A few types of income properties for new real estate investors stand above the rest. Even though the market is full of homes for sale right now, that doesn’t mean you should move on the first house you see down the street. Instead, looking at the homes through a few filters is best to know if they’d make a great starter investment property.
Here are the top three types of properties to consider, primarily because of the positive cash flow potential.
#1: Multi-Family Homes
“In my opinion, real estate is the best way to grow wealth. If you want to get super rich, get involved
in real estate… There are many indications that multi-family apartment investments will continue to be great.”
-Grant Cardone
Perhaps the best way for new investors to get started is with multi-family homes. There’s a reason why it’s usually not easy to find them for sale! Fellow investors know these are great investments, thanks to the diversified risk. Multi-family properties are often list privately, so the best way to find them is to enlist the help of a real estate broker.
Keep in mind, however, that you don’t prequalify for a multifamily property like you would if you were buying a single family home. Instead, you go through the property’s operating income and discuss whether or not that will be enough for the down payment you have at hand. It’s always best to be working with several lenders specializing in multifamily mortgages.
The best way to explain why multi-family homes are excellent income properties for new investors is with numbers. Let’s say you have two homes on the market. The first costs $200K and is a single-family detached home. The other option is a $300K duplex. The duplex isn’t much more extensive but still commands $100K more.
Even though the duplex has a much larger mortgage payment, the fact you will be able to fill it with TWO tenants instead of one makes a huge difference. Each tenant can pay slightly less than they would for the single-family home, but you make more money. This leverage grows even more if you get a larger unit, such as a triplex or quadplex.
Another factor to consider is maintenance cost. Even though a duplex has some separate entities (like the air conditioning units and walls), they also share a few. For example, it still has only four walls, whereas owning two single-family homes would mean maintaining eight divisions. If something happens to the roof, you’re only dealing with one large roof instead of two smaller, separate ones. These maintenance savings become even more substantial if you get a building that houses even more families.
Finally, multi-family units hold their value. As mentioned earlier, investors love them because they offer several advantages over investing in single-family homes. So when you decide to sell the property – whether it’s in 2 years or 20 – you can rest assured that it will still be a valuable piece of real estate.
#2: Mobile Homes
Investing in mobile homes is a great way to get started as a real estate investor. The first is due to the low upfront cost. These homes can usually be yours for less than $100,000, and you can often find them for much less. Because the mortgage payment will be so low, obtaining positive cash flow every month won’t be as difficult.
Another reason mobile homes make great income properties is the low maintenance required. A larger home has a lot more things that can go wrong with it:
- More roof tiles to replace
- More siding to paint
- More windows to replace
- A bigger, harder-working air-conditioning unit
- Etc.
Even though maintenance will be required on a mobile home, there’s a lot less to keep up with. This helps reduce the risk of those late-night phone calls of something going wrong.
If you decide to pay off the mortgage quickly, that’s MUCH easier to do in a mobile home. Let’s say you purchase one for $70,000 and put $20,000 down; your monthly payments would likely be less than $300. Anything extra you put into the payment goes straight toward the mortgage. You could quickly pay off the property in less than ten years; after that, the monthly rent is almost all profit.
Finally, keep in mind the most valuable part of what you’re buying – the land the home sits on. Over time, this land may be the most lucrative part of your investment. If you’re able to split it up in the future and sell it off in small chunks to developers, your ROI can be astounding.
#3: Detached Single-Family Homes on Sale
“Make money on the buy, not on the sell.” – Robert Kiyosaki
When most people think of income properties, they generally think of single-family homes. These properties are easy to understand, mainly because so many of us have already purchased one for personal use.
These types of properties are great for new real estate investors, but you can’t just buy any home. To help ensure positive cash flow, you need to get a great deal on the property. Even though this is important for mobile homes and multi-family units, it’s especially important for single-family homes.
Why? Mainly because there aren’t as many advantages to renting out these types of properties. You’ll need to rely on a low mortgage rate. That way, even if the market goes down and you have to lower rent or have a major maintenance issue, you’ll still be able to maintain positive cash flow.
If getting a great deal were easy, everyone would do it! The key is to be patient and keep your eyes open. You will probably need to spend more time looking at different properties than you’d prefer, but that’s okay. It’s all a learning process.
#4: The Airbnb Rental
This type of property can be anything, from a tiny cabin in the woods to a huge 6-bedroom house in the city.
These types of properties have become popular over the last few years. It has a few advantages over traditional rentals but lends to some negatives as well.
For example, one positive aspect is that you can get a higher rent per night. If you have a hot property and keep it booked throughout most of the month, you can make a lot more money than having just one tenant with a traditional model.
The biggest downside is the revolving door. Cleaning costs will add up quickly, and having more people use the property increases the odds of getting a guest who won’t take care of the property well. Even though Airbnb can reimburse you for damages, it’s still a hassle.
Investing in the best income properties
To be clear, there are a number of other types of income properties you can invest in. For example, you can buy/build a number of tiny homes and rent them out on Airbnb. Another option is to purchase a commercial warehouse, divide it up, and rent out each space to a different small business.
But when you’re first getting started, you want to invest in properties that are easy to understand and don’t require an extremely large upfront cash investment–primarily if you’re investing on your own. That’s why we recommend sticking with either a multi-family home, mobile home, or single-family home that you got for a great deal.
The most important thing is to think outside the box. New investors are just learning the ropes and usually don’t have the cash flow that more experienced investors have. While this can be a disadvantage when shopping for some properties, you can turn it into an advantage by using your brain to find some overlooked gems.