You’ve got your money saved. It has taken a few years to get to this point, but now it is time to decide what type of investment property you want to get involved with. There is no right or wrong here, you just need to know your comfort level and what your goals are.
It is important that you have a target property type in mind. Your goal here is to become as much of an expert as possible in as little time as possible. This is hard to do if you’re looking at townhomes, condos, duplexes, and single-family homes. Your realtor could tell you a property is a sure bet because they’re looking to make some commission dollars. Without having a base knowledge or understanding of the pricing, location, amenities etc. of certain asset classes, you wouldn’t know if it is a good investment or not. It doesn’t take long to learn the market. Especially with the tools available; Realtor.com, Zillow.com, Rentrange.com, you can become knowledgeable with just a few hours of research. So, when that property comes up for sale and your realtor sends it to you, you can have a rough idea of it’s potential. And if that’s not the case, at least you can quickly do some research and find out its potential.Choosing a property type and investment strategy is critical when beginning as a landlord.
Once you have a property or two under your belt, it is more acceptable to be opportunistic about types.
Single Family Detached Home
Some of the most common rentals and homes are single-family detached, you may have grown up in one yourself. It is basically a house, not connected to any other houses.
A single-family detached home could then be classified as a ranch, 2-story, bi-level, tri-level among many other sub categories. These properties will have their own gas, water, and electric meters. I won’t discuss properties that are on a well, septic, or propane because this is your first investment property and we are going to TRY and keep it as vanilla as possible.
Probably one of the easiest resale properties on this list. Even though homeownership rates have decreased in the previous years to roughly 64% it is still the American Dream to own a home. That means you can, when you decide to sell it, sell it to homeowners or investors. The only issue upon resale is if it is a rental, you will need to wait, unless negotiated otherwise, until the lease has terminated for homeowners to be able to purchase it.
Because there are separate gas, water, and electric meters, you as the landlord can require the tenant to put all of these utilities into their name. As the landlord, you are then only responsible for the debt service, property taxes, insurance, maintenance, and if there is an HOA on the property. The variability of utility costs can be offloaded onto the tenants.
You will rent to a group or someone who wants the pleasures of a home without the responsibility or liability of ownership. This means, you could potentially have long term renters on this property. One of the biggest costs that comes with being a landlord is turnover. In general, single-family detached homes SHOULD have renters living there long-term.
Landscaping can be an issue. Hopefully you’ve found a good tenant who really wants to take care of the home as if it is theirs. There is a higher chance of this when renting single family homes. However, you will also come across the renter(s) who act as if there is no lawn on their property. You can mitigate this by requiring the tenant to maintain the lawn, but you and I both know if they give minimal effort, your lawn is going to suffer and you will be the one bringing it back to life.
One tenant, one lease, one rental income. Vacancy can be a killer on this property type. Let’s say the median price of a home is $200,000. If you were to get a loan with 25% down paying 4.75% interest, escrowing your property taxes and insurance assumed at $250/Month your daily debt service is about $35/day.
This can really start to add up. 10 days of vacancy and your $350 out of pocket.
Turnover costs can be higher as well. Your typical single-family rentals are 4 Bed 2 Bath bi-levels at around 1,500 square feet. This is a large space if you need to paint and replace the flooring which comes at a high cost.
Overall, single family homes are a great property type to get involved with as your first investment property. The annual appreciation on a single-family home is the strongest. As they say, they aren’t making any more land and land value is what appreciates. Of all the asset classes we will look at, single family homes will have the most opportunity to appreciate.Next week, we will look at Attached dwellings (condos and townhomes) as an investment opportunity.