What Type Of Real Estate Should Your First Investment Property Be?
New Investors
All new real estate investors usually have similar dreams. They want to be able to replace their primary source of income with income derived from real estate. Something a lot of investors tend to forget about is that there are many different ways of achieving this goal through real estate.
When someone thinks about investing in real estate they often think about owning a small apartment complex with multiple units and tenants, but there are other types of real estate, and an apartment complex might not be the best place to start.
The Types Of Real Estate
In this article I am going to focus on the primary types of real estate available in the market, and break down how I would suggest a new investor think about each type.
The types I will be covering are single family, multi family, mixed use, commercial, and industrial.
Single Family Real Estate
As the name for this type of property suggests, single family real estate describes a property that is meant to house one family. These are properties such as condos, semis, townhomes, or detached homes. The great thing with this type of property is that they are by far the most available type of real estate asset.
Single family homes are also generally the most liquid type of real estate. What this means is in the event that you you need to sell your home, there is a large quantity of people who would be interested in purchasing it, making it easier and faster to sell.
If you are a new investor I would suggest looking at a single family property to begin your investment journey. They are some of the lowest risk investments, and when you are starting out the mistakes you make will be far less costly.
When comparing the different types of properties that fall under single family real estate, it is important to understand each sub type.
Condos are great for investors with limited knowledge in investing. The way they work is each condo complex has a set of rules and guidelines for owners. In exchange for a monthly fee the condo board will take care of the maintenance to the complex, so all you need to worry about is the interior of the unit. While on average condos will earn less income than other types of assets, they are much more hands off, and you don’t need to worry about most things.
Townhomes & Semis can be great, or can become a nightmare. As an investor you need to look at if the units are part of a condo complex, or if they are 100% individually owned. If they are part of a complex, the above information about condos hold true, and they can be an attractive investment. If they aren’t, while no issues could arise, you are tied to the neighbouring unit(s). As an investment this can be daunting as anything your neighbour does will impact you. If they decide to neglect their building, or rent to unruly tenants, it can quickly and negatively effect your building. One thing to keep in mind is that sharing a wall can mean sharing noise, bugs, rodents, and structural damage.
Detached Homes are one of the best investments for seasoned investors in single family real estate. These types of properties offer the most up side, but also carry the most risk. Everything from the roof to the foundation is your responsibility, so proper maintenance and saving money for repairs is your responsibility. On average they will be more costly to renovate, and can have more issues and cost overruns.
Multi Family Real Estate
This type of real estate describes properties that are built to have two or more families living in it. This includes everything from duplexes to large 100 unit+ apartment complexes. While there are many benefits of multi unit real estate, it also comes with challenges.
Some of these challenges include safety for fire separation, noise separation & complaints, waste disposal issues and even parking disagreements. To a new investor, dealing with these issues can become overwhelming until you understand the LTB (landlord tenant board), have resources & contacts in place and understand local laws.
The benefits, however, are that you will be in control of the entire building and can create a lot of up side to the investment. By having more units in the same building you are minimising the number of roofs to repair, driveways to maintain and lawns to cut. This reduces your expenses and helps you drive more profit out of the property.
Mixed Use Real Estate
Mixed use real estate describes properties that have more than one type of tenant in them. Properties like this can be a mix of residential, office, retail, or industrial. These types of properties come with unique challenges and require a knowledge of both residential and commercial real estate rules. Like multi family real estate, the same pros and cons exist, but with an added struggle of managing multiple types of residents.
One of the most prominent types of mixed use properties on the market are “downtown buildings” where there is an office or retail space on the main floor with residential units above. When dealing with a property like this you need to be ready for different taxes on different unit types, different types of contracts, different maintenance agreements, and more.
Commercial Real Estate
Commercial real estate describes properties that are used for office or retail businesses. While these types of properties can have the highest returns (especially with triple net leases) they are also more difficult to rent out. There are fewer people looking for retail or office space than there are looking for residential, which means the audience of people you can rent to is smaller. This usually means longer periods of vacancy.
Some investors like this class of real estate due to the triple net leases that are commonplace. What this means is that the business agrees to pay the landlord a set amount of money for use of the building. On top of rent the tenant will pay all the costs of maintenance, repairs, taxes, and utilities. Upon the lease ending it is the tenant’s responsibility to return the property to the landlord in the exact state it was given to them.
Industrial Real Estate
This type of real estate describes properties that are used for manufacturing or warehousing. While these types of properties can have high returns, they are also risky and involve a large investment up front. Due to the limited number of tenants that are looking to rent industrial space, finding a tenant can be difficult and it isn’t uncommon for landlords to provide incentives like free rent for a period of time, or for landlords to pay for renovations needed to accommodate the tenant.
Some investors like this class of real estate because good tenants will stay long term and provide consistent income. While there are few tenants, there are also few landlords, meaning that tenants are less likely to move and will often do what they can to stay in the same place so they don’t disrupt their business.
So What Do I Own And How Did I Start?
I am a big believer in diversification, and when it comes to real estate I think the same way. At the time of writing my portfolio consists of single family homes, mixed use buildings, and one small industrial property that is still to be developed. In the future I am looking at more single family homes and multi family properties.
I began with purchasing condo units, I then purchased a piece of industrial real estate, and then opted for mixed use real estate and additional condo units.
So far my best experience has been with single family homes that exist in a condo development. Right now these have been the quickest to provide a positive cash flow, and have provided the fewest headaches. As a new investor I would highly suggest starting with these types of properties and move to other types as you gain experience.
This article is for informational purposes only; it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
