As Millennials continue to make their presence felt in the real estate investment market, many of them are looking for a starting point. The goal of any investment is to get the highest rate of return possible, tempered by the level of risk. A simple starting point is residential buildings, as the initial cash requirement is generally lower and therefore more affordable. Here we will look at three of the most common types of residential buildings and recommend which of the three presents the greatest potential for the maximum rate of return.
A few notes are required before proceeding to make sure you fully understand the objective of the article. First, there are many ways to analyze a real estate market sector, so this one is based on a 20 year period. For those who are more interested in flipping houses this will not be of much use to you. Second, it is also an article that is intended to make finding this type of real estate investment easier. In other worlds, this article isn’t taking some obscure niche and trying to profit from it. With only a little effort you should be able to check out some of these properties for yourself.
Single Family Homes
These are widely available, though not in every local real estate market. The type of people who often seek out a single family home for investment are generally people who are not inclined to become real estate experts. High income professionals such as doctor and lawyers are too focused on their practices and have neither the time nor the inclination to have anything more to do with real estate than watch its value appreciate. The good thing about the single family home is you can get a good sense of the future of your investment by just using common sense. Areas surrounded by high crime are generally not going to stay crime free forever. Simple asking why the owners are selling their property will tell you a lot.
Properties with Between 3 and 15 Units
These are buildings that have between 3 and 15 units/apartments available for rent. There are people who are reading this why actually live in such a property. The potential that lies in these investments is multiple sources of revenue from ownership and only a moderate cash and risk level. Like the single family option, you don’t have to call in a survey team to decide whether it is the right choice for you. It is fair to say that with this investment, experience is the best teacher.
The Multifamily Complex
This third group of real estate properties involves a lot more cash, so are able to catch the eye of people connected with real estate syndications and investment funds. You want to be part of such a group where you pool your money in with other people and instead of opting for a small transaction (single family home) you want to go with one large transaction where the time investment and potential profit risks are divided among the group.
The Properties with Between 3 and 15 Units is the choice based on a number of factors. First, there is not much attention (read: competition) to these types of investments because in most cases they are local and don’t catch the eye of state or national businesses. There are businesses who give a close look at the 3 – 15 units building but after the financial analysis is done they usually conclude that the time required to manage the property will not generate sufficient profit to make it worthwhile. Likewise, people who have a high net worth want simplicity (see: single family homes) so will generally pass on these opportunities.
One of the easier ways to get involved with the 3 – 15 investment is to form a syndication. One of the critical issues to address is finding the right property management partner because a property neglected is a property in decline. Some analysts believe that the starting point is not 3 units but 5, therefore Properties with Between 5 and 15 Units. We put the minimum range out there because of availability reasons, so it depends on your local market to determine the starting point that is right for you. Another reason is that at 5 units and above you will be able to get a commercial appraisal, which gives you a bigger upside potential.
The good news is that there are only two major downsides to be concerned with. The first is negotiating terms because the whole buying process can get very time consuming. There are financing issues, terms of the closing, and initial property repairs to be considered. The second is the future occupants. In most cases these tenants will require more management than a single family home occupant because they, after all, will be renters who cannot afford to rent the house. The need for a strong property management company was noted earlier.
Written by Garrett Parker
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