Traditional Investments vs. Investment Properties
With everything that happened in 2007 from 2011 in the financial arenas and all the markets diving, many investors wonder if it’s a better time to buy traditional investments or to buy investment properties. Which would be a better investment? Most top investment advisers choose to have their clients diversify their portfolios to include lease properties. The advantages of these residential investment properties, if bought properly, are passive rental income each month. They are generally assets that grow in equity and increase in positive cash flow over time. Many use them as a hedge against inflation because their value generally stays consistent in growth and is not as volatile as traditional investments such as stocks and bonds.
More experienced investors with more cash on hand might choose to go the way of commercial properties. The rents tend to be a little higher and the tenants seem to be a bit more stable and easier to work with, but if we go through a downturn in the economy again, you will more often than not lose commercial renters, and it might take a while to fill your space again. There is a bit more risk in commercial properties, but the reward may be worth it to you. Risk tolerance and mitigation are something you need to weigh for yourself.
With residential real estate, there is always a constant flow of tenants as people always need somewhere to live. There will be even more demand in a slowing economy, so if you buy right, you should be able to mitigate your risk and make a handsome reward for your effort. Local real estate wholesalers are often a great source for off-market, reasonably priced investment properties.
I have found through years of investing and a little research that there are a few very important rules to purchasing the right investment property to mitigate your risk and become financially risk tolerant. I have laid them out below in their matter of importance in my opinion.
Location, Location, Location
It can’t be said enough. Purchase in areas in good school districts, close to hospitals or near local colleges. The demographics of the area in which you buy will impact both the type of renters and how often you will have vacancies. For instance, if you buy in an area near a hospital, the odds are that your pool of potential tenants will most likely be nurses or college students doing internships. You will probably never suffer vacancies, and your tenants will more than likely not destroy the place while they are there.
Style of Property
Personally, I would stick with residential properties. Single-family homes generally grow in equity better than apartments, but duplexes, triplexes and quads have better rental cash flow. Depending upon your cash on hand and/or experience, you will need to choose the type of property which is suitable for you and your investment needs and capabilities. Taking care of one single family home is easy compared to multiple duplexes where you’ll have much more to oversee and manage.
New investors would be wise to start with a single family home as an investment property and graduate up to multiple quadplexes in order to mitigate their risk and gain experience. Property management companies can alleviate the hassle involved with multiple quadplexes, but will cut into the return you may be looking to receive. I would not recommend that route if you don’t own several investment properties.
No one wants to live in a war zone! If your property is a hot spot for criminal activity, you will either have difficulty renting it or you will be renting to criminals. You can check with the local police or sheriff’s office or check online for crime statistics in various neighborhoods and zip codes. I would never rely on the information provided by the previous homeowner. If you don’t do anything else, you can ask the neighbors of the property you intend to purchase about the area. Who knows better than the people who live there?
Things that you should look for are serious crimes involving property damage or violence, drug activity, and even petty crimes such as loitering. They are all a sign of how well an area might be for your investment. Check to see if the crime rate is rising or falling. You might have found a diamond in the rough! Ask about the frequency of police presence inside your neighborhood. If they are patrolling often that could be a good sign… or not. In any rate, it will affect the amount of rent you will be able to expect.
Very simple but often overlooked. Can your renters pay the rent and the amount you want? Growing employment rates mean more tenants as locations that are attracting jobs and employment growth rates will always appeal to more people. You can do a simple online search to find out how well a particular area is faring. Unemployment rates are made public just about every day it seems, so a little tracking won’t be hard work. If there is news of a new company getting ready to open it’s doors in the area, you can be pretty confident that workers will follow. This, however, may result in house prices reacting negatively depending on the company moving in. The point is, if you want the new company to move into your area, you will most likely want the tenants that come with them. And if you don’t want that company, same will go for those tenants.
Everyone’s favorite thing. Property taxes are certainly not a standard number in every municipality. They are used to pay for many of the school districts and functions of the city. As an investor planning to earn an income using your investment property, you need to be aware of how much tax you will be paying. High property taxes may be a sign of affluence and a well maintained city with good schools and low crime rate.
It also might not be negative if the community is a haven for long-term renters. Many of the property appraisers and tax collectors sites are connected by a link so you would easily be able to look up the tax information for a particular property that you may be interested in. If all else fails, you could always speak to the homeowners in the vicinity and get their assessment of the area to see if they feel like they are being fairly taxed for the value that the community provides. Bottom line, taxes will affect your financial gain.
Schools are one of the biggest deciding factors for parents or soon to be parents in choosing a home to buy or rent. Landlords should take into consideration that their tenants may have or plan to have children who will want to enroll their children in the best schools. When you have found property, you will want to check the scores of the schools that are assigned to that area as this may affect the value of your investment.
If the schools are ranked very high, the investment may be in more demand and allow you to charge a higher than average rent. Also the property may appreciate faster than homes in a lower scoring district. If the schools don’t perform well, this could easily affect the value of your investment. Although cash flow may be what you seek the most, you might enjoy the amount of equity that you build when you eventually sell your home.
Happy Investing and I hope this has helped you in your quest for wealth. The investment property market could very well be the biggest bang for your buck, even better than stocks, bonds, and other traditional investment strategies. Good luck!!