Cheap Rehab & Rent to Own vs. Buy & Hold Long Term Rental?

[Craig S.]

Hello,

I am just getting into the real estate investing world (age 23) and have come across many different strategies to investing in real estate. My ultimate overall goal is to have enough rentals providing me relatively "passive" income so that one day I will be able to live completely on my rentals providing me a good income (200-300k+) per year or more. If I play my cards right and have enough equity and/or own enough properties free & clear, I know I can make this happen.

I have two major strategies I am considering right now and want others to give me your opinions and feedback on the risks and thoughts on both methods. I have talked to intelligent individuals on both strategies and want to learn more about both before I pull the trigger so to speak. I plan on managing the units myself for the most part.

Option #1: Start off by buying a rental duplex for about $110,000 that provides me about $200 /month cashflow ($100 per door) -- this being calculating the cashflow using the "50% rule".

This would be my first deal (listed above) as an owner occupant and I would plan on continuing with this type of strategy buying properties that are already in decent shape and with a sale price close to market value--hoping to make my profit on the monthly cashflow. I would start off with a few duplexes then move onto apartment buildings, etc. as I grew. Obviously buying as cheap as possible is key, but I would be mostly looking at MLS, newspaper, relators, or anywhere else I find deals and buying properties that are in decent shape and in decent areas/markets. Down the road I may venture into doing more rehab work, but starting out I am still learning so probably prefer to invest in properties that are already in decent shape--no major work like foundation problems, drainage problems, etc.

Option #1 seems to be portrayed similarly by @Rich Weese here on BP.

Option #2: Instead of using my cash to finance more expensive properties (duplexes, etc.), I would buy cheap properties that need minor rehab in lower income areas/cities or areas that the market is weaker and complete the minor rehab--own the property free & clear, and then do something like rent to own. I could put the homes on something like a 3 year rent to own contract and either sell the home at the end of the 3 year term for a decent profit, or continue renting it out with a contract renewal fee if they weren't able to finance the property.

My first property as a "minor rehab" project might cost around $10k to $20k to get into--paying cash free & clear. It may be in a rougher part of town, but I would own the property free & clear and I could keep a much larger portion of the income for cashflow. I would also have the opportunity to sell in a few years for a cash profit.

Option #2 seems to be portrayed/recommended similarly by @Rob Gillespie here on BP.

I am relatively conservative on investments and would love to make cash quick, but am also being realistic and want something that won't be a nightmare to run/manage, but still provides me good returns.

Let me know your thoughts on both strategies (Option #1 or #2) and why. Possibly providing another strategy that might also be beneficial. I know there are so many strategies to investing in RE, but I am looking for general overall strategies that would allow me to build a cashflowing portfolio of rentals over time.

I am scared to invest in areas that the market is way down (like local Cleveland, OH). I'd hate to pick up a property just because it is cheap, but then face a nightmare trying to attract renters, renting to people who destroy the place, and maybe not being able to sell the property due to the economy, etc. I wouldn't buy in war zones, but if I buy CHEAP it won't necessarily be in the best area.

Looking forward to your replies.

Craig