June 13, 2024

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Transforming Houses Into Homes

How to Choose Real Estate Investment Property

The first decision you must make before looking for your real estate investment property is on the type of property you want. There are a number of factors to consider before you make your decision because each differs from the other.

In this article, we’ll examine in general terms what to look for regardless what type you decide on and then consider five common types of real estate investment property.

What to Look For

1) General location – Location, location, location is the mantra in real estate. Unless the property is located in an area that will sustain or boast rents, and in turn be able to be sold for a profit, forget it.

2) Site improvements – Does the property require repairs that might eat away at your cash flow, or are there repairs that can be made that would substantially increase your cash flow and return?

3) The lease form used – In the case of a commercial building are you locked in to a favorable or very unfavorable lease? In other words, are you buying a favorable or unfavorable income, and for how long?

4) The income produced – How much income does the income property generate and is it realistic, and can it be sustained? Is there room to increase the income?

5)  Type of expenses – What does it take to keep the property operational? Is there anything out of the ordinary, and is there a chance that some expenses can be reduced or eliminated?

7) Management requirements – Will the property require a professional management company, perhaps a resident manager, or is it something you can handle.

8) Financing – Can you leverage the property? What about the rates and terms will you and/or the investment property qualify for the best loan possible? What are the loan payments?

9) Depreciation benefits available – How much of your income can you defer by depreciating the property?

10) Unique features – Is there anything about this particular investment that sets it apart from other real estate investment opportunities? Perhaps its location, construction, or maybe it offers great upside potential. 

Types of Investment Real Estate

1) Apartment Complex – This is the most popular form of real estate investing and can include anything from a duplex to a high-rise building. The size and mix of the individual apartments are usually keyed to local market demands and typically include studio apartments and larger. Apartments can be rented on an annual lease basis or month-to-month. When present, coin-operated laundries and storage facilities or garages can produce a small addition income fro the owner. A well-managed apartment complex can be a highly profitable investment and a great way for new investors to get started.

2) Office Buildings – This type of investment property requires more savvy then multifamily property, so first time investors should be cautious. Office buildings are generally leased on a square footage basis rather than a flat price per unit; typically including a cost for a proportionate share of common areas like entrances and hallways. Depending on the lease, tenants might also be required to pay a proportionate share for parking lot and roof maintenance, and as a rule, tenants will pay all or part of the cost of finishing the interior of his suite. Office buildings generally make for a sound and relatively easy-to-manage investment.

3)  Shopping Centers – In many parts of the country this type of real estate investment is very popular, but as with office buildings, contain some unique features of which an individual investor should be cognizant. A shopping center can mean anything from a couple of stores (known as a strip center) to large regional malls. Tenants generally sign a lease and are expected to share in the cost of maintaining the common parking lots, landscaping, daily cleaning of the grounds, etc. in what is known as common area maintenance (CAM) charges. Small neighborhood centers with a moderate cash requirement can be a great way for a beginner to start in this type of investment.

4) Warehouses and Industrial Buildings – Rental warehouses provide small-to-large bays or rooms used for storage and small workshops. These typically rent on a month-to-month basis and thus (because tenants can move out at anytime) make it one of the least stable of all real estate investments. Industrial buildings are usually characterized as larger space and generally leased on longer terms to more stable tenants such as manufacturing plants. The ultimate investment here is a “sale/leaseback” situation wherein a major company sells you their building and then leases it back from you on a net basis but are difficult to find because they are excellent investments.

5) Mobile Home Parks – This type of real estate investment has become one of the most sought after in recent years because it provides retirement-age people and young couples a reasonably priced home. In this case, a pad with water, sewer and electricity hookups, plus a concrete patio area and tie down rings is rented to someone who wants to place a mobile home there. Other improvements include the streets (which may be deeded to the local municipality, thereby relieving the owner of street maintenance), recreation facilities (perhaps with a building), and laundry facilities. Because mobile home parks are profitable and easy to manage, they can make for a very good investment.  

Entire books have been written on the five forms of real estate investments and we obviously kept it very brief just to give you an idea. Hopefully it helps your real estate investing strategy, though.

We should also mention that you should never purchase investment property without doing a thorough real estate analysis. Quality real estate investment software makes it very easy. So be sure to check it out. Here’s to your success.