There are a few variations in investment property ownership. Each has its merits and will be well suited to the level of commitment an investor can apply to rental property ownership. I will focus on the three most common forms leaving out the bigger investment types such as apartment complex and condo developments. These three types of investment come down to number of units and type of property involved.
Single Unit Investment
There are many good reasons to begin investing by starting with a house, condo or even a vacation property. Military personal are often attracted to this type of investment, as are people who are not sure where they will be in the near future, but are eager to give investment property ownership a try. The typical investor for a one unit wants a place of their own but knows that relocation is a very real possibility.
Just take care to choose the properties location with your future plans in mind. I would not advocate buying in an area that you may not come back to, for example. One of our first investment purchases was a large home close to a VT ski area. We managed it for short term rentals during the peak seasons, used it as a vacation get away when not rented and let friends and family stay at a very reasonable rate. We did well for the first five years but once we had our first child, we realized our ski life style would soon be put on hold. We made a very positive cash flow each year and after a bit of updating sold the property for almost double the purchase price. We re-invested in the area choosing a two unit that would be more manageable and could even be rented out long term.
Many property investment experts argue against this type of investment. They see the investment as a bit short sighted. The cash flow may not be as great as having a multi-unit but depending on your situation, a one unit might be a good place to start investing and test the investment property waters.
If your future plans will include renting the property long distance, make sure you get a very well qualified renter. I would suggest all back ground checks should come out squeaky clean, you have at least two good past rental referrals and you have very good communications with the potential renter. Don’t rent to a party that you have any doubts about; you will soon regret the decision!
Live In Investment Property
Wiping out your housing costs, establishing great credit and gaining future capital by equity build up are all typical benefits of choosing this approach to investment property ownership. On top of that, this option is one of the easiest to manage since you are on site to take care of any issues. This was how I started out investing and it proved to be a great choice in terms of both cash flow and ease of management.
This investment usually means owning a duplex or a multi family. I prefer a duplex situation as it affords a bit more privacy and therefore will attract more suitable renters. Choosing this approach has the added benefit of weeding out possible problem tenants. For some reason having your landlord as a neighbor is a complete turn off to most rowdy renters, (kind of like having a police officer as your neighbor). I still do a thorough job in picking renters and lean towards a semi handy renter. The last thing I need is a renter who will be knocking on the door for even the slightest maintenance issue, like a blown light bulb.
This investment type may not produce a positive cash flow in the traditional sense, but it will likely get rid of most household’s biggest expense, the cost of housing. Save that freed up money and you could be on your way to the next level of property investment.
Stand Alone Multi-Unit Property
This type of investment puts you square in the landlord business, no doubt about it. You could own several duplexes or a six unit apartment building but you are now in the business of producing positive cash flow from rental property. This is where most investors depart from casual investment into making real estate investment a small business. As a small business a commitment in time, management and solid decision making becomes critical to the investments success.
I would not advise diving into this type of investment unless you have the proper skills and knowledge under your belt or you will be utilizing a property management company to take care of the heavy lifting. I acquired these skills over a period of about five years before becoming the owner of several investment properties. I took a course in investment property management, gained valuable tenant to landlord experience and have an ongoing commitment to learn the skills needed to self maintain the properties. Without this prior experience, I would probably have made to many bad decisions and suffered to many bad experiences, to have made this level of investment pay off.
Once you have achieved a level of investment of ten or more units, it may dawn on you that you no longer need that day job. My goal was exactly that by the age of fifty five. I am not there yet in either regard but I am getting very close. A semi retirement with investment properties to keep you busy in your mid fifties is not a bad fate in this economy. On top of that consider the net worth of the properties you own and what they would fetch in the future, if sold and you might find yourself sitting on a nice nest egg when you decide to retire!