There are many different ways and approaches to consider when building a rental property portfolio. In addition to the number of units, you also have options with the location, price point and cash flow amounts. All of these give you flexibility and options that you may not have known existed. Additionally, you can seek out properties that have better long term appreciation potential rather than the traditional monthly cash flow strategy. If you think of rental properties as just one or two unit houses that you can collect rent on, there is much more to it than that. Rental property strategies come in all shapes and sizes. Find which one suites you the best.
Like most things in the real estate world, it is best to determine your exit strategy before you make a purchase. There is a huge difference on the types of properties you are looking for if you know you only want to rent for a few years or if you want to keep the property as a retirement vehicle. Things can always change on a dime, but you need to have at least some end goal before you buy. This will also help you determine your location, purchase price range and even number of units.
If your goal is to buy with the intentions of renting, you want to look at better properties in better locations. This has an impact on the type of work you do. You should not have to spend much money repairing or replacing items in the short term. With cash flow, you can allocate money to other projects and can look to add more properties with it. When it is time to sell, you won’t see as big a payday, but you will have already reaped the benefits of monthly rent checks.
Conversely, if you are looking to see your pot of gold when you sell, you will look for lower priced properties that may not have as much cash flow. These are properties that you may not put much work in or wait until the market turns and do your work then. You are constantly looking at comparable sales in your area. When the time is right, you list the house on the market. This is a somewhat risky strategy, in that the market may not turn for several years. However, it is worth the risk for your goals.
There is also something to be said about how involved you want to be as a landlord. How involved you want to be will dictate the type of property you buy. If you know that you cannot do much of the work that is needed or the property is a lengthy drive away, you need to factor this into your numbers. Hiring a property manager makes sense, but it will also come at a cost that will impact your monthly bottom line. If there is little room for a property manager and you can’t be as involved as you would like, these properties will be a major headache and you will be looking to sell as soon as you buy. Even if it is a seemingly good deal, it may not be a good deal for you.
If you have experience owning properties, you may want to move up to the commercial side and expand your number of units. This could provide both monthly cash flow and huge upside potential, but will require a large financial commitment. Most commercial lending programs require between 20-25% down payment in addition to some reserve asset requirements. There is also number crunching that has to be done regarding cap rates and other commercial property specific formulas. You will also need to have funds allocated for a property manager and ample reserves in the event that something needs replacing. This is a strategy that is high risk and high reward, but largely not for first time investors.
More and more first time investors are getting their start either through single-family rentals or two family properties while living in the other half. This allows them to gain landlording experience, all the while having a tenant pay down their mortgage. Single-family investing is relatively easier than having to deal with multiple units and tenants, but can actually be riskier than multifamily properties. In a single-family property, if the tenant doesn’t pay, you have no cash flow coming in. However, in a multifamily property, you have other tenants to fall back on. Cash flow is limited in these situations, but if you buy the right property, you could see strong appreciation when you decide to sell.
Owning rental property can be a source of tremendous monthly wealth or sizable returns down the road. There are many viable options given your risk tolerance, personal preference and availability of capital. These options are specific to you and your situation, and should be free from outside influence. It can be easy to get caught up at investment club meetings or even talking to fellow investors hearing what you should and shouldn’t do. Each property, location and situation can be totally different. If you see long term value in a property and want to hang on to it, that is entirely your choice. The same is the case regardless of where you want to buy and what the purchase price may be. Real estate can be a source of great long term wealth, just make sure the strategy suits your business model.