Over the past few weeks I have had a number of friends and past clients reach out about possibly starting an investment portfolio of rental properties. While there are as many investment strategies as homes on the market, we have been able to categorize the kinds of investments you can make.
In the Richmond Metro Market, some generalizations can be made to help a soon-to-be investor decide on the type of property they may want to go after. There are three main types that we, on the residential side of the industry, deal with: Single family, Duplexes, and Triplexes/Quadriplexes.
These different types can be purchased with residential loan products and do not require a huge capital investment. Most contractors can do work on these properties and any residential real estate agent can find them in the Multiple Listing Service (MLS) and assist with your purchase.
Depending on an investor’s cash flow needs, the monetary advantages can vary greatly. However, my goal in this article is to go over the other factors that should be taken into account when deciding how to invest.
Single Family Properties
The majority of investors start with either single family or with a Duplex. The reasoning is typically a cost and availability calculation. These usually have the best capitalization rate of anywhere from 7-10. These properties are widely available within the city and suburban areas of Richmond.
Typically, single family property investors either look for areas near Virginia Commonwealth University, Virginia Union University, and University of Richmond, or they try to pick houses that are in good public school systems. Schools usually keep a high, consistent demand of tenants that are willing sacrifice condition and affordability on the basis of location. These also have the longest term tenants when you are looking in non-university settings.
When we look at purchasing power, investors can purchase multiple single family homes for the same price as a quad or triplex. In theory this is great, as you are building equity in multiple locations and diversifying your appreciation potential. The problems arise when systems fail within the homes. The thought process is "1 roof for 1 lease is not as good as 1 roof for 2, 3, or 4 leases".
Multiple closing costs should also be taken into consideration with single family buildings. This might not be an issue if you are only buying one property, however if you are buying several single family houses, the closing costs can add up.
They are probably the most sought after kind of investment property in the city of Richmond. The reason is two-fold:
1.) Usually they are in the most desirable areas of the city: Museum district, The Fan, Church Hill, Northside, and the Near West End.
2.) It is the most attractive option for an owner-occupant because you can rent out the top or bottom unit, live in the other side and have the tenant subsidize your mortgage.
I think this is probably not the best option for an investor who isn’t occupying the property, as the cap rates on duplexes seem to be at a 5 or 6 at the best. This is due to location and the attractive nature of having someone else pay a large portion of the mortgage.
Triplexes and Quadriplexes
I will lump these together because the pros and cons are more or less the same for both of these property types. Cap rates on these vary widely as you can find a quad in the heart of city or in a suburban area. I would expect them to be between 4-7 percent.
These are usually bought by 1031 Tax Deferment Exchanges as people sell their single family investments and buy larger unit buildings. These buildings are usually partially renovated and you will end up paying a premium if the property has been completely renovated.
We see a lot of New York and DC buyers purchasing these, because a 4 unit building for $600-900 thousand seems reasonable compared to the single family houses being sold in either market. These units are most desirable if they are separately metered for water, gas, and electric.
Parking and commercial first floor spaces can also be a buying factor for quads. They create long term clients which increases the benefit level of this type of investment. Additionally, certain buildings are also conducive to conversion into condominiums. This provides a large one-time financial gain for the owner. Although getting the legal and zoning hurdles can be massive, the return on investment is worth the headache.
All in all, there is no one perfect way to approach it. But these are at least a few different factors to consider when looking into starting an investment portfolio. Our team has worked for just about every kind of investor and no single type of investment strategy works for everyone. We would always suggest sitting down with your tax accountant, attorney, and Realtor before starting on your investment venture.