Part 2 in my answers to my post “I Know You Have Questions“. John Gall asked: “Of all the types of rental property, is there one type you’d recommend for a first timer?” I get asked this question often, here is my response (also check out my post: How to become a Real Estate Investor):

I’m not trying to be evasive, but my answer is always “it depends”. When I meet a new investor for the first time, this is usually a 20-30 minute discussion. Initially, I like to ask some probing questions to help develop an opinion about what types of properties may be best for them starting out, such as:

1. This may seem obvious, but how much money you have to invest will play a major roll in what type/size of buildings you should look to purchase.
2. Why are you buying investment property and/or how many are you planning to acquire eventually?
3. How active can you (or want to) be in the properties and/or how busy is your life?
4. Where do you want to own properties?

Here are some characteristics of each type of property investment:

Single family houses or townhouses

1. There is less cash investment required to buy single family houses than multi-family, but when the property is vacant there is $0 coming in. Fortunately, it is easier to sell single family investments as it can be sold to either another investor or to a family (owner occupant).
2. Single Family Rentals typically have lower management/time requirements as the tenants often tend to be former homeowners that will require less attention.
3. Finding single family houses is simple as they are everywhere, although some neighborhood price ranges may not support rentals.
4. As you increase the number of single family houses, management will increase, ie: owning 12 single family houses can be significantly more accounting work than three 4-plex buildings. You will also have 12 roofs, 12 furnaces, 12 water heaters to maintain versus the 4-plex buildings that may have common elements.
5. Leasing single family houses can be easy or difficult depending upon the rent amount you are looking for. If your rent is just a small amount about the price of a comparably size apartment it is easier.

Duplex (or tri-plex)

1. Requires additional cash investment, but typically generates larger cash flow. Can be sold to an owner-occupant that wants to rent the 2nd side for additional income.
2. Duplexes can be maintenance nightmares depending upon how/if it was converted from a single family house into a duplex. I have seen many terrible conversions that have poor space planning.  The other problem is often the mechanicals are a mess. Whenever possible, you should attempt to find a duplex that was originally built as a duplex or one that was properly/logically converted (including having separate utilities for each tenant to minimize the landlord’s expenses).
3. Duplexes are more prevalent in some neighborhoods than in others, but can be found almost anywhere.
4. Every investor should have a few duplexes in their portfolio to diversify their holdings. Duplexes are a good combination of multi-family pedigree with a single-family demeanor.
5. Although leasing duplexes can be easy, having adequate storage space and laundry facilities for both units can be a challenge depending upon the layout of the building.

4-plex

1. Buying a 4-plex, as expected, requires a larger cash investment, but will often generate enough cash flow to still cover expenses when one unit is vacant. Typically these buildings are never owner occupied. Depending upon the condition, larger cash reserves may be required for larger repairs (roofs, boilers, etc).
2. Because you have four units under one roof, you are beginning to take advantage of economies of scale, ie:  even though you have four units, there is one front door, one roof, one yard to mow. Maintenance can typically still be done at residential standards, but may cost more because of the size. The majority of 4-plexes were built as 4 unit buildings and are therefore easier to maintain and will have held up better over the years of being a rental.
3. Most 4-plex properties are in older, central neighborhoods. Very infrequently will you find more than one or two in newer suburbs.
4. Owning a 4-plex building can require more time and management than smaller buildings because they often have common hallways and common mechanicals that smaller buildings do not have. This additional work should be off-set by the potential for higher cash flow.
5. When you are leasing an apartment in these buildings, you will be competing with larger buildings on rent and amenities. A problem tenant can also affect the other tenants and turn it into 4 unhappy tenants.

Larger Buildings (5 units+)

1. Buildings larger than 4 units will require commercial financing which will have higher interest rates, typically 5 year loan lengths (on 25-30 year amortizations), and 20% down payment requirements.
2. These buildings can require large cash reserves as they often have commercial grade mechanicals. Replacing a roof or a boiler may be a $20-30,000 project.
3. You will again enjoy even better economies of scale if purchase correctly with larger cash flows.
4. Tenants in larger buildings tend to be less loyal to the building/landlord and will move more often. You may be working on leasing a unit almost every month.

As you can see, each building style has different pros and cons.

You’re probably saying:  “He still hasn’t answered the question!”.  If I had to vote and give my preferred building for a first time investor (without any other factors), I would recommend a duplex.  I believe they are easier to manage as tenants are more loyal and stay longer, they can be maintained just like a single family house, they are normally easy to find and sell, and they will often cash flow and appreciate nicely.  Sorry you had to read so much to get the answer…like I said, this is normally a 30 minute discussion!

[9/11/09-Update-It appears the site is off-line]  When I read Steve’s post at The Property Pundit, I couldn’t help but smile from ear to ear. When he takes applications for his apartments, he searches the Internet to see if the prospective tenant has an on-line identity. In one case he came across a prospect that was advertising her erotic services on Craig’s List! Oh boy!

Probably the most creative search is how he searches MySpace looking for (and reading) their profiles. Read the full article here.

In my post “I Know You Have Questions“, I asked the readers of my site to send me questions or topics that they are just dying to ask or are confronted with often. John Gall asked: “Aside from watching asking prices for rents on places like Craig’s list is there a good way to determine the fair market value in a given city or area for a property?” Here are my thoughts:

First off, I encourage every new investor to pick an area or neighborhood and buy your initial cluster of properties there. This will help you become intimately familiar with the area including: problem buildings, rent amounts, neighborhood snoops (these are the little old ladies that know everything about everyone’s business), and possible other real estate opportunities.

If you are looking at a new area to expand/buy into, I recommend the following tactics to further confirm fair market value rents:

1. Drive around the area and call on every red and white “For Rent” sign you see. I understand this is simply the asking price for rent, but if you call on 10-20 of them, you should get a pretty good median rent amount to use for each bedroom count.
2. If there are larger apartment complexes (greater than 10 units) in the area, call and book an appointment to see their units. Depending upon the age and condition of the apartments (compared to what you are looking at), these larger buildings will either be competition (they are the same age and condition as yours) or they are the upper price point for rentals in your area (they are newer in age and better condition).
3. I have a couple of investor friends that use Section 8 rental amounts as their method to analyze rents. I am not convinced this is a great tool to find rental amounts as Section 8 pays the same rent in South Minneapolis as in North Minneapolis. The market rents in South Minneapolis tend to be 10-20% higher as the properties tend to be different than in North.
4. Network with other investors that own property in the area. Most are willing to give out this information to a fellow investor. Depending upon what area you are interested in, I may own property there or know someone that does. Drop me a line and I would be happy to give you my opinion.
5. If you are working with a Minnesota Realtor, he can use the MLS to research the rent amounts listed on the rental properties for sale in that area. Again, you should review 10-20 rentals and use the median amount as often the MLS data can be wrong.
6. Once you find a property that you are interested in, prior to submitting a purchase agreement, you should ask for copies of the signed leases from the seller. Not only will this confirm the rent amount, it will give you other valuable information including lease expirations, lease terms, and the amount of the damage deposits.
7. One more data point that can be helpful is stopping by the local coffee shop or any place that has a bulletin board that people can post items on. Look for “For Rent” ads.
8. In Minnesota, there are several free newspapers that have cheap classified advertising and often people will use those as an alternative place to advertise their rentals.

Using these eight sources in a systematic way should allow you to quickly get a good feel for the fair market value rent in the area. The final rent amount you put on the apartment will vary slightly depending upon condition, street location, location in the building, as well as amenities (washer dryer, hardwood floors, air conditioning, landlord-paid heat).  Even the time of year that you are leasing can change the rent amount slightly.

Lastly, leasing is very similar to selling houses.  If you are not getting any calls on your rental advertising, your price (rent) is too high.  If you are getting showings, but no one is filling out a rental application, the location or condition of the unit may be scaring your prospects away. Keep adjusting your rent until you find the sweet spot that prospective tenants are willing to pay.

I know that people read this Blog as the stats show pageviews, clicks, and RSS subscribers. I don’t (think I) know any of you, but thank you for reading. I find most of my topics from interactions with my customers, other investors, and other real estate agents. I really enjoy working with real estate investors and especially enjoy helping them be better owners and landlords.

But now I want to hear from you. Have I missed a topic? Is there something you would like me to discuss? Are you running into the same obstacle or problem in your own business that continues to frustrate you?

Drop me an email to scott(at)ficekinvestments dot com (this syntax keeps the spammers away) or better yet, comment on this post and let everyone hear what you are thinking.

Thanks again and I look forward to hearing from you and posting many more topics.

Scott

I have always stated that if you are going to be successful at buying and owning investment property, you need to build your team of advisors. Chris Lengquist published a great article about the importance of one key trusted advisor you must have when you are investing in real estate. You can read his article here: Do You Have A Coach For Your Investing Business?

Almost 80% of my investment property is within 10 minutes of my house. More importantly, I have 2 “clusters” of investment properties where the bulk of my properties are located. Conversely, I have met investors that own 1 duplex 30 minutes south of their house, they own another one 20 minutes north of their house, and 2 more 15 minutes east of their house. Every time they want to stop by their property, they can only see one at a time and it is an planned event. I can see 14 of my units in about 5 minutes by driving to NE Minneapolis (often when I am just driving past to my house in South Minneapolis).

I tell everyone of my customers to initially buy property close to where they live, work or where ever they travel at least a couple times a week. Clustering your investment property purchases brings you a lot of efficiencies and synergies:

1. You can stop at multiple properties during one trip to your neighborhood.
2. There may be opportunities to save on advertising for open units if you own properties in the same neighborhood and price range. Plus, you will save time by showing multiple units.
3. You will become familiar with the neighborhood including: other vacancies, problem areas, rent amounts, and property valuations.
4. There may be neighborhood handyman that can do most of your repairs for your properties.
5. When I am at my properties, I occasionally have neighbors approach me and tell me about other properties that are for sale (typically non-MLS) and possible houses that I could flip.

There are thousands of good investment property buys out there these days. There is no need to stretch yourself from one side of the city to another. Build some clusters of investment property and you will happy that you did.