My Favourite Type of Rental Property
In today’s article about investing in Real Estate, I finally get to talk about my favourite type of rental investment, investing in single family homes. So why is it my favourite? It’s all due to the multiple streams of income.
In previous articles I had addressed condos and townhouses as investment options and although slightly more affordable, the biggest negatives is you only have a single rental income. If the tenant leaves, or worse stops paying, you have no money coming in to cover your costs and until you get that tenant replaced, all the costs are completely out of your pocket to operate the property.
I also discussed buying duplexes. These potentially get you into two streams which helps make the process easier. Of course, from there you also have triplexes and four-plexes which can provide you with multiple income streams, but now with higher costs! That is why single family homes still have the most appeal to me.
A Real Estate Investing Tip To Add an Income Stream
Traditionally, most investors look at a single family home as two streams, but by purchasing the right property, there is a simple Real Estate investing tip you can use to easily converted that into three streams! We are not talking about adding more units in the basement, but rather renting out the detached garage separately. Note that I said “detached garage” as this is a requirement for any single family home we are buying as an investment!
Contrary to popular opinion, a garage does not automatically go to the upper tenant as part of the rent. Instead it should be treated as a separate entity that either your upper or lower tenant could rent from you, but preferably you rent to a third party. By renting to a third party, you really do have three independent income for the property and if one party leaves, you still have two incomes to offset your payments.
Which brings up the common question, who would rent a garage? Amazingly, this is a huge market once you start looking around with your eyes wide open.
I’ve personally rented to contractors who have simply used it for storage, to weekend mechanics who store their prized restoration vehicle there and now have a space to work on it during weekends and evenings and even to hobbyists who need more space to work on their projects.
The list seems to grow the more you think about it and depending on the size of the garage, whether it’s heated and whether there are counters and cabinets to work on and store items in, you can rent garages out from as little as $125 per month for a single garage to $350 or more for oversized double or triple garages that include heat.
Could you imagine what an extra $350 per month would do for your bottom line? Even renting it out at $200 a month, that works out to an additional $2,400 a year which is about two mortgage payments! Or a bundle of extra cash flow depending on how you look at it.
And What a Great Exit
Perhaps the most important part of a property like this is the exit strategy. Single family homes have significantly more buyers every year than condos or townhouses and even duplexes and can be marketed to multiple buyers. This gives you more flexibility when it comes time to sell and makes the process easier.
Obviously, its first appeal would be to regular families looking to purchase a home, but it would also appeal to families that are looking for a way to offset the cost of home ownership. What better way to do this than helping a mortgage helper unit in the basement? This can be a phenomenal way to market to first time buyers who are concerned about the cost of ownership.
Another market is other investors like yourself. If the home was properly configured and you have managed and maintained it properly, it will instantly appeal to investors. After all, it’s the ideal single family rental property (according to Bill!) with three streams of income!
Now just to close out this topic, there are some caveats when buying these properties. When you are buying properties like this, it’s important to make sure they are properly zoned for a rental suite in the basement. There are few things as devastating to a new investor as having the basement income taken away.
Second, you want to make sure any renovations that were completed were done up to code and all the work completed to build the lower suites was properly permitted. Your main concern is you want to make the units safe, but this can also come back and bite later as well, not necessarily due to complaints, but mainly when you go to sell later.
Problems like this can hold up a sale or cause it to fall completely through. Additionally, if you are up to code now, if the rules change later you are typically grandfathered in which can save expensive upgrade costs later.
Cash Flow is Crucial To New Investors
When you are starting out, cash flow is vital to your continued success, so don’t cut corners when you start as any money you initially save you tend to lose in multiples later. Think of any extra costs and expenses you deal with now, to improve or get the property up to the proper standards, as a long term investment.
Investing in rental property is not a short term proposition. It typically requires a minimum of five years to really benefit, so think long term and if you plan and buy appropriately, you will also get rewarded better than someone in it just to turn a buck.
Do you have thoughts about your favourite type of rental property? Have you already been renting out garages, or will you now start? I’m looking forward to your comments and thoughts.