Ready to buy a Rental!

[Joe Young]

Hey everyone, I believe I am now in a position to begin earning passive income.  I posted once before on the topic but now am really ready to move forward.  I have a few ideas and look forward to bouncing them off of all of you.  Seeing as there is no character limit to the post, let's start with some relevant and less relevant background!

I live with my wife and dog in the southwest suburbs of Chicago in a 2b2b condo that I purchased to begin our marriage.  I chose this property based on it having such great value for the area.  Anyone from Illinois understands the taxes here are a pain, so at a surprisingly low $1456 per year (with a first time home buyer exemption that I may have saved for a more permanent residence, not that I had the choice two years ago) and a purchase price of $110,000 with current value estimated around $125,000 in only two years, we started off on the right foot... I think.  Point being, we have managed to limit our housing expenses, build equity, and save enough to where we have $50,000 that we are ready to invest.

A friend of mine has been advising me up to this point who has done very well with rentals.  He has somewhere between 40 and 50 rental units in a number of 4 to 6 unit buildings.  Although I haven't taken this option off of the table, all of his buildings are class C properties which seem a bit less attractive to me.  I have helped him out at his buildings a few times and met a fair number of his tenants and although the strategy is working, the buildings are fairly run down, the grass is dead and overgrown in places, the parking lots are a bit rough, there is trash surrounding the dumpsters due to tenants that take no pride in living there, and it just doesn't feel like me.  I'm not sure I'd be happy seeing them every day and calling them mine or inviting people to live in them.  Not only that, but with a more run down building and lower income tenants, I feel like there will be more damages to the units, more frequent evictions, etc.  Am I making a mistake by putting less of a preference on this option?  The thought is that if I move up to B class, the money saved by less frequent repairs, fewer evictions, longer term tenants with no vacancy will outweigh the difference in predicted cap rate.  So the first two options are B class building, C class building, but what about a single unit?

The more I have studied real estate (just finished my pre-licensing course), the more it seems like a single unit would be a bad idea whereas before it seemed like the most attractive option to me. Given the rules and regulations that an HOA presents to homeowners, I feel like a bad tenant could really put me as the owner in a rough position. However, I also feel that I would have the benefit of starting out with just one tenant to get my feet wet, an HOA to take care of just about everything that I would have to do myself outside of a building otherwise (although it'll cut into my cash flow, but my time is valuable too!), and neighbors that are more commonly owners which, combined with the HOA, would keep the community looking much nicer and increase the desirability of the unit.

So that's where I'm at so far, choosing my first investment property between a C class building, or a B class building or unit (B class 4 unit is likely too expensive, so that might be out of the picture). An FHA loan for an owner occupied four unit building isn't an option either. My wife and I discussed it and don't wish to live in the same buildings as our tenants, especially in the event that it's a C class building.

I look forward to hearing what all of you might have to say, thank you for taking the time to read.