Watch for sales if you know you will need some materials. Often time’s contractors will discount you if you get the materials and have them on site. Contractors do mark up the cost of materials.
There are other considerations when buying the investment property. In the future it might be something you want to have for yourself or a family member; in which case more consideration might be given to size, style, and other factors that ad cost you might not normally want to incur.
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