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Profit from Real Estate

The Many Types of Real Estate

By - 2013

Of the many different kinds of real estate you might invest in, single-family homes are perhaps the ones that you are most familiar with. As an investment they have their advantages and disadvantages, which will be touched on briefly below. Following that are ten other types of real estate and/or ways to invest that you might want to consider. We can't say which is best in a general sense, because that depends on what the market is doing where you are, and on what you specifically need.

1. Single Family Rental Houses

In many areas of the country, investing in single family homes is the easiest way to get started in real estate investing. This is because they are typically the easiest to finance and vacancies are (generally) less of a problem than with other types of real estate. That being said, it's worth noting that for those who bought houses eight or nine years ago, they may have been just about the worst investment possible.

We are back to rising prices at the moment, making this a better time to benefit from long term appreciation, but to avoid potential losses here's a simple formula: buy for the long haul and buy only houses that will yield enough positive monthly cash flow to give you a decent return on your money. Had you done that (if it was possible -- and if not, there's a clue about a possible bubble market) in 2005, the drop in value of your rental homes would have meant lower property taxes and therefore a higher return while you wait for prices to rebound.

One big advantage of single-family homes as rentals is that when you sell you have two markets; investors and owner-occupants. Home prices might have risen even if rents did not, allowing you to sell at a gain. What are the disadvantages of these properties? Being a landlord isn't much fun, and you typically wait a long time for the big pay-off.

2. Condominium Rentals

The primary advantage at the moment (in most areas) is that you can buy condos for less than houses. It is also true that there are (generally) fewer surprises about the building itself, or at least fewer that affect your pocketbook. This is because the homeowners association is usually responsible for the roof and all exterior parts of the unit. The disadvantage is that cash flow can be affected by increases in the HOA dues. If property taxes or other expenses go up for houses, they tend to affect all homes in the area, so rents will be raised by most landlords. But if a particular condo association decides to raise the dues by $100 per month to catch up on deferred maintenance, there is not necessarily any way to raise the rent to cover that, since tenants can find cheaper rent elsewhere, so it comes straight out of your cash flow.

3. Low Income Rentals

The advantages of renting cheap places are the same as with any rentals, but they often generate a better return on your money. The disadvantages are also the same as with other rentals, but with the addition (usually) of more repairs and tenant problems. (There is more about being a "slumlord" further down the page.)

4. Fixer-Uppers

A quick return on your investment can be had with a house or other property that you buy, fix, and sell. This can also be very creative work. We have many pages addressing this scattered throughout the site (see the home page or site map to find them). Also, in times when prices might be dropping you can sometimes be in and out before the falling prices affect you too much. Of course you face higher risk (many unpredictable expenses and problems) than with other types of investing, and you will probably be taxed heavily on the gain.

5. Lots

Buying and selling small lots is perhaps one of the most difficult ways to make money. Speculating on price increases is fraught with risks. Prices might fall, or might not rise fast enough to cover your carrying costs (mainly just property taxes if you buy for cash) and leave a decent profit after the costs of the sale. But there is one way to make it faster and safer. Buy as cheap as you can and sell the lot for payments. You can sell for substantially more when you make it easy for a buyer, and you profit from the increased price as well as the interest you collect.

6. Land

Larger parcels of land are also a very tricky investment, although it is easier to see what you are getting than with other types of properties (no hidden foundation problems or flooding basements). As a speculation you better do your research well because, you need prices to rise fast enough to cover your taxes and the costs of buying and selling, and then provide more gain than you would have made just investing in something like safe bonds. But one way to make land pay is to buy land that can be split into smaller parcels. Forty acres that you buy for $120,000 might be split into eight five-acre home sites that can be sold for $30,000 each. You can do the math.

7. Boarding Houses

Advantages: You can get a lot more cash flow renting a house by the room, especially in a college town. Disadvantages: You can get a lot more headaches renting a house by the room, especially in a college town.

8. Commercial Real Estate

Advantages: Long term triple-net leases mean little management and high rates of return. Disadvantages: Tough market to break into, and you can lose income on vacant storefronts for a year or more at a time.

9. Profit From Your Own Home

You can buy cheap, fix and live in a home for two years (minimum), and then sell it for a big tax-free profit, then start the process again. The obvious disadvantage of this strategy is that you have to move a lot.

10. Sell Lease Options

When you buy a house and then sell on a rent-to-own arrangement you get higher rent, and the buyer is usually responsible for maintenance (a typical agreement might require the tenant to cover any repairs under $200). Disadvantages: The bookkeeping is tricky, and most tenants don't complete the purchase (this can be an advantage too, but it does mean more work for you).

11. Speculation

Advantages: Buying in the path of growth and holding until values rise can yield large gains, especially if you buy low to start. Disadvantages: Prices aren't that predictable, you have expenses with no revenue while you're waiting, and transaction costs can eat much of the profits. To overcome this, consider buying land that has an old rented house or mobile home on it, and use the rent to cover all the holding costs and other expenses.

How to Be a Slumlord

Okay, I got your attention, but I really don't recommend endangering renters with unsafe housing. Much of what people call slumlording though, is simply providing reasonable housing for those with low incomes. It is of benefit to the renter and the landlord.

Why Do People Rent Dumps?

People rent not-so-nice places because they can afford to. A house that needs paint, has old rusty hinges on the doors, and a dirt driveway - this is a house that cost less to buy, and therefore can be rented for less. Anything major that the landlord does to improve it will result in higher rents, and possibly drive the renter away.

In fact, this often happens. A few years ago my own town enacted its first rental regulations. The fifteen pages of new rules included many non-safety-related requirements, like a minimum of windows, to allow natural lighting, bedroom square-footage requirements, and no peeling paint.

These things are done in the name of poorer renters, and yet the result is always the same: higher rent. With that and the regulations against mobiles homes, poor families are moving further away from town and jobs. I mention all this to let you know that if you offer an ugly, but safe and affordable rental, you are providing a real service.

Why Consider Low Rent Housing?

A nice two bedroom house in a small town might costs $130,000 and rent for $800, while an old mobile home on a lot in that same town might cost $40,000 and rent for $500. Notice that the house costs three times as much, but the rent you get isn't even doubled. This will usually mean that the mobile home gives you more cash flow. That is why old houses and mobile homes (on land) are good investments.

It's important to know you'll have more risk and management problems with low rent housing. Repairs come up more often, and rent will be late more often (on average). This is why you deserve a better rate of return. Otherwise, who would want to provide low-cost rentals? Treat your renters well, and make your places safe, and you can do well and sleep well - even if some people want to call you a slumlord.

Note: for more on the different types of real estate and ways to invest in them, see our big list here: 100 Ways to Profit from Real Estate


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