Rental properties can be one of the most rewarding investments you can start today. Although the entry cost seems difficult for some investors, there are a lot of ways to start with a small amount of money. Plus, there are a ton of property types to choose from depending on your financial situation. In the rental property series, we have seen types of rental properties, pros, and cons of each one of them. The purpose of the series was to do a detailed analysis of each type so that we could be able to make a final conclusion regarding the best one to invest in. In this article, we will find out the best rental property you can invest your money in with greater returns.

Would Condo properties be the best for your investment?

We are starting with condo investments. Condos have limited space since they are part of big complex buildings. Therefore, condos can be compared to apartments except that you own them instead of renting them. Condos have an HOA fee which can be a lot or less depending on the location and the quality of the property. This fee can eat up the cash flow if a thorough analysis is not done beforehand. They have less privacy and do not appreciate really well over time. On the other hand, they are cheap which makes them a good target for small families, people with small capital, or first homeowners. Condos are also a good choice for people who are busy with no time for mowing yards, plowing snow, etc (the HOA takes care of these activities).

When it comes to an investment standpoint, especially in our case where you buy and hold; it can be difficult to build real wealth through condos. If you have a small capital and want to start with condos, your portfolio will grow slowly. Let’s say that you start with one condo and pay off the down payment and have a tenant living in it. We can also assume that you have done your homework and your condo cash flows $100 a month. At this point, you have 1 tenant, mortgage payment, and related expenses. If you want to retire with $4000/mo of cash flows, you will have to acquire at least 40 condos ($100 of cash flows times 40 (number of properties) equals $4000) assuming that all of them will cash flow at least $100/mo.

There is nothing wrong with owning 40 condos. The problem is that you applied for a different mortgage, and insurance, and did the paperwork for each condo you bought. This is a very expensive process in terms of time and money. Think about going through mortgage applications 40 times, 40 insurances, doing paperwork 40 times, paying closing costs 40 times, and doing related paperwork 40 times. Then the HOA eats up half of the cash flow you managed to get. I don’t think you want to do it. Also, tenants in condos tend to be short term like students, contracted employees, unsettled families, etc. This increases the chances of vacancies and rehab expenses. As an investor, you try to stay away from these expenses as much as you can.

The other problem associated with condos is that as you buy more and more condos, your debt to income ratio will get in the red zone. At this point, no bank or money lenders will give you money until you fix your financial situation. The good news is that if you have a small capital, you can start with one condo. Once you acquired a handful of them, you can refinance them and upgrade to another form of property to speed up the process.

Would Town-homes be the best investment for you ?

The next type will be Town-home investments. This form of property can be classified as an advanced level of condos (condominiums). They have a lot of similarities like privacy, HOA fees, regulations, etc. However, town-homes are much better than condos. They offer little privacy. Owners have their own yard and are in control of their unit. More importantly, long-term tenants prefer town-homes because they offer the luxury of living in a single-family home at a cheap price. However, they are much bigger and more expensive than condos. If you invest in town-homes, you would run into the same problems we have seen in condos. It would be challenging to build a reasonable portfolio. The debt to income ratio issue still applies and it increases faster the more you buy properties. Plus, you through a lot of mortgage and insurance applications. This can be a major setback to some investors

Would single family homes be the best properties you can invest in?

The next group on the list is the single-family home investments. Single-family homes are considered more private, come with a yard (big or tiny depending on the location) and owners have complete control of their properties. Single-family homes appreciate better and much faster than condos and town-homes. They do not have HOA fees or regulations imposed on them. Single-family homes come with more privacy since they do not share a wall with other properties. The yard can be used to plant trees to increase privacy in case the owner has close neighbors. However, it is hard to build a rental property portfolio using single-family homes. The investor would run into the same situations we have seen in condos and town-homes.

I do agree that there is a big difference between owning condos and town-homes vs owning single-family homes. Single-family homes come with a lot of benefits that tenants love such as privacy but they also come with some responsibilities like taking care of the lawn, removing the snow, etc. For these reasons, tenants in single-family homes are generally more stable financially and family-wise compared to other forms of properties.

What about multifamily properties investments?

Last but not least, we have multifamily rental properties. These are properties with more than two units. From our rental property series part 4, we have seen that they are divided into two groups: residential (1-4 units) and commercial(5 or more units). We have also seen that multifamily properties are complicated and hard to manage, very expensive, more regulated by the government, and require extensive care.

However, some of these negative qualities can be an advantage to an experienced and savvy investor. The competition is less since the average citizen cannot afford or manage them. They come with less paperwork compared to other property types we have seen so far. For example, you can buy a 100 units property with one mortgage, negotiate insurance once, do paperwork once, etc. But If you were going to own 100 single-family units, you would have to negotiate 100 mortgages, go through paperwork 100 times, negotiate insurance 100 times.

Multifamily properties do generate a lot of cash flow faster than any other rental properties we have seen. This means you can achieve your goals faster by investing in multifamily properties than single-family, town-homes, or condos. The downside of them is that the down payment is always high. As the number of units increases; the mortgage payments follow the same trend. This situation can get the majority of investors into bankruptcy if they cannot have their properties rented most of the time. Many investors are eliminated by this factor.

Which one is the best property to invest your hard earned money in?

Now, here comes the millions dollar question. Which one is the best property to invest your hard-earned money in? You ask. Everything boils down to how much money you have or want to start with. How much risk you want to take. The location you want your investment to be in. The trend of the market and long term predictions. Your availability to manage and take care of challenges when they arise, etc. For example, dealing with tenants means you will be able to take their phone calls at 2:00 am about their toaster that is not working property or other dumb stuff.

If you have little to no money, I would recommend starting small. For example, you can start from a very cheap single-family home and upgrade to multifamily units like a duplex, triplex, or 4-plex as you generate more capital. The main purpose of rental property investment is to generate cash flow and save as much money as you can. If the property seems expensive in your area, try to look for those that are a little with some renovation like a smelly apartment, carpet replacement, etc. If you are just starting, I would recommend staying away from properties that need major renovations such as foundation replacement, electrical upgrade, plumbing, and major structure rehab. These projects are costly and can push you in a big loss real quick.

Do you have some capital to start with? Jump into multifamily units as soon as you can. This is a way to go. The reason is that they generate more cash flow compared to single-family properties, condos, or tow-homes. In addition, you can reduce your vacancy rate with more units than what it could be if you had only one unit. For example, if you have 10 units, and 7 are occupied, you only need to look for 3 tenants. Even if your entire property is not occupied, it is still generating 70% of the revenues it was supposed to be providing. This money can be used to take care of mortgage payments and protect you from out of pocket cost. On the contrary, if you had only one unit and it is vacant, you will have to pay the mortgage and related expenses 100% out of pocket because your property is 100% vacant.

Conclusion

To summarize, everything will depend on your financial goals and how much risk you are willing to take. You can start small or big. Never take more risk than you can handle. In the end, it is not how much you start with or where you start. What matters is where you end. Yeah, go get some properties and make sure you take action. “A person who started yesterday is better than the one who will start tomorrow or who will never start at all”.