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Investing 101

We receive calls almost every day from people wanting to invest in rental properties. Their questions are almost always the same. What type of property is best for a rental, and what area of the city should they be looking in? The best advice we can offer is... Invest in a property where the numbers are right and you're going to meet your objective(s).

You Make Your Money When You Buy!:
There are two well known axioms in real estate. They are ... You Make Your Money When You Buy, and Location, Location, Location . As long as the property can be used for its intended purpose, and you buy it for a low enough price, you've probably got a good deal.

What is the Best Location?:
From a residential rental standpoint you want a property that will be 'liked" by as many people as possible. Most people usually do not want to live on a busy street, especially if they have children. There are many good places in every community. Put yourself in your prospective tenants shoes and look for a location that will appeal to as many people as possible

Keep in mind I'm speaking from a strictly "rental" aspect. We are not talking about appreciation, maintenance, age, future resale, etc. When you bring in those other factors, along with your personal investing preferences, then where you buy may be more difficult to pinpoint. You see it's hard to foresee what any one neighborhood or market will do over the next 20 years or so.

The two things that eat into rental profits are vacancy and maintenance. So buying a new property in a newer area of town might be a good way to go. The challenge here is that you pay a premium for this type of property and unless you either get a terrific price or you put a lot of money into your down payment, you could possibly have a negative cash flow every month. Keep in mind that all properties will get older and as they do will require more and more maintenance.

What Amenities to look for:
Another thing to keep in mind when selecting a property, strictly for rent, is not to impose your own personal likes and dislikes into the decision process. Try to be objective from a renters point of view. You may like two story homes and usually on a per square foot basis they are cheaper. From a tenants standpoint they may not be as great. For one thing older tenants may not want to climb stairs. Many parents with infants would like to stay away from stairs as well. There are many medical disorders that may prevent someone from climbing stairs frequently no matter what a persons age is. Consequently buying a two story home may put constraints on who will rent from you. Age restricted communities pose a similar problem. Most tenants would enjoy covered parking especially in a city where the temperature can reach 120 degrees. So either a car port or a garage is a good thing to have.

PROPERTY TYPES - Another question we get constantly is which property type is better? Here again, any type where you can make money. Every property has it's advantages and disadvantages.

House - Your average house needs to have the lawn and or landscaping cared for. Houses are normally larger than most condos, which means there is physically more area a tenant can potentially damage. If your house sits vacant you are 100% vacant as compared to say a four-plex. Also, you normally continue to incur other costs with a vacant house. There are electrical, water, and landscaping requirements. However, you do have the advantage that you are not directly competing with all the apartments, condos, townhomes, and plexes on the market. Also, people who rent houses, as compared to other housing types, stay longer and move less.

Condo/Townhouse - Condos, have to compete with every apartment complex or townhome, so there is more competition. On the plus side, an owner usually doesn't have to worry about the exterior of the property, and has a smaller interior to fix should it get damaged. Tenants in condo's however, as a demographic group, as compared to people that live in houses, have a tendency to move more often. Condos are almost always located within an HOA. HOA's serve a purpose but many can get carried away with their rule enforcement.

Plexes/Apartments - Duplexes, tri-plexes, fourplexes, multiple units and apartment buildings. There really isn't much new property in this category, here in Clark County, for the most part, as compared to all other forms of construction. Consequently, these properties are normally older. Your price per unit is usually less than compared to a condo, but your overall investment is much higher simply because of the size of the project. Depending on the building size, having one or a few vacancies may not be a problem. Your overall cost per unit to maintain the building is less, you just have more maintenance to do. However, every major repair is initially much more cost intensive. When you replace the roof it might run $15,000 - $30,000. But on a per unit basis, it's a third of what it would cost to do a house.

The bottom line is that every property has it's advantages and disadvantages. If you buy an older property because it's initially cheaper than a new one, then you will probably be paying more for maintenance. If you buy a new property, in order to avoid potential maintenance problems, but don't put much down when you purchase, you will probably be upside down in your rental income and mortgage payments. There is no perfect solution. It is whatever you are comfortable with. Just remember, you make your money when you buy.