So how do you find below-market value properties? It’s a vital skill you need to be able to grow a portfolio fast. In this blog, I share what below market value actually means, and what type of properties should you buy as investments.
Property investment is a strategy that can be both rewarding and profitable. Prospective real estate owners can use leverage to purchase a property, unlike stock and bond investors, by paying a portion of the total cost upfront and then paying off the balance, plus interest, over time.
Income Property #1: Multi-Family Homes
Multifamily housing may be the best way for new investors to start out. There’s a reason they’re typically hard to find for sale! Due to the diversified risk, fellow investors are aware that these are excellent investments.
Numbers are the most effective way to illustrate why these are excellent income properties for new investors. Consider that you have two houses up for sale. The first is a single-family detached home that costs $200,000. The alternate choice is a $300,000 duplex. Even though the duplex isn’t much bigger, it costs $100K more.
Even though the mortgage payment for the duplex is significantly higher, the fact that you can rent it to TWO tenants rather than just one has a significant impact. In reality, you make more money because each tenant can pay a little less than they would for the entire single-family home. If you’re able to acquire a larger unit, such as a triplex or quadplex, this leverage increases even further.
The cost of maintenance should also be taken into account. Although a duplex has some shared components (such as the walls and air conditioning units), it also has some separate ones. For instance, it still only has 4 walls, as opposed to the 8 walls required to maintain two single-family homes. When something goes wrong with the roof, you only have to deal with one sizable roof rather than two smaller, independent ones. If you purchase a building that accommodates more families, these maintenance savings become even more significant.
Income Property #2: Apartments
Benefits
- greater rental yields than homes
- better rental returns frequently translate into lower or no holding costs.
- less upkeep necessary
Disadvantages
- typically less favorable prospects for capital growth than those of homes and villas
- Strata fees can be expensive, especially if the complex has a lot of common areas like pools and elevators.
- The property is subject to less control and has restrictions on renovations because of strata bylaws.
- increased competition for buyers and tenants, especially in large complexes and places where apartments are more common (i.e. CBDs)
Income Property #3: Property flipping
Flipping houses requires a great deal of expertise in real estate appraisal, marketing, and renovation. In order to flip houses, you need money and the ability to make or supervise repairs as necessary.
This is real estate investing’s infamous “wild side.” Real estate flippers are distinct from buy-and-rent landlords, just as day trading differs from buy-and-hold investors. One such example is the desire of real estate investors to quickly and profitably resell the underpriced homes they purchase.
KEY TAKEAWAYS
- Aspiring real estate owners can purchase a home by using leverage, making a down payment equal to a portion of the total price, and paying off the remaining balance over time.
- Being a landlord of a rental property is one of the main ways that real estate investors can make money.
- Flippers, who purchase undervalued real estate, renovate it, and then sell it, can also make money.
- A more passive method of making money in real estate is through real estate investment groups.
- In essence, real estate investment trusts (REITs) are stocks that pay dividends.
Investors should also include other investment options in their plans, which are frequently included in the portfolios of more seasoned investors. These options include development sites, commercial real estate, as well as development and commercial syndicates. Although again, individual risk appetites and circumstances apply, novice investors should typically begin by looking at homes, villas, or apartments.
To be clear, you can invest in a variety of other kinds of income properties. For instance, you could purchase/build several tiny houses and let them out on Airbnb. Purchase a commercial warehouse, divide it into sections, and rent out each section to a different small business as an alternative.
But when you first start out, you should invest in properties that are simple to understand and don’t require a sizable cash outlay up front, especially if you’re doing it alone. That is why we advise staying in your single-family, multi-family, mobile, or cheaply purchased single-family home.
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