The most important strategic decision that new landlords make is choosing what type of rentals to buy.
There are many choices from single family home rentals to small multi’s to large apartment complexes. Within these categories, there are many more choices.
For example, many new real estate investors start with single family home rentals because they can buy one at a time with the advantages of getting into the game with limited available resources, ability to get financing and minimize risk while building a comfort zone for both the numbers and tenant management, then grow. Those are pretty compelling reasons for newbies who want to start in this business with the ultimate goal of financial freedom but are apprehensive before buying their first investment property.
As noted in my presentation “Achieve Financial Freedom Through Successful Part-Time Real Estate Investing,” 89% of the 17.7 million single family home rentals in the US in 2016 were owned by landlords who own 10 or less such homes. Yes, most landlords start by buying single family home rentals.
After making the decision to build a portfolio of single family home rentals, one brick at a time, the next decision is in which neighborhoods to buy.
In my detailed presentation “How to Choose Houses for Rentals,” I explain that each landlord should seriously consider first choosing the income level of the target tenant pool and only then decide in which neighborhoods to buy.
The tradeoff for choosing lower income tenants is that the financial cushion for tenant hardship is lower, while the cash flows are higher is you have low vacancy, repairs and administative costs.
Most of my coaching clients who are landlords buy single family home rentals in lower income areas. In contrast, I buy in middle income class subdivisions since I prefer tenants with a higher probability of being able to absorb a money emergency and still have the ability to pay rent. Again, the tradeoff for buying lower income single family home rentals is tenant management of tenants with little cushion for an emergency while the benefit is higher cash-on-cash return, IF economic vacancy can be minimized or avoided.
Let’s examine numbers in our area in South New Jersey. The average purchase price of single family homes in Camden City in 2017 was $44,000 and the median rent was $880/month. In contrast, in nearby Cherry Hill, the average purchase price of single family homes in 2017 was $251,000 and the median rent was $1,330/month. In other words, even though the rents in Cherry Hill were 51% higher than in Camden City, the purchase price in Cherry Hill was a whopping 470% higher than in Camden City! That is one factor that makes cash-on-cash return in Camden City much higher than in Cherry Hill and that doesn’t even take into account the huge difference in property taxes.
If you want to learn the full detail for the calculations for rentals as well as ALL of the considerations when choosing single family home rentals, you should watch BOTH of the following two training videos: