People often ask me what kind of rental property I buy. This is a great question, and a complex one with no simple answer. Everyone has a different opinion. Some investors like apartments and feel that it’s easier to manage and to plan for expenses. Some like townhouses because they cost less than a house. And so on. There isn’t one right property to buy, just one that’s right for you. The key is to buy what you can afford and what is likely to produce your unique desired results.
I’ve been an active real estate investor since 2003, and have bought more than 175 properties since then. These properties are varied: condos, houses, townhouses, apartment buildings and houses with suites. My personal philosophy is based on three criteria:
- what tenant profile I seek
- what area I want to buy in
- how much I want to spend on a down payment
All three of these pieces of information help give me a clear picture of what to look for. Let’s look more closely at these three factors, which will set you up for success over the long-term.
The lack of creating an accurate tenant profile, then matching that to the property, is something that can ruin the fun in the game of rental property ownership. I’ve seen too many people buy their first property with an unrealistic idea of who their tenant will be. Too often, people have an idea of a certain kind of tenant: one who is perfect. This fantasy tenant usually has excellent credit, is a respected professional, and maybe even brings a cute young family. But if an investor buys a low-end house to suit their low down payment, they won’t attract that tenant. The property will be in the wrong area for such a tenant. So now the tenant profile changes and the tenant they do attract is of lesser quality than the one they envisioned.
Location, location, location
The old real estate adage holds true. Location might be the most important thing when it comes to rental houses. Match the house and the area with the tenant you wish to attract. Once you’re clear on the type of tenant you want, the next step is to find the type of area they already live in. That’s where you want to buy the house. Most people do it in reverse!
House, Condo, or Townhouse?
The type of rental investment you can buy will depend mainly on what you have for a down payment. If you’re seeking a loan, and most people are, banks require 20% down payments for rental properties. So, if you only have $50,000 earmarked for a down payment then don’t look at a property more than $250,000. When a client asks me whether to buy a townhouse for $250,000 or a house for $350,000, I put it to them in simple terms, “What do you have as a down payment?” If they have $55,000 set aside then there are two options. One – buy the townhouse for $250,000. Two – find a joint venture partner to invest in the house.
In summary, the type of property you buy really doesn’t matter. Just be clear on who your tenant is and where this type of tenant lives. Then go buy the property in this location, which fits the down payment you have available.
For more about tenant profiling or Edmonton market expertise contact me through this website and ask for Jared.