Real estate investing is like a smorgasbord: You can choose what you like. Whether you’re a beginner or a sophisticated buyer, there’s a property type, time frame and investment strategy that you can understand and at which you can probably succeed.
Enjoy the smorgasbord
Most investors purchase one of two basic categories of properties: single-family or multiple-family properties. Most operate on two basic time frames: buying for the short term (wholesaling, and rehabbing), or buying for the long term (landlording while building equity and capital appreciation). After that, there’s an endless number of ways to look for cheap property and just as many strategies for “creative financing” to buy these properties. For now, let’s look at the two general housing categories and who should invest in them.
Single-family versus multiple-family home purchases
If you’re a beginner, start out small. If you bought a single-family home and turned it into a rental property, you could be on your way to generating a retirement income. Good thinking. But why not expand the concept? In New York and New Jersey, where we’re used to seeing houses attached to one another, we often call buildings single-family houses if they have fewer than five family units in them. Meanwhile, mortgage lenders consider anything under five family units personal property. In other words, you’re still personally liable for repaying the loan whether you live there or rent to tenants. So instead of buying a one-family property, why not get a duplex or a brownstone with three or four floor-through apartments? While the purchase price and mortgage might be 25 percent or even 50 percent higher, your rental income could be as much as 200 percent to 400 percent higher.
If you’re buying your first home, community-based organizations, such as the Greater Jamaica Development Corp. and Neighborhood Housing Services, can help you afford the down payment and get great mortgage terms from banks. While owning residential real estate will improve your lifestyle, commercial property can pay for the lifestyle you really want. Commercial properties consist of five residential units or more, or buildings that are zoned for business or industrial use, such as offices, warehouses, raw land and strip malls.
Greg Warr, who buys and operates apartment buildings from New York to Inglewood, Calif., advises you not to buy anything less than a 25-unit apartment building if you want to become wealthy. By buying more than five units you automatically decrease your risk, he says. “If you have a one-family home and it’s vacant, that means your property is 100 percent vacant. But if you have vacancy in a 10-unit apartment building, your property is only 10 percent vacant,” Warr says.
The single-family investor probably can personally handle most aspects of ownership—buying, selling, renting out and managing—more easily than she can handle a 10-unit apartment building. By contrast, multiple-family dwellings, particularly if they also have retail tenants, are loaded with regulations to which owners must adhere.
Banks loan mortgage money more easily to buyers of big apartment buildings. Banks look at mortgages for five units or more as business loans. Lenders, therefore, look at the rent roll income and the value of the commercial property first and at your credit rating second. The amount you make at your job is almost irrelevant. It’s not hard to see why. In a 100-unit building, you may pay $30,000 a month in debt service, which could be hard to cover with a salary. Instead, the lender wants to make sure that the building can pay for itself. And since banks consider anything less than a five-family house personal property, they’ll require a credit report to determine whether you qualify to buy. In addition, they’ll check your personal income and any other expenses you may have. Under this scrutiny, less than 36 percent of the population has the ability to buy a four-unit building.
You or a management company?
You can hire a property management company to manage large or small buildings. Check the Institute of Real Estate Management (www.IREM.com) for a certified property manager in your area. Ask to see the company’s income-expense reports to see whether it has made or lost money for its clients, whether it has brokering and superintendent licenses and accountants and attorneys on staff. The average fee for a management company is 5 percent to 10 percent of the building’s monthly income.
Tony Chapelle is a private investor who buys homes. He may be reached by e-mail at email@example.com, or by calling at 212-534-7195.