I met with an old friend and former neighbor last night. He is interested in buying rental property. Thought some of what I told him might be a good post.
When I first meet with somebody wanting to buy rental property, I like to let them know what I think the pros and cons are of each type, so here we go:
1) Commercial-Good return, a bit more volatile than others. When you sell, your only market is another investor or a business owner.
2) Multi-Family-Good return, a lot of work, and typically more turnover! The only buyers for this property will be investors. I have never seen an investor that was willing to pay top dollar. Also, most investors only sell their properties when they have cash flowed them to death and they are in dire need of repairs/updates.
3) Single Family Houses-Not a huge return, less turn over. When you go to sell, you can market it to an investor or an owner occupant. An investor wants a deal based on the numbers. An owner occupant will pay retail. I think this model is the best for most people.
Unless you find a super bargain, entry level single family homes are a better choice than more expensive ones. The numbers just work out better. If you ever need to part with one of these houses, you can sell it to a first time buyer in a good market, or somebody downsizing in a bad market. There were a lot of people selling their bigger houses and buying smaller houses during the Great Recession.
My personal favorite is a simple, one story house on a slab. One story because it makes it easier to repair or clean gutters and you don’t have windows up high. A slab because you eliminate the risk of rotting wood and mold under a toilet or tub if there is a leak the tenant doesn’t tell you about.