First-Time Real Estate Investor? Which Homes Will Offer The Greatest Potential Return?

20 November 2015
 Categories: Real Estate, Blog

If you're just beginning to consider adding rental real estate to your investment portfolio, you may find the prospect of carrying two (or more) mortgages at once to be a daunting one. On the other hand, saving up enough to pay a rental property's listing price in cash could take years, allowing real estate prices to rise far faster than you can save or invest. You'll, therefore, want to ensure that when taking out a mortgage you're investing in a property that can be cash flow positive, providing you with enough income to pay the mortgage, property taxes, and any routine expenses that might crop up without dipping from your regular income. Read on to learn more about which types of homes may provide the best immediate return on your money, as well as what you should do before purchasing your first rental.

Are multi-family homes (MFHs) a better investment than single family homes (SFHs)?

In some areas, multi-family homes (such as those offered by Prime Realty)-- duplexes, triplexes, or small apartment buildings -- are far more common than single family homes, and the thought of having multiple units bringing in market rents can be tempting. On the other hand, you may picture yourself becoming enmeshed in petty neighbor squabbles between your tenants, or going through the hassle of performing multiple evictions at once (while collecting no rent from any of your units). 

However, assuming you screen your tenants well (including both a criminal background check and a credit check), you'll likely be able to prevent most disputes and ensure prompt rent payment. In addition, as long as you can cover the mortgage on your rental home with only a single tenant, you'll ensure you're never homeless. If you lose your job or go through bankruptcy, you'll still be able to live in one of your rental units for "free" by allowing your tenants to cover mortgage and maintenance costs.

While each home's investment potential can vary, for those who can easily afford their rental home's mortgage without needing to have all units rented, a MFH may be the quickest route to financial independence.

What else should you do when shopping for your first rental home?

When you're making this investment, you may instinctively be drawn to the seemingly too-good-to-be-true deals. In the rental real estate world, these true gems come along rarely, so you'll want to enlist the services of an experienced real estate agent and home inspector to ensure you're not purchasing a financial albatross that will require a new roof or furnace before it can even be safely rented.

You may also want to consult a tax accountant or financial planner to help get a good feel for your rental income and expenses. For first-time landlords, routine maintenance and rental income taxes can be difficult to calculate, so having the services of an expert when you're getting started can save you a significant amount in the long run.