The Best Type Of Rental Property To Invest In Is….

Investing In Rental Property

Can you believe we are already on our fourth article in this series of Real Estate investment articles? This post will cover my thoughts on what I believe are the best type of rental properties to invest in. Realistically, there is no definitive answer to this as it can vary depending on your needs and requirements, but hopefully I can make a nice argument for my decision!

We’ll start the ball rolling by talking about condos. Some investors feel that investing in condos is the best opportunity going. They have minimal maintenance requirements, no worries about yards and often even the ability to become part of a rental pool to help lower the risk of vacancies. They are also one of the cheapest ways to get into property investing as condos tend to have lower starting price points and require smaller down payments because of this. Which brings me to rental pools.

Rental pools are often an enticing feature for new investors who are just starting out. If you haven’t heard of rental pools before, they are simply a collection of condo units in one complex that are managed for you by the pool manager and all profits (and losses) are pooled together.

So now, instead of losing 100% of your costs when your unit is vacant, the cost is split across all the units in the pool. Conversely, instead of receiving all the profits when your unit is full, you share it with the other units. It ends up being a great way to reduce your risks, but it also really cuts into your potential profits.

These can be a great option if the property you are buying is a recreational property with shorter rental terms and is being run a distance from you, like in Scottsdale or Invermere. Personally, I would stay away from both rental pools and condos. When we first started they looked incredibly attractive and a fairly simple way to enter the market, but over the years my opinions have changed. Condo fees and condo boards have caused me so many issues over the years that I have found other types of properties to invest in, that are much more profitable with far fewer headaches.

Another common focus for investors are townhouses. I personally know property investors who have accumulated a considerable amount of wealth from buying townhouse after townhouse after townhouse. They’ve actually built their whole business model on them. The positive again is the lower cost of entry when it comes to purchasing properties. Townhouses are typically going to be more affordable to buy for new investors.

However, depending on what type of units these are though, you often end up with the same difficulties associated with a condo, that’s being the monthly fees to cover common areas and costs and condo boards to deal with. Fees that directly eat into your profits and that you have almost zero control over.

If you can find units that are not part of a condominium plan, you may be slightly better off, but I feel there are even better options available. The big plus is they are one of the most cost effective places to start. I have owned multiple townhouses over the years and the benefits are, they typically provide nice cash flow as they are not too expensive, but the problem is when they are vacant, they drain your bank account as they only have one revenue stream, just like a condo.

Which leads me to duplexes, triplexes and other various plexes. Finally, we are talking about the properties that start to show you the joys of multiple streams of rental income! With a plex, you suddenly have two or more units that you are renting out, so now if one unit is vacant instead of being completely out of pocket to cover expenses, a portion is covered by the other unit(s).

In the case of a triplex or four-plex, the first two units may actually cover all your costs and units three and four can translate into pure profit. So now if you have one vacancy, it doesn’t drain your bank account, it just doesn’t increase until you fill it!

While it’s true they cost more, the extra overall revenues more than offset this. Again, instead of a single rental income seen in a condo or simple townhouse, you receive two or more incomes depending on the property for much less than double the cost.

Granted, this also increases the opportunities for tenants to have conflicts and may result in extra work in managing the properties, but the benefits definitely outweigh these slight hindrances. Of course, when purchasing these properties it’s always advisable to make sure it is properly zoned for this as many of these units were converted to multiple units illegally, which can cause issues down the road.

Now the downside of buying plexes is that when it comes time to sell them, you are typically just limited to selling to other investors. Though there is never a shortage of investors buying rental properties, it is definitely a much smaller market. Oh and we tend to be a much more demanding/cut throat group, so whatever your selling price, you can expect a fun bit of negotiating.

This now leads me to my favourite type of Real Estate investment property, the single family home. I have so much to talk about this type, that it requires its own article, which you will have to wait until next week to read!

Tell me your thoughts!

Shout out to us below!

So what are your thoughts? I know many of the readers here have investment property already, while some are just learning the ropes (and others are eagerly just waiting to read more stories about my unique tenants and have no intent on buying property!). So why don’t you share some of your experiences. If you are having great success with condos tell us what’s working for you, if townhouses are your thing tell us why! I’m looking forward to your comments.

 

About admin

Bill has been investing in Calgary Real Estate since 2003 and has been writing about various Real Estate topics since shortly after he started. With a significant amount of Real Estate transactions and experiences he is able to pass his knowledge on to other investors and partners, and now you through his Real Estate blog. To automatically receive new posts, be sure to sign up on the top right of this page and I will send you a free ebook on Screening Tenants.
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5 Responses to The Best Type Of Rental Property To Invest In Is….

  1. Tyrone says:

    Hi Bill,

    Great article. My investment property is an old house. I rent to own it to people, but they never buy it in the end. On to my third rent to own tenant in as many years. I always hope they buy it but its ok if they don’t. I get rent plus a premium so its been good. Even though you would think that because they are going to buy it that they will treat it good, the answer is no. You must continue to check what they are up to in your house. And they are late with payments even thought they risk nulling and voiding the contract. But over all its been lucrative.
    PS- Thanks for the help over the years.

  2. Bill Biko says:

    Thanks Ty,

    It is truly amazing how often Rent to Own’s fall through. I’ve had multiple rent to own tenants over the years and only one ever made it through and ended up purchasing. Others ended up in divorce, tenants changing their mind, losing jobs and the list goes on. The bonus of course with Rent to Own is they put up a good sized deposit up front, which they forfeit if they bail, but often that money has simply gone back into renovating and updating the property for the next people. Still, the mortgage keeps getting paid down and they are minimal work during the rental period, so it’s not all bad!

    Regards,
    Bill
    Bill

  3. Harold Hagen says:

    Woh!
    I have to weigh in here! LTOs have a bad reputation generally because tenant prospects are afraid they will loose all their hard earned money when the deal falls through and their forced to move. In many cases (typically 50%), that’s exactly what happens. I blame the prospects for not doing their due diligence beforehand and not treating the transaction as a viable shot to home ownership. I equally blame LTO landlords who’s only criteria towards the LTO prospect is “how much downpayment do you have?” (present company excluded!).
    As landlords, if we are entering into a LTO agreement with ithe intention of closing down the road, the focus must be on finding the RIGHT LTO tenant, not just the FIRST one.
    I provde a service thet inlcudes not only credit mngmt and veritable credit hand-holding for the tenant for the term of the LTO agreement, but incorporates credit counselling through a qualified debt mngmt organisation. As a team, we are better able to get the right tenant going on the right track and close successfully down the road for the investor. A true win-win in my books.

    Sorry for the rant, just trying to clean up this market and bring some respectability back to LTOs!

  4. Bill Biko says:

    Good points Harold,

    I think all but the most unscrupulous landlords are hoping their tenants eventually purchase the property. My point being if it does fall through the initial deposit they forfeit helps. I know I have had to reject numerous potential lease to own tenants as their incomes simply wouldn’t have made it viable for them long term (unless of course they were planning on eating or paying other bills). It should be the duty of the landlord to make sure there is a high possibility the tenants can make it work
    regards,

    Bill

  5. Jack Hullman says:

    Before investing into real estate of any kind you must get yourself satisfied regarding all the issues that you can face later on. You should look into all the aspects, so that you don’t have to face any kind of problem at all. Investing in a rental property could prove to be an profitable investment if you had taken all the points and had satisfied yourself for issues arising later on.

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