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!
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.