Defining Your Investment Goals
When you invest your money in residential rental properties, you really should have some goals in mind first.
Those goals could include:
- steady and reliable cash flow
- property appreciation
- debt pay down (by the tenants)
- tax benefits
Or maybe all of the above.
Either way, you should have your goals laid out prior to actually investing in your first residential property.
Ideally, you ought to have both short-term and long-term goals planned out (in writing) somewhere. The plans should include how you will use your various investment property types to achieve your goals.
Once these tasks are complete, you will be ready to invest in your first residential property.
Let’s go over the different types of properties so you can see how they might fit into your plan.
List of Residential Property Types
- Single family homes in four separate classes
- Easy entry single family homes
- Multi-family home duplex
- Multi-family home triplex
- Multi-family home quadplex
- Townhomes
- Condominiums
- Apartment buildings
- Foreclosures
- Distressed homes
- Manufactured/mobile homes
List of Single Family Homes (SFH)
What do the various classes of single-family homes mean?
Let me define them here, then explain which ones are good to invest in.
- Class A – luxury house, made with high quality materials for more than 90% of the house as well as internal fixtures. These are located in high end neighborhoods where the affluent live.
- Class B – nice house, partly customized and featuring nice upgrades. These houses are not as costly as a luxury one, but do cost more than a standard house. The neighborhoods are usually safe and middle/upper class.
- Class C – your standard single family house, this is a stock house built with the quality materials. They typically exist in a community where at least most of the houses look roughly the same and have some crime, but usually non violent.
- Class D – a single family home in bad shape. These homes are usually located in lower income areas with high and violent crime.
Money can be made in all classes at different times in the market, but your bread and butter should be B & C class homes.
The beauty of B & C class is that the investor can usually make improvements to the house and add to its value immediately. Now we have additional equity, our property value is going up because it’s in a good location, and we can still capitalize on cash flow because we bought it at a “deal”.
If you as an investor focus on these types of homes and buy consistently, you will grow your wealth and cash flow over time.
Multi-Family Homes
- Duplex – this is a structure that has two units in the same building. Each has its own entrance and can house a small family. The two units share a common wall, yet the floor plans can vary.
- Triplex – this is a residential structure that features three separate but connected units. These residential properties share one or more common walls. The triplex is designed to house multiple families.
- Quadplex – a quadplex, aka fourplex is a building containing four dwellings and used for commercial purposes. These are meant for small families and sometimes couples or individuals that want more space.
Multi-family homes are good residential investment properties because they allow you to scale the number of doors in your portfolio quickly.
The investor could also choose to “house hack” the multi-family unit. This is where they would live in one unit, and rent out the remaining ones. This allows for better financing options, with less money down.
Instead of one steady income coming in, this investor has between two and four steady incomes. It is also easier for them to hire a property manager to oversee the homes.
Townhomes
Townhomes are single-family homes which typically have two floors and share a wall with another home. It is possible for a townhome to have more than two floors. Traditionally, they do not have only one floor.
There can be two joined yet separate townhomes or an entire row of them. Depending on the location of the townhome, it may have a small yard, porch, or balcony as part of the property.
As is true with the multi-family house, an investor of townhomes can build his or her portfolio faster and have multiple sources of steady income from them.
It is important to know what fees, restrictions and covenants the HOA’s have in place before taking the plunge into renting townhomes.
Condominiums
These are basically individual apartments an investor can buy.
Their structure is similar to those of apartments, yet instead of renting them, the owner can buy them. That said, it is feasible for an investor to purchase a condo, then rent it out.
Again depending on where the condominiums are located, the buildings can either resemble garden apartments with two or three floors, or a multi-story apartment building. They can feature only one or a few bedrooms and bathrooms.
There are normally numerous condos in one complex and are perfect for a small family, a couple, or an individual. This is another deal where the owner of the complex is more likely to be able to hire a property manager to take care of things.
Like with Townhomes, it is imperative that you know what the HOA fees and restrictions are before buying a condominium.
Apartment Buildings
Whether they are garden apartments or tower buildings, apartments are a great investment. These are perfect for people who do not seek the permanence of owning a home. They are content to rent for however long of a duration they are comfortable with.
Sometimes rental apartment buildings turn into condominiums. It all depends on the preference of the investor. With a rental apartment the maintenance and any repairs are provided by the superintendent and his or her staff.
With a condominium, the owner has to take care of those things themselves. Depending on the size of the apartment complex, the investor can get all the income they desire from one or two properties if that is what they want.
Most investors “syndicate” apartment deals because they cost so much to get into. Syndication is a fancy word for saying that investors raise money from other investors to have enough money to buy the apartment complex.
Foreclosures
These are properties where the owner could not keep up with the mortgage payments and now the bank wants to take back that house or other property type.
Sometimes, out of spite, the owner will destroy the property before the bank takes possession of it. Then repairs must be made in order for that property to again be profitable. This is an attractive opportunity for an investor.
Very often the property which is in foreclosure will be put up for sale as is to the general public. An investor has the option of buying it as it is and fixing it up themselves.
Then, this property may become valuable again.
The new owner can opt to sell it or turn it into a rental home. Many investors like to snap up properties in foreclosure because the price is typically quite low and very affordable.
Distressed Property
This term is often assumed to be a foreclosure, but it does not have to be. Oftentimes, a distressed home may have been inherited by an estate when a family member died, or it’s owned by an out of state landlord who hasn’t kept it up. Or sometimes by just a lazy homeowner who has let their home go to shambles.
Or it could be someone who is in actual financial distress and needs to get rid of the home quickly.
Like a foreclosure, these homes are frequently available at a significant discount from its actual worth. This is great news for an investor.
It is rare that a distressed sale gives the seller the full value of that home. Any property type can fall under this category.
Manufactured Houses
These are homes that are also known as mobile homes, and are prefabricated and often come in two or more sections. The models pretty much all look the same and the house itself can be moved from one location to another.
Oftentimes, an investor will buy a mobile home “park” where they buy multiple mobile homes at one time for investment purposes.
An advantage of a manufactured house is the price to own it is significantly lower than a stationery home. They can sit either in a mobile home park or on a large parcel of land. That is typically up to the owner.
Another advantage is that they have traditionally produced great cash flow.
A downfall of mobile homes is that they are depreciating assets, whereas real homes are appreciating assets. Think of a mobile home park like a car- they go down in value over time.
There is also more maintenance that is required to keep them in good condition since they aren’t built as sturdy as a standard home.
A bonus nugget: You always want to own the land the mobile home sits on in a mobile home park. If not, you’ll end up paying a land lease to someone else, and they can raise that at any time.
Decide Between Short Term Rentals, Long Term Rentals, and House Hacking
First, let’s define what each of these are. Each of these represents your ideal renter, even if you are one of them.
- Short Term Rental
- Long Term Rental
- House Hacker
Short Term Rental
A short term rental is when you, as the owner of the property, allow very short term renters to use your house. This could be as little as a single night, although this is a bit annoying, and usually no longer than a month.
These residences are ideal for people looking at a vacation rental, where they might only be staying for a week, or just a weekend getaway for a birthday, corporate retreat, or family gathering.
Long Term Rental
A long term rental is when you are only allowing renters to stay for longer durations, like a month, a year, or even longer. This type of property is usually rented by someone who plans to live there as a seasonal or full-time resident.
While some may be for just a month or quarter, most of the terms signed in this category are for an annual lease—mostly families who are not able or not interested in buying, or someone who just doesn’t want to commit to purchasing their own home.
House Hacking
House hacking is probably one of the more interesting types of properties because you, the owner, are also a resident—you just so happen to be renting out another portion of the property at the same time.
House hacking is most common using a duplex, triplex, or quadplex type of property where more than one residence can be utilized within the same property. A duplex means you occupy one space, and you have a tenant in the other. A triplex means you’d occupy one, and have two tenants. And so on.
While some find this a great way to keep a sharp eye on the property as they live in and build equity at the same time, or even have a place to live essentially rent-free, others are not so keen to be in such close proximity to their renters.
Decision Matrix for ROI vs. Safety vs. Difficulty vs. Entry Price
You can use a decision matrix to lay out and evaluate your goals for getting the best return on your investment.
Below, you’ll find a decision matrix to help you find the type of residential properties you wish to concentrate on and how you plan to use them to meet your short- and long-term goals.
| Type | Difficulty | Risk | Reward |
|---|---|---|---|
| SFH-A | Hard | Low | $$$ |
| SFH-B | Medium | Low | $$$ |
| SFH-C | Easy | Low | $$$ |
| SFH-D | Expert | High | $$ |
| Duplex | Easy | Low | $$$ |
| Triplex | Easy | Low | $$$ |
| Quadplex | Easy | Low | $$$ |
| Townhome | Easy | Moderate | $$$ |
| Condo | Medium | Moderate | $$$ |
| Apartments | Expert | Moderate | $$$$ |
| Foreclosures | Hard | Moderate | $$$$ |
| Distressed | Hard | Moderate | $$$$ |
| Manufactured | Expert | High | $$$ |
You can also get an idea of how safe an investment this will be.
If you can see from your decision matrix where a particular property type will be a difficult investment with a high entry price, you may wish to steer clear of it.
Instead, concentrate on residential property types which may be simpler and only slightly less profitable for you.
Start, Then Optimize
In the end, the stops to finding the ideal type of property is simple:
- Write down your goals.
- Learn about the property types.
- Identify your ideal property types based on your goals.
- Start.
Just remember—as you build your portfolio, you may find your goals change, or you may learn new things about each property type you really like (or really hate).
Start, adapt, and build your dreams by building your portfolio today.