What would you do???

Question

What should I do?  I live in a town that is NOT affected (much) by the housing market.  About 125,000 in population, with a MAJOR highway corridor being built and 4 yr university is now here and several big factories moving in because of it.  It's the 2nd/3rd fastest growing city in the state and is predicted to double in population in the next 7-10 years.

Rent houses stay vacant for about 1-2 weeks.  Even in the "hood", you can rent something pretty quickly.  I can pick up a few houses and small complexes using the 2% rule.  I've never been a landlord, and plan to hiring a PM.

I make about $200K/yr from my job (this won't last forever, but a good 2 or 3 yrs left), great credit, about $750K in assets, $200K in cash, and NO debt.

My question:  Should I just pick up as many SFH as possible (assuming the 2% rule) or go after complexes?  If complexes, which ones?  Big, med, small? They may not fall in the 2% rule though, maybe 1.7% or so.  I see a lot of growth, but not sure how to capitalize on it.

Maybe it's not even real estate that is the key, maybe it's something else. I don't know.  Please advise and let's assume my population growth turns out as expected.

Thanks!

T

Matthew Giegerich · Answer

I can only speak from experience,like Scott. I have single and multiple family residences. I have bought and sold over 150 units,had as many as 25 at a time. I find that it is easier to buy, sell, and access cash for these  quicker than my associates who own commercial.My appraisal fees are $300 and can close in 2 weeks to 30 days compared to $4-$5,000 for a small commercial property and 90 days to close.One of the 4 units is worth 500k however my cash flow is superior to my friends 500k commercial unit.  Again I think its all what you are comfortable with and how much time and $$ you want to spend investing.

Scott Ficek · Answer

Interesting.  I just have not had that same experience.

I talk to my commercial tenants about every 6 months.  The rent arrives on the 1st of the month or a day or two before.

They only complaints they have had were about the snow not being removed fast enough when we got about 24" over the course of 2 days.

I work mostly in commercial offices.  I don't have experience in commercial retail.

Richard F. · Answer

Wow, I beg to differ!

Approximately 20% of the portfolio I manage are commercial (small shopping plazas, office buildings, and strips). Granted, this is not the same league as something with a big box national anchor, or a Class A office tower, but then I suspect most of the readers of this site aren't looking at that scale of investment.

Small business, almost by definition, is largely "mom & pop", or purely entrepreneurial, and most fail within the first three years. They are also a very "independent" group, and that extends to their operations. They largely ignore the lease terms; often pay late; and when they do finally go out of business, they really just change their entity and open up at another location, leaving you with nothing to go after.

They can nitpick and complain about other tenants; anything that goes wrong such as a water leak or electrical problem, they immediately blame and threaten the manager, and they are clueless about who might be causing damages or otherwise abusing facilities.

If you are unfortunate enough to NOT have separate electrical services, they NEVER shut off lights or AC, and leave the doors open, AND then raise cain when the CAM charge goes up 5 cents.

In my experience, they are NOT significantly better or worse than residential tenants, unless you are in the really big league. A building is a building, and people are people. It's all the same...just different!

Scott Ficek · Answer

I love commercial property if you can swing the down payment.  No tenant issues, built in rent increases, long leases!

Downside is more exposure/cash flow issues when vacant.

Patrick Murray · Answer

Have you considered investing in commercial real estate rather than residential? In my experience, the return on commercial (especially retail) has been better than the returns on residential properties. I would consider purchasing a small shopping center and hire a good property manager.

Scott Ficek · Answer

Generally speaking, single family houses move price-wise with the market and are easier to sell.

Scott R. · Answer

Im debating between which to buy right now as well.. but it seems as if your planning on selling when the population booms (if it does) ? if so id think SFR are going to be alot easier to sell and the value is going to increase the most.. but then, the problem I look at here in texas is taxes which are high.. if you own one building with several units you pay taxes for one unit, although more cause its bigger and a duplex maybe, but its still cheaper than 2 sfr as far as taxes and insurance go. 
 but im in the same boat.. who knows.. as im not sure myself.

Scott Ficek · Answer

Great questions.  I think the type of buildings you buy is a personal choice.  It is much like what type of car you prefer to drive.

I would recommend you take some time and connect with your local REI group and see if you can find a seasoned investor that you can talk with.  Maybe have him show you around his properties for a day and buy him lunch.

There are customers of mine that would never own a single family house, but others that love them.  They are both good and bad investments.

Also, find your property manager early (if you haven't already).  Some will not work on one type of property or the other.  If they have other customers, they should be able to guide you to where and what type to buy.

Sorry to be evasive, but I think learning more about the types of properties will help answer your own question.

Good luck.