3 Card Monty – Rental Properties

Previously, I have written before about wanting to add rental properties to my portfolio. This would diversify my portfolio and provide for a new passive income stream.

I feel it is inevitable given how close I have come in the past. Coupled with how much disposable income and accessible credit I have accumulated.

Now, which form of rental property?

I write this post as an introduction to a reader poll of sorts to help me decide which avenue to proceed down based on your thoughts and experience.

The way I see it there are 3 distinct types of real estate on the table. Each with their own unique advantages and disadvantages. I will try to delineate them here based upon my own thought processes;

The biggest factor is what your own personal market looks like. Urban and rural will look very different.

These are my 3 rental properties options;

  1. The Multi Unit Complex. This is usually comes in the form of a duplex or four-plex. I like the four-plex because it is the most you can get and still stay with a conventional loan. Any more units and you need a jumbo loan.
  •  Pros More units equals more rent for the same underlying infrastructure.
  •  Per unit, the lowest price for square feet and taxes.
  •  Added income streams like coin operated laundry.
  •  Cons Probably need property management.
  •  Tenant turnover and higher chance of bad tenant.
  •  Seem to appreciate the slowest of all 3 types analyzed here.

2. The Single Family Home. This is the most readily available and varied in price and quality.

  • ProsGet a good family, steady rent and maybe they eventually buy.
  • The house value will appreciate over time & you make money two ways.
  • Probably easiest one to resell if the need/or the time arise.
  • ConsWhen in between tenants you loose any/all the money coming in.
  • Late/or bad tenants cost you 2 months rent.
  • One full set of responsibilities, only one rent coming in.

3. Vacation Rental. Higher end property in desirable location. People will pay to rent for shorter periods of time. However, this may be a riskier option.

  • Pros Higher value property, more desirable.
  • You get to use it or let friends/family use it, great location remember.
  • Likely has the best appreciation over time, big money on the back end.
  • Cons –  Rich people are needy and have high expectations.
  • More money spent up front to purchase and make nice.
  • If it doesn’t attract, you have high mortgage/taxes & no $ coming in.

In conclusion, who is the best girl to take to the dance?

I ended up going with a multi-unit building. It worked out great. My sister-n-law is one of my tenants. Moreover, I bought the building at a song. Lastly, I rehabbed the lower unit. Now, I sit back and collect rent.

 

7 thoughts on “3 Card Monty – Rental Properties

  1. Ooh, ooh, ooh! Teacher pick me!

    *blurts out answer*

    “It depends on your location!”

    In Seattle, single family homes have experienced record breaking appreciations. The inventory is very low compare to condos and townhouses. Rental income for a SFH is on average $200 higher per month than the same property in a duplex form. We have a SFH out as a vacation rental, yes, the customers are needy. If there is a small drip or a degree above their comfort, they will let you know. My agent friend told me a duplex makes great money for the initial investment in exchange for the additional work and that’s what she’s planning to do.

    I google inventory number from month to month in my area and track the numbers. If it nears somehow nears 5,000 units, I can tell something’s up.

    • That’s actually a really good point, I have been comparing my options in a static theoretical way and not looking into the actual market I am taking about to see if there is an area specific answer to this question, thanks!

  2. I only have one experience and don’t really know enough to help to you choose. However, in 2017, we bought a cheap townhouse in Myrtle Beach that we could afford without rental income. I had no luck renting it for short term vacation, because it was not luxurious enough. It feels more like a normal apartment than a beach house. I then switched strategies, and sought people to sign 10 month leases, which left the summer available for my unemployment. It worked great for the first two years and not so great for the most recent renter. Our inexperience in managing properties, and the 5 hour drive to Myrtle Beach was an issue, with our problem tenant. I think the most important thing was that we bought the townhouse at the right price, and we are profiting even with a few mistakes.

  3. There are so many different ways to invest and so many variables. I think it depends on where you live and how active you want to be. (hands-on vs passive). Generally multifamily will give you best chance for cash flow. You can improve the property and the NOI, which increases the value of the property (forced appreciation). You can also invest in a larger property through a syndication if you are an accredited investor and participate in larger buildings. Multifamily gets my vote for #1.
    Single family is my second choice. It’s also a good investment if done right. But vacancy is all or none.
    I’d stay away from vacation rentals since it can be seasonal. Also it is non-essential housing and the first to be cut when a recession hits.

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