Greetings Everyone.
We are now on step five of ‘How to buy your first rental property’. In this article series, we have examined:
Step One: Determining WHY you are buying a rental property
Step Two: How to figure out your financing for this property
Step Three: How to pick the location that you will buy in.
Step Four: The ecomomic influences of your location
In step five, we examine the importance of picking your property type.
What does ‘property type mean’?
The phrase ‘property type’ refers to the ‘type’ of rental property that you will be buying. Examples of property types can be:
- detached homes
- semi detached homes
- townhouses
- condominiums, and
- multi-family buildings (such as duplexes, triplexes, etc.)
It is important to know what your property type is before you begin looking at potential rental properties to purchase. This is important for a number of reasons.
Reason Number One
Defining your property type provides you with direction. Knowing what type of property you are going to buy will make your search more efficient. It will save you time with your search. If you don’t know what property type you are buying, you will be bouncing all over the place with no focus. One day you might view a potential rental property that is a townhouse, the other day you might view a potential rental property that is a multi-unit building.
Reason Number Two
Since a townhouse and a multi-unit building are different property types, you might possibly have different tenant profiles as well with these property types. This is an important factor to consider, as it is always wise to know your tenant profile. It is good to know your tenant profile because it is good to know what you are getting into. For instance, if your tenant profile consists of people that are ‘rough around the edges’ that don’t pay rent on time, this is crucial to know. You don’t want to have a rude awakening the first time you have a bounced rent cheque. This is a risk that you can mitigate by knowing your tenant profile.
Reason Number Three
Also your required down payment for these 2 property types might be very different. Your bank or lender might have different criteria in terms of downp ayment for the purchase of a townhouse versus the purchase of a multi-unit building. Since the two properties will probably vary dramatically in purchase price, there is no question that a different amount of funds would be required as a down payment.
For example, if you are purchasing a $150,000 townhouse and you are putting 20% down as a down payment, you will need $30,000.
Versus, if you are looking to purchase a $1,500,000 multi unit building with a 20% down payment. In this case you will need $300,000!
As you can see, there is obviously a big difference between a $30,000 down payment and a $300,000 down payment!
A question for you!
If you are investing in real estate already, what is your favourite property type? Why?
If you are an aspiring real estate investor, what property type do you want to invest in? Why?
Feel free to place your comments in the comments section.
Step Four – How to buy your first rental property
Step Six – How to buy your first rental property
My favourite is a detached 3 bedroom 2 bathroom home in a good area … but the only way those seem to cash flow these days is by doing a rent to own.
So… if I am buying to hold then I like side by side duplexes.
Oh oh – you said I had to pick a type – but I just picked 2. Was that cheating?? 🙂
Hi Julie!
Thanks for the comment.
Personally, I am a fan of the 3 bedroom 2 bath townhouse.
To your point, Rent to Own is definitely a good way to increase the cash flow on a property.
My secret is that I have 2 property types as well in my portfolio…
I am a cheater as well. 🙂
I like the 3 bed/2 bath single family homes BUT I suspect that we’ll be looking into multi-families next year. Condos here are a real pain in the butt due to the insanely high association fees that can increase substantially at any given time.
Hi Shae,
Thanks for the comment. I have heard that the fees for condos in the states can be quite high due to the HOA increasing them arbitrarily. Do you know if this is the case for most States?
I’m not sure about the other states, but Florida (at least South Florida – retirement central) is one of the condo capitals of the U.S.! I have a friend in Wisconsin who seems to buy (and flip) quite a few condos so the investors must like them there.
Just to give an example, yesterday I was talking to a friend who told me that when she moved into her condo 3 years ago her condo fees were $99/month and in 3 years they have increased to $375/month. That is insane and can KILL your cashflow.
The biggest problem the associations are facing is that people are abandoning their condos because (1) they can’t afford it anymore or (2) they feel they are better off since the value of the place is down 60% and then they go into foreclosure…at the point, the fees increase for all the people who are remaining.
Hi Shae,
Thanks for your feedback. The scenario you described is quite different compared to associations in Canada. (here as you know, we call them Condo Boards)
I will connect with you offline as I have some questions for you about South Florida.
Thanks for stopping by!
I’m curious why you do not discuss the income tax impact on real estate investing. By deducting capital cost allowance on your income tax return you can turn a property that cannot generate monthly income be cash positive on an annual basis.
Hi Bradley,
You raise a good point. I don’t go into taxes much with this post as the readers are from all over the world, and taxation differs all over. All the best, -Neil
I am leaning towards the “right” multi-family housing units.
For instance a unit that is readily available or easily converted to be sold as individual units. By focusing on these it provides me with greater flexibility in exit strategies and promotes a greater sense of security for the lender. This additional feeling of security lends to more flexibility for terms and down payment amounts greatly enhancing revenues in the long term.
Additionally if the unit is comprised of multiple buildings i.e. 8 buildings with a total of 36 units, then a portion of those units can be sold as condos. This would allow you to maintain a rental property while subsequently cashing out a portion for other investments or improvements.