4 Different Properties To Consider

Some might say that a common investing strategy is to wholesale single-family homes.

But have you considered other types of properties?

Like…

Condos
Multi-Family
Apartments

Well, I want to dive into those other great options today – perhaps after this lesson, you’ll give one on these types of properties a go.

Let’s look at each one…

Single-Family Homes

So, as I said, the most common property is single-family homes.

Why?

Well, several reasons, but here are the biggies:

They’re typically easier to rent out than other property types
They’re easier for new investors to understand when running the numbers
These properties typically have the best financing options available, which makes them desirable and a natural first step for investors

The biggest downside?

Economies of scale.

And that means 2 not good things…

When you lose your tenants, you lose all of your cash flow = not good
You could have negative cash flow if home values and rental rates in the area drop over time, but debt servicing and expenses stay the same = not good

Multi-Family

I LOVE multi-family properties and I definitely recommend them.

Here’s why…

duplex Let’s say you buy 8 single-family homes… that means you have to maintain those 8 different homes. Which is A LOT of work, right?

But, if you buy one 8-plex… think about what that means: You have to repair just one roof and do landscaping – at one place. The overall expense goes way down on a multi-family property.

And keep this in mind, too…

Investors usually describe multi-family properties by the number of doors that they have (this isn’t rocket science):

a duplex will have 2 doors
a triple has 3 doors
a four-plex has 4 doors

…you get the idea.

But check this out…

Anything under 5 units (5 doors) is considered residential real estate and can qualify for residential financing.

Anything 5 doors or above is considered commercial real estate and will need a commercial loan or cash to purchase.

The units with 5 doors or less are usually handled a lot like a single-family property... meaning they can fluctuate with the local market more than a larger multi-family project, which a solid management company could better control the value of.

There are a bunch of benefits to investing in small multi-family:

They generate decent cash flow
You can spread your risk over several units, so if one becomes vacant, your investment can still produce income.
Smaller complexes are typically easily managed
You can use residential
Usually, these properties appreciate very well, similar to single-family homes

With the good comes some not so good…

If you’ve got tenants, there’s always an unknown… there’s risk involved. And with several units, you have several tenants.

Of course, even though there are professional management companies to take on this part, it’s just not as easy-going as, say, a single-family home would be simply because of the number of people involved.

Personally, I’ve done many small multi-family unit deals over my years in this biz – I like them and I’ve done pretty well. You can too…

You just need to structure your legal entities correctly. If you do, you can certainly make investing in smaller multi-family projects super fun and profitable.

Condos

There are some nice advantages with condos…

As an investment, they’re typically cheaper than single-family homes.
The Homeowner’s Association (HOA) maintains the premises.
The unit is easy to maintain because you’re not responsible for replacing roofs or doing exterior repairs.

Probably the biggest disadvantage with condos is that the HOA dues can dilute the cash flow.

And, there’s usually not so many financing options available.

More downsides?

Condos appreciate a lot less than other properties and they’re the 1st to be affected in a down market.
You may find it difficult to resell and exit the investment.
Due to the rules and regulations of the HOA, you will have a loss of control.

Because of all of this, I actually advise my students to steer clear of condos.

Having said that, there are 3 exceptions:

If the condo is near a university
If it’s in a highly desirable vacation area, in which case you could turn it into a vacation rental
If the condo was so cheap, and there are strong rental rates in the area

Hear me now… my suggestion is to stay away from condo unless it meets one of those exceptions.

Apartments

Okay, 4^th and final… let’s touch on bigger multi-family complexes: apartments.

While I haven’t personally dealt with these types of properties, I know colleagues who have.

And this is what they say…

HUGE cash flow advantages come with investing in an apartment building – IF – it’s managed the right way
There’s less competition investing in bigger complexes than smaller ones
Paying for management becomes easier/less expensive because you can spread the cost of management over several doors or units
Economies of scale make apartments a lot less expensive than buying the same number of single-family doors

Of course, you know I have to give the full story, so here are some negatives to watch out for…

Apartments are very expensive – in 2 BIG ways:

Buying the apartment
Repair costs

That second point is actually the reason why many new investors don’t even consider apartments.

apt Plus, with an apartment building, you’re forced to deal with so many tenants – that you’d have to hire a professional property manager. And again, with so many tenants, you have A LOT of legal risk to handle.

You also need to know that an apartment building could be harder to resell... and would be less liquid than a single-family home or even a smaller multi-family complex.

So… if you’re a highly experienced investor with lots of capital or access to it – go for apartments! They can be a great investment. If not, gain more experience before you jump into this option.

Bottom Line

It’s important for you to weigh the benefits and downsides of each of these property types before you decide the route you take.

And, also remember that it should align with the goals of your investing career. Will investing in a condo take you where you want to be as a professional investor?

Just because you see a good deal doesn’t always mean you should pull the trigger on it.

Make sure each deal and property fits your REI plan. And that includes choosing the property type that will be right for you.