What is the best investment property to purchase?
What investment property to buy?
Almost all real estate investors, at least just starting in the business, ask themselves this question. What is the best type of property to buy. Of course that returns on the investment, appreciation rates as well as risk, vary from property type to property type. All investors would like to buy the property that yields the highest return on their investment with the minimum possible risk. We have many possibilities when talking about good returns, risk, appreciation potential, etc but possibilities are limited by the resources one may have. Not only financial resources such as funds, access to credit, joint ventures, partnerships but also knowledge and degree of sophistication of each individual investor.
Let’s list the property types available to invest in. We can divide into two large groups, Residential Properties and Commercial Properties.
For Commercial Properties we can say that most of them fall in one of the following categories
- Retail Centers
- Office Complexes
- Multifamily Buildings
- Industrial Properties and Distribution Centers
- Special purpose properties such as Medical Buildings
- Land (considered a commercial-investment property as it is held for appreciation regardless of its zoning or future land use)
For Residential Properties we have basically,
- Single Family Homes
- Townhomes/Twin Homes
- Condominium units
Commercial properties require large amounts of capital, knowledge of the business, competition and sophistication so they are good for seasoned investors that not only have been in the real estate investment business for a long time and have large amounts of cash to deploy to these investments, but also have good access to credit, venture capital, participate in partnerships or perform syndications. A small investor can invest in commercial properties through investment vehicles such as REITs (Real Estate Investment Trusts) or private investment offerings or other participations but will have no control or decision making power over his/her investment.
We will analyze in future articles Commercial Property Investing but this article is geared primarily to the smaller investor and we suggest to small and novice investors to concentrate in residential investment.
When we look at residential properties first we need to talk about the property type. Condominium units sometimes represent a problem because you need to abide by a strict set of rules that many times are not investor friendly and create problems with the optimal performance of your real estate investment. In most cases the interests of owner occupants are not aligned with those of owner investors. In addition to this the investor has no control over the expenses for the maintenance of the condominium complex and the condo monthly fee which can eat a good portion of rental income. Finally the vacancy time of a unit is always longer, sometimes 30 days or more than other properties because the prospective tenant has to be approved by the Condo Association and this is a lengthy process.
With townhomes the investor has more flexibility but in most cases they are located in Home Owner’s Associations and the same problems exist for investors as in condominium units. In addition to this some townhouses are built in such a way that important structural elements such as walls and roofs are shared/connected with adjacent owners and sometimes this creates difficulties when is time for repairs and replacements not done by the HOA. For example one owner may have termites and need to treat the structure but the next door owner refuses and this may become a battle to tent, limiting the treatment to localized areas with other methods.
What most investors look for are single family homes preferable located outside of an HOA (home Owners Association) that can be rented without wasting any time and where the only rules are set by the investor itself, having to abide only by the ordinances of the municipality where the property is located.
That is regarding the the type of property but what about areas or other factors. Generally is important to look at middle class, working class neighborhoods where the tenant usually remains longer in the property. It is good to avoid luxurious properties that have a limited market and where most likely the rent/price relation does not offer the best return on the investment or avoid transient neighborhoods where people relocate a lot for work because of the nature of the area. It is better to look for areas where tenants are more stable, les transient. Most of the time these are family oriented neighborhoods. What is also important in many cases is the school system, are the residents able to send their children to excellent public schools? That is very important. Also important are the recreational activities. Parks, sport complexes, cultural centers, libraries, etc.
It is always good to look for properties that are close to shopping centers, restaurants, bars, employment centers or at lest have great access to highways so tenants can have the best possible commute to work. In many cases and depending on each City, public transportation is a very important factor. In Major cities it is. Great plus being close (within walking distance) to subways, trains and bus lines, or even airports.
It is very important to know the local laws and invest in investor friendly communities. Buying the wooing property in a rent control area may bankrupt a small investor.
In summary, it is very important to have the knowledge or the proper counseling consulting with experts when buying an investment property.
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