Money for investing can come from existing savings or other liquid investments such as stocks, bonds and CDs, it can come from equity in your personal residence or other investment property or from certain retirement accounts.
You can invest in condos, houses, small apartment buildings and large apartment buildings as income producing investments. In addition, land and any of these home types can be purchased for appreciation or equity investments. I recommend condos for entry level or investors who do not want to be heavily involved in their properties. Typically condos are newer than most other properties around, and they usually present the best GRM – Gross rent multiplier, which is the ratio of Price to rent. That means they will usually present the highest rate of return. The one thing condos lack is that it is difficult to get a large upside on a condo through remodeling. That is, when you remodel a house or 2-4 unit, you can achieve greater equity returns through your own efforts.
HOAs are the best thing that can happen to a beginning investor or absentee owner. An HOA will subsidize your cost for insurance, utilities and repairs, while potentially limiting your loss for major repairs. You will have dues increases, and likely you will have assessments, but you have the same on a house when you spend $7,000 for a new roof!
The return will depend on the quality of the property and the area, as well as the property type.
Most apartment buildings will return about 5-7% of your down payment during the first year. This is comparable to your average stock or CD investment. However, by the 5th year of ownership, the return on your initial investment will roughly double to 10-14%.
For condos right now we see anywhere from 3% to 15% depending on area. I usually only recommend looking at 2 bedroom or more condos, as those are easier to rent. Houses are generally very difficult to rent out profitably, and I usually do not recommend them specifically for this purpose. Small apartment buildings are 2-4 units and are subject to residential financing, which is generally easier to obtain than commercial financing, for 5+ unit buildings. Small buildings have been hit by foreclosures to a significant degree more than larger ones, and likely have more upside value right now.
Note that this does not take into account the potential increase in value of the building. Buildings are primarily valued based on their income, making them less succeptible to market fluctuations in the residential market. By raising your rents 3% every year, which is about half of the current average rental increase, you can raise your properties value by 16% (compounding the rental increases).
Because you leveraged your property, the 16% increase in value is not based on the $100,000 down, that you put, it is based on the total value of the building. If you purchased a $400,000 building, and it increased in value by $64,000. This is an unbelievable return of 64% on your original investment, plus the $45,000 in cash flow, for a 109% return in 5 years, or an annualized return of 21.8%. While this may be an optimistic scenario, it is by no means unrealistic.
For those of you who do not want a role in the management of the building, there are many property management companies to choose from and many of the building already have functioning, on-site managers.
The next step is to speak to me and I can help you assess your situation and determine the best real estate investment plan for you. Contact me to get started!