What Kind of Investment Property Is Right for You?

What makes a good real-estate investment?

Before you answer this question, consider the reasons for making the investment in the first place. Are you interested in holding the property long-term for the appreciation potential or are you more concerned about cash flow? Answering this question will dictate the type of property you might consider.

There are various types of investment properties. Most novice investors start with a single-family or small multi-family unit such as triplexes and fourplexes. These are more manageable and generally affordable. Real estate investing, like most financial subjects, is something learned through experience. The more properties you've bought, renovated, managed and sold, the better equipped you'll be to profit from your investments. That doesn't mean you can't be wildly successful from the start; just don't expect to be.

If you buy a property in an upscale neighborhood, expect negative cash flow at least at the beginning of your investment. This is because rents in good neighborhoods generally don't rise as quickly as the price of the homes. If you need positive cash flow, better to buy properties in lower-rent neighborhoods. Some industry experts suggest buying investment properties where the monthly rent collected is one percent of the purchase price. Anything less and you won't cover your maintenance expenses.

Another strategy is the house flip. In this scenario, investors buy a house in need of repair, spend some cash renovating or bringing it back to life, then turn around and resell it (hopefully for a lot more money). Often, a house is simply run down cosmetically and a nice paint job will do the trick. Successful flippers should understand the difference between a house that is rough around the edges and one that is structurally unsound. A mistake of this nature will cost you thousands of dollars, not to mention a great deal of frustration.

Once you've gained the knowledge and capital to move into other areas, here are some interesting types of properties to consider:

  • Land: While it's difficult to determine the future value of land, (especially property outside developed areas), the cost of maintaining it is much less than other types. If you have a long-term investment horizon, it can be an extremely lucrative form of investing.
  • Senior Housing: The need for retirement homes isn't going away. America continues to age and our older seniors need looking after. Investors willing to venture beyond the suburbs will find a huge unmet need.
  • Strip Malls: When consumers need everyday items like milk or bread, the convenience store and bakery are usually only minutes away. No matter how much society moves to online shopping, people will still need to buy certain products on a last-minute basis. Strip malls fulfill that requirement.
  • Mixed-Use Office and Retail: Investing in two- or three-story office buildings with retail tenants on the main floor is the commercial equivalent of the small multi-family property. The rent collected is generally higher than in residential units, but commercial properties are more expensive to maintain.
  • Hotel Conversion: An interesting niche is buying old, worn out hotels and converting the rooms into condominium units. This investment can be very profitable, especially in expensive resort areas.

Real estate can be an expensive hobby and you'll always need enough funds available for when things go wrong (they always do) and for repairs. Like in any business, undercapitalization can sink an investment property scheme fast.

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