There are many ways to make money in real estate and the best investment vehicle for any particular individual is going to depend on a number of factors. These include such concerns as age, financial goals, financial strength (credit worthiness, assets, cash position, etc), risk tolerance, and so forth and so on. It is impossible to say based on limited information what the best strategy for any given person is without more insights into that person’s goals and current position.
If you wish to gradually build over a decade or more a residual income stream with a relatively safe asset, and you have financial reserves to handle the things that can pop up with rental property, buying good solid rental property in sound areas with a good market demand may be a good way to start. With rental property you have the property management requirement so you must decide whether you will manage the property or someone else will manage. I have managed some of my own properties in the past, and can say that you must follow a well thought out process and stick to it to be successful managing your own property. If you are looking for a more hands-off approach then build in management cost when you run your initial proforma.
Having been involved in real estate my entire life as far back as I can remember, I have seen more investors than I can count who have overpaid for property that they own and rent and have done so without taking into account negative cash flows that can result therefrom. Although there are certain situations where a long term acquisition may be entered into where this is a known negative cash flow these situations are quite limited and usually are where there is strong appreciation and so the investor is buying for the appreciation which will offset the negative cash flow with the hope of cashing out on the back end or refinancing periodically to absorb the reverse flow. There is an element of speculation to such investment however and for someone just getting started I’d say look for a good positive cash flow if you buy an investment for a long term portfolio.
It is vital to understand proper investment analysis to cover ALL expenses that’ll be associated with whatever investment you acquire. Look at all aspects including tax aspects.
In general, and in most bread and butter rental areas that I’ve seen throughout the country, multi-family properties cash flow better than single family, though you may get a little more appreciation on single family, forced appreciation excluded (such as change of character or use of a property or neighborhood that results in a higher than market average short term appreciation).
When considering the size of a property, financing also comes into play. Typically on 1 to 4 unit buildings you can get residential financing – that is, the financing is in your own name. Most lenders with whom you deal directly (not thru a mortgage broker or middleman) will lend funds on such investments amortized over a 30 year time frame. If you go above 4 units on residential, you’ll typically be looking at terms of 20 year amortization which will increase debt service which must be factored into your cash flow analysis. Usually someone with good credit will realize higher yields in the first few years by using residential funding, though you do not want to get too many loans in your own name as it does impact your credit score and ability to borrow additional funding for private causes.
Generally I recommend someone just getting into residential investing where they wish to buy and hold property (and you should have some reserves and buy something that does not require a significant amount of attention unless you’re in the position to spend such attention to it) look at a 2 to 4 unit building as it lowers the vacancy risk a bit (if 1 person moves out of a single family you have 100% vacancy). Although it is for those with a little different mindset than most, you may consider living in a 1 to 4 unit building and renting out the neighboring units – this is NOT without some possible negatives. This will typically allow you to get what is known as “owner occupied” loan terms which are typically a little more favorable than non-owner occupied terms as the lender considers the risk of default slightly lower for owner occupied.
Not meaning to ramble, just throwing out thoughts for you to consider. You might also review a post I made recently at http://www.reiclub.com/forums/index.php?board=29;action=display;threadid=18097.
Best of luck with your investments.
Ron