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.
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.
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.
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?