What Type of Property Should You Buy?

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This is one of the most common questions that I get when working with new investors, and I guess that it is to be expected.  Not only are there a lot of different types of properties out there, but there are also different strategies and pros/cons to each strategy.  So in this post I will attempt to provide some criteria for how to answer this question for yourself.

What Are Your Goals?

I believe that everything comes back to your individual goals.  There are many different types of properties and strategies out there, but unless you know your goals it is difficult to know which one to select.  So start out by figuring out your goals.

Related: Tips for Achieving Your Goals in 2014

What is Your Strategy?

Once you have your goals established, the next thing is determining which of the hundreds of strategies you could utilize to achieve your goals.  Some strategies are more active, such as wholesaling and flipping.  Others are more passive (but still require work) such as buy-and-hold or tax lien investing.  Narrow down the strategy or strategies that will contribute towards achieving your goal.

What is Your Location?

Sometimes this step can come before your strategy, sometimes it can come after.  In my case, my goal was to generate monthly income to cover my expenses to allow me the freedom to make decisions without having to worry as much about the financial impact.  My strategy to do this was to purchase buy and hold properties.  So my next step was to find a location that would fit my strategy.

One of the first things that I did was to lay out my criteria for a location.  These included things like:

  • Within 1 hour of driving
  • Steady/increasing population over the past 10 years
  • Multiple businesses locally available offering jobs
  • Purchase prices that allowed positive cashflow

After I had my basic criteria, I grabbed a map and created a circle of my target area.    I then took towns (Zip Codes) within the circle and plugged them into City Data to get information and population trends for the zip code.  Any that did not have steady/increasing populations got removed from the list.

Rochester-NY-Radius

 

I then created a spreadsheet for each Zip Code.  I followed rental ads (either in the newspaper or online, whereever landlords advertised properties for rent).  At the end of the month I analyzed the data and asked the following questions:

  • On average, how long were ads in the paper (how long did it take to get a place rented)?
  • What is the average rent for a 1 bedroom apartment? 2 bedroom? 3 bedroom?
  • Were apartments offered single family houses or multi-units?
  • What were the “norms”?  Ex. Were pets allowed?  Were utilities included?

Once I had this information, I then began looking at properties for sale.  I used a spreadsheet to quickly evaluate these properties.  At this point I was not looking to purchase a property, but instead looking at the ratio of house prices compared to rent.  Some of you may be familiar with the 2% rule.  I’m not going to debate the rule in this post, but what I was looking at is basically what is the ratio of purchase prices in the area to rents in the area.  By looking at multiple properties in an area and using this ratio, I was effectively able to “score” each Zip Code.

Related: Investment Property Location: Don’t Dismiss the #1 Rule in Real Estate

What Property Type Fits Your Goals/Strategy/Location?

So back to the answer of “what type of property should I buy?”  The answer comes from a combination of your goals, your strategy to achieve those goals and the location that will allow that strategy to be successful.  For me, I ended up investing on the small rural town that I grew up in.  After performing the above analysis, not only did it come out as one of the top Zip Codes, but I also had the added benefits of knowing the area and having connections locally.  Also, I chose to target multi-family properties they were available in my area and the numbers made more sense.  In terms of vacancy, I have found that the number of bedrooms is the deciding factor, not the type of property.  Our 1 bedroom units have the highest vacancy rate, which makes sense as people typically start out single or with a significant other, then expand and grow their family.

What type of property do you look at/invest in?  How did you determine which type you would focus on?

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About Author

Tom is a serial entrepreneur and real estate investor from Rochester, NY. His real estate investments primarily target multi-unit properties. Along with his wife Ariana, they run a blog called Entreprenewlyweds, which helps couples understand how to manage being real estate investors/entrepreneurs while also maintaining a great relationship and family life.

15 Comments

  1. Anthony Armstrong on

    Wonderful post. I think it gives some sort of road map for new investors like myself to follow. You get so much information and fall victim to information overload and shut down. Thanks for this.

    • Anthony – Thanks for the comment and I agree. Far too often we suffer from information overload, especially when it comes to real estate investing. So many strategies, so much data, many different opinions and variations between markets.

      Use this as a starting point and tweak it as you find something else that you need.

  2. “On average, how long were ads in the paper (how long did it take to get a place rented)?”

    Great idea to monitor that, Tom!

  3. Tom – I am not familiar with the 2% rule. Can you expand on that a little? Also, what kind of multi-family units do you invest in? Duplexes, four-plexes or small apartment buildings?

    • Martin – The “2% rule” is a guideline for evaluating real estate. Basically it suggests that rents should be 2% of the purchase price. I do like using this guideline, but as others point out it is not always applicable (depending on where you are in the country) and it does not guarantee success.

      Related to this post, the point was as you evaluate areas, you can use the same strategy to compare apples to apples. So for each zip code, what percent of the purchase price are rents. Areas where rents are a higher ratio of purchase prices are the target, but that is only one piece of the puzzle. You have to weigh that with the rest of your criteria to really make a holistic decision.

  4. Great post! This is very useful for new investors on getting a starting point. I go over this in my own way, buts it best for everyone to have a tool set of solid ways to take their first steps.

  5. Tom, I really enjoyed your post. It is so true like Anthony mentioned above- about information overload. I have been involved in prop mgmt for a couple years now so I understand much of the management and legal side. But getting started in my own investments, I spend much time reading and reading and reading some more. I probably overanalyze too much. This post is very straight-forward and reiterates the most important things. It is exactly what I needed at this exact time! Thank you for embedding the links to some of those others posts as well!

  6. Nice article. I do alot research too of the area before i even buy a property. Unfortunately, the 2% rule cannot be used down here in South Florida. The good thing is vacancy rate is very low.

  7. Very good article! Simple, practical and very valuable. More than being conceptual you offered very simple techniques anyone can implement. I’m saving this in my ‘strategies/toolbox’ for REI. Thanks.

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