First Rental Property: Cheap SFR, Mid SFR or Cheap Condo?

Question

From my other post I know I am going to be told that I should leverage. And while I am not taking that completely off the table, for our first investment property I think my wife would be a lot more comfortable in not taking out another loan. And I think I'd sleep better at night too. Maybe once we get one under our belt then we can feel better (and use this one to support a leveraged one).

So question is... for a first "getting feet wet" property... would we be better off going for a 40-60K Apartment/Condo, a 60K-100K SFR or a nicer 100-150K SFR?

I am not handy at all (software engineer: great at building software suck at anything physical) so I think I should probably utilize a rental management company.

Thanks again for your kindness and patience with a rookie just trying to soak up any of your knowledge I can to become a seasoned vet in a few years!

Kerry Baird · Answer

I think you are asking the wrong question.  What is the *demand* for certain properties in your area?  For example, what is the ratio of rent per dollar expended in each of those situations?  You put so much down, you get so much rent.  Compare the percentage.  Also, what is the vacancy rate for each of those property types?  Will one sit on market for three months before renting, because there is no demand...while another may be snapped up immediately because you have a new company in town, or an oil boom, or college in session?

Stephen E. · Answer

I would give some more consideration to condos. Yes they have condo fees, but SFHs have expenses too, like roofs, doors, windows, guttering, etc that eventually have to be replaced. In my jurisdiction SFH landlords have to provide snow removal and yard maintenance as part of the rent. With a condo all of these items are rolled together in the condo fee and you don't have to do anything, the condo corp looks after it. For a time conscious investor this is a great benefit as it substantially reduces the maintenance that you are responsible for. Condo fees are a negative cash outflow but so are all the costs of maintaining the structure of a SFH, and condo landlords cover this with one fee and without using additional management time.

Also, the best rental property is cheap property because tenants usually don't have a lot of cash and can't afford more. Condo apartments and condo townhouses have very good rent to value ratios. From what I can see decent quality single family homes do not perform as well as the purchase price of the unit rises more rapidly than does the rentable value, thus depressing gross rental yield and reducing benefits for the investor. After a while of doing both apartments and townhouses I am now turning away from apartments and looking at townhouses exclusively for new units. The rental yield is greater and the expenses are lower because the condo corp has no expensive common areas to maintain or elevators as in an apartment building.

Curt Davis · Answer

Well I would say the higher price should in theory bring better home, better area and better tenants.  If you can afford this I would think this the way to go, or go with your middle option towards the higher price of it.  Try to stay away from condo and HOA fees if possible, they are cash flow drains.

Jason Byrne · Answer

Maybe it's a risk-reward thing but when I look at rental rates vs price in my area it seems like you get much better returns when you buy cheap properties. I'm basing that on what Zillow shows for rental rates (actual or estimated) to compare net annual profit (50% rule) to price.  I'm finding it hard to find 8%+ with the 100K+ homes.

Mike Cowper · Answer

I like @kerrybaird response - especially the part about the percentages. Figure out which range will give you the best return on your investment and then try to find a property at that range that fills a demand in the market. Also, once you are comfortable with the property you can always refinance and then leverage.

Bryan N. · Answer

Thanks @Stephen E.

It's no different then buying a home for your family. Different price points (rent or mortgage) eliminates certain parts of society.  I could take cash and buy all kinds of cheap properties (rents) and get all the headaches.  Or, I can save up and buy a property which rents for a higher amount and eliminate most of the headaches.  I prefer drama free low maintenance renters.

Stephen E. · Answer

@Bryan Neal that is so true, above $1,000 you seem to get a lot less drama.

Bryan N. · Answer

For me it's what rental price do I want to work with.  I don't like silliness so I don't buy properties that rent for under $1K per month.  in my area low rents equals a lot of shinnanigans.  I have better things to do with my time then deal with that.

Joseph Catalano · Answer

I agree with Kerry if you have the greatest property in the world and there is not a demand for that property in your area then it is worth nothing. You have to find out what works in your area and work from there.

First Rental Property: Cheap SFR, Mid SFR or Cheap Condo?

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