Suppose you have been thinking hard about starting to invest in real estate. In that case, you might have wondered whether to focus on a strategy of eventually owning multiple single homes for rent or whether to focus on one of eventually owning a few multi-family properties or apartment complexes. There really is not a clear-cut answer, nor could we recommend one over the other. What we can do is write down some points to be considered, which could eventually lead you to make the right decision for you.
Apartments vs. single houses for rental
There is no correct answer on how and where to start your real estate investment portfolio. Many seasoned investors readily tell novices that owning multiple single-family homes versus owning a multi-family property or an apartment building is not a good idea. We guess that behind this broad and way-too-general recommendation lies the golden rule of thumb for rental property management: your rental properties should be no more than a 30-minute drive from where you live and hopefully no more than 40 minutes from each other. But these seasoned investors ignore that many new investors do not have the money required to purchase a multi-family property initially.
That being said, we know of many investors who are quite successful with scores of single-family homes. However, most seasoned investors tend to "upgrade" from single-family homes to multi-family properties.
Being an investor in single-family homes isn't a bad idea at all. It's just that your ultimate objective should probably be apartments, not houses, due to the fact that, for example, it reduces travel time when tending to maintenance or showing the unit to new tenants. It also makes it less burdensome when keeping track of Homeowner association fees and property taxes, that is, general paperwork.
What variables are involved in the decision?
First and foremost, your financial situation will heavily weigh on the type of initial investment property you invest in. In the case of most investors, we have financed on the road to crafting a real estate investment portfolio, the vast majority could not start off buying an apartment building. Instead:
- Some started off with a duplex. These Real Estate Investors lived in one unit and rented the other. This situation called for them to have enough for the down payment of two units rather than just one.
- Some had initially purchased a small house to live in. As their financial strength increased, instead of upgrading to a larger property, they purchased a second small house and rented it out. In a few cases, they bought a house down the block.
- Some purchased a large house and rented out the back independent unit. In contrast, others subdivided a part of the main house and created a rental unit with a separate entrance in the same property. (Refer to our blog on "house-hacking," click here).
In addition to your own personal financial situation, you should consider the following "structural" housing characteristics where you live and plan on investing (do live and invest in roughly the same area, as extended travel time and related expenses tend to kill your profitability):
- Single-family home availability. Are you going to overpay on your first investment property due to the limited offer and the hot local market? That is not a good idea; you might not be able to make mortgage payments with the rental income, so you might find yourself making up for the shortfall in money.
- General housing availability. Are there many vacant rental properties, or is there a scarcity of rental units?
- The rent-to-purchase price ratio. Will your prospective tenants be better off buying their own house with just a few dozen more monthly dollars? This could lead to increased tenant turnover in the long run.
- Other factors include whether you live in a booming college town or an abandoned industrial city, or you live in a large metropolitan area or a smaller-scale community that is up and coming.
Once you have stabilized your real estate investment portfolio, you will have to consider the following issue: in some areas of the country, buying houses may make a lot more sense; in other areas, buying apartments does.
Finally, here is some food for thought: would it make sense for you to start investing instead in commercial properties? Once again, there is no "one size fits all" answer to this last question.
At AMI Lenders, we specialize in private money loans to finance real estate. Our advice as mortgage lenders is always geared toward funding the right investment property at the right price, for the right reasons, and with the appropriate loan terms. So, if you are in the Houston area thinking about investing in real estate, look no further.
We are one of Houston's fastest hard money lenders regarding closings and will become your financial ally. Houston Borrowers will also have difficulty finding better rates for hard money loans or private loans than those we offer.
We want our customers to succeed and take advantage of the financial opportunities provided by investing in real estate. Thus, we look favorably on investors starting the down the road to crafting a real estate investment portfolio. Visit our website today and fill out an application for a loan backed by real estate. En AMI Lenders hablamos español.