The Best Real Estate Investment Choice
What is the best real estate investment?
I believe it is single family houses.
Single family houses are unique in their benefits of rental property investing. I'll explore that in more detail in a minute. But first I want to talk about why other types of real estate investing are not as good.
Let's look first at commercial property investing. Commercial property has a lot of sex appeal - after all, Donald Trump does it and look at the women he attracts!
Commercial real estate does have a lot of benefits and once you become rich, it is a good idea to diversify your real estate investments by buying commercial property. First, look at the benefits of commercial real estate:
- You are dealing with business tenants and these type of tenants tend to be much easier to deal with
- Business tenants tend to improve the property to attract customers. Part of the lease agreement with a commercial tenant often includes capital improvements to the building
- Business tenants often will lease a property for many years, so you don't have to spend a lot of time finding new tenants
On the other hand commercial property has some negative factors you should consider:
- You need much more cash up front to purchase a commercial property. Often this is more than 25% of the purchase price. Sometimes you can get seller financing, but banks are less willing to loan on a commercial building if you don't have enough "skin in the game". From a banks perspective, you are much more likely to walk away from a commercial property than your home.
- There is a normal business cycle in a capitalist country. The economy goes up and down with regularity and when the economy is down it can be extremely difficult to find tenants if your tenant goes out of business. You need a lot of cash to survive economic down turns with commercial property
- Changes in local zoning, traffic patterns or economic growth can have a very large impact on the rent-ability of a commercial property
- Sometimes you might have to tear your building down just to sell the property. If the new buyer (e.g. McDonald's) wants the property, they are not going to use your building
From the perspective of a beginner real estate investor, commercial property is not the best real estate investment.
So that leads us to
residential real estate investing.
Multi-family residential real estate can mean anything from a duplex to a large multi-unit residential property and many consider it the best real estate investment.
From a lenders perspective there is a distinctive difference between 1-4 unit rental properties and multi-unit investment properties of 5 or more units. Rental property investors of 4 units or less can get real estate investment loans much easier than those who want to buy larger investment properties. If you live in your 2-4 unit rental property, a real estate loan is much like a homeowners loan.
Multi-unit properties of 5 or more units have the same loan requirements as commercial properties. However, due to the number of units available for rent, vacancies cause much less of a problem than for a commercial property.
On the other hand, many States require that if you have more than 4 rental units you must have an on-site rental property manager. This will negatively impact your rental income (unless you want this job!).
Multi-unit properties can also be negatively impacted by government programs. I once owned many multi-unit properties that were 100% occupied. But the government decided to build a subsidized housing complex nearby and my vacancy rate sky-rocketed to 75% after that complex opened!
Many real estate investors fall in love with duplexes. Duplexes seem to be ideal for the small investor. In many ways they have lot of admirable attributes:
- You can live in one side of the duplex and so you know exactly how the tenants are taking care of the property. It's also easy for you to take care of the property.
- Duplexes provide a higher income per square foot of rental space compared to a single family homes
- You can spread your risk by buying duplexes in several locations. If you own a 100 unit residential property and the location becomes undesirable you may lose substantial real estate value.
On the other hand I find some disadvantages of owning duplexes:
- Like all multi-unit properties, as well as commercial property, your real estate assets have the least liquidity. Real estate has limited liquidity, but in these cases the only buyers will be other investors. This can severely limit your ability to get out of your investment when you need to.
- Tenants in multi-unit properties expect you to take care of all maintenance and typically look at you as a rich landlord. If you don't have a management company they call you at all hours of the day and night. (I've been called at 2 am to rid an apartment of bats!) Tenants tend to abuse multi-family rental units.
- You probably need to get a property manager to take care of your duplexes (if you own more than one or two) since you will be responsible for filling vacancies, fixing the properties up between tenants and dealing with disputes between tenants.
- Turnover in multi-family units is much higher than either commercial property or single family homes. You should allocate 10% of your projected income as vacancy losses. If you have a property manager as well, count on taking 20% off the annual income.
Though many rental property investors love duplexes, there are too many headaches dealing with tenants for me to consider them as the best real estate investment.
So what makes single family homes the best real estate investment? There are a number of reasons for
buying a house
- single family homes have the most liquidity. You can always sell them - you might not get the price you want but at some price any single family home will sell.
- The demand for single family homes is high due to the ingrained desire of people to have the satisfaction and privacy of home ownership.
- Probably most important, in my estimation, is that you can use my
Rent to Own
strategy to pick "owner-tenants". These type of tenants will take care of and often improve the property at their own expense.
- With a lease-purchase agreements and rent credits you can motivate tenants in single family homes to make paying their rent on time a high priority. I've never been able to have that success with multi-unit buildings
- With a Rent to Own strategy it is extremely easy to find tenants and vacancy rates are almost non-existent. Even if I have a vacancy, the option money more than covers the loss in rent.
In summary, single family homes are the best real estate investment because:
- They have the best liquidity
- They are the easiest type of rental property investment to buy
- They are less susceptible to the ups and downs of the economy
- You can get the best tenants
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