If you're entering the world of residential rental property investing, it's important to have a strategy as to what kind of residential properties you want to own and where. And what kind should you own? Within the residential rental market, there are opportunities in both single and multifamily categories. Single family rentals are detached homes of various types intended for one family to live in while multifamily includes duplexes, triplexes, fourplexes, townhouses, garden apartments, multistory apartment complexes and high-rise apartment buildings.
Most people just getting started in residential real estate investing tend to want to start small and work their way up the ladder of real estate ownership and investing. This is important because buying a smaller single-family home or a duplex, for example, generally affords you an easier entry into the market, having less money at risk, and fewer operating headaches. Notice that we said “generally”. Why? As an example, suppose you buy a single-family property that has a lot of deferred maintenance (work that should have been done that you are now going to have to take care of) as opposed to a triplex (three units) that is relatively new and in great condition. In this case, it's likely that your involvement and expenses, at least early on, will be greater, possibly by a fair margin.
Creating a portfolio strategy has to meet your personal preferences and interests as well as your financial circumstances. You shouldn’t go into real estate investing without a plan. And the plan doesn’t necessarily have to be complex. It simply has to outline what your targets are in terms of property type, timing of buys, max price per property, location of properties, and your source of funds to acquire the properties. We don’t know your specific financial or personal situation and can’t offer up that plan. So, it’s up to you to really think through how much time and money you have to apply to sourcing and acquiring residential rental properties and then develop a plan that may be rough initially, but will evolve over time as your situation also evolves.
When you do projections for that first property acquisition, you should assume that there will be both positive cash flow and the building of equity over time because if those two things aren’t assumed to be true, should you be buying the property? Of course, you shouldn’t assume those to be true unless you really believe they will be true. This is important because your plan will depend on a successful first buy. And your ability to parlay the first buy into a second buy may also depend on a successful first buy.
So, what kind of properties appeal most to you? Are you most interested in owning a bunch of single-family homes? How about duplexes? Or larger multifamily complexes? Or will you own a combination of various types of properties based on the best available properties? It’s likely you’ll have some mix of property types, but you’ll want to zero in initially on what makes the most sense for you.
Obviously, your strategy will depend somewhat on what you can afford to buy (as long as the property is a quality one that has the potential to throw off good returns during and at the end of your hold period). It’s important to note also that your location matters since prices and expenses can vary, sometimes widely, from area to area. If you live in an area where housing is relatively inexpensive both in terms of purchase price and ongoing expenses such as property taxes, insurance, HOA fees, etc., then your strategy may be (likely will be) different than if you live in an area where the opposite is true.
Avoiding major mistakes is a key factor in your success as a real estate investor. This article lays out some of those mistakes that can shave returns and make an investment go sour.
Learn more about the various aspects of investing in residential rental properties in our e-book, An Introduction to Investing in Residential Rental Properties.
