I have clients who want to own investment properties. The thing is, even though they may own several personal and vacation homes, the idea of putting all of their property investment eggs in one building basket is counter to their successful track record of spreading the risk across different assets.
Individual investors generally think of the three most common property holdings: office buildings, shopping centers and apartment buildings. And the easiest of these investments to manage and understand is the apartment building — people pay rent, you subtract your expenses and voilà, there’s your net taxable income. (Their CPA then works his/her magic by factoring in mortgage interest and depreciation deductions, but that’s something for another day.)
Investment advisors will often frown on the idea of holding a single family home as an investment, saying that if it’s vacant you have a vacancy factor of 100%. A four unit building, on the there hand, gives you four chances to get it right, and even if one of the units is vacant, you are still 75% occupied. I agree with both of these statements.
So, here’s the dilemma my clients face, they want to have multi-unit investment portfolio, but because duplexes don’t make much sense as an investment, and the real money starts kicking on at five or more units. Even worse, most of my clients want to buy in already established A+ areas, which means the buildings will be somewhat pricey and they don’t necessarily want to place such a large chunk of change on one Asset. And that’s when I introduce them to the strategy of buying a multi-unit portfolio one unit at a time.
What’s surprising is when thinking about investment properties, people usually don’t think about houses or individual condos, mainly because we’re conditioned to think of them as living units. And they are. It just doesn’t mean that they’re the ones who have to live there. That’s why there are renters.
For clients that don’t want all of their eggs in one building, I recommend getting into the multi-unit game by starting with two small condos — often one bedrooms near a local 2 or four year college. For the truly risk adverse, I’ll recommend picking two different colleges on opposite sides of town (in LA let’s say one near Loyola, the other near CSUN).
Starting with college locations almost always ensures a larger rental pool. Additionally, it affords them the luxury of not having to buy A+ luxury condos — remember the places you lived when you were in school? Also, owning and operating at least two condos means that if only one were occupied, you’re only looking at 50% vacancy. And with student housing being one of the strongest rental markets across the country, this strategy will work pretty much anywhere.
The biggest plus of owning multiple properties, even single units, is that possible losses on one unit can be balanced against profit on another, which is why owning multiple individual units can be even better than owning them all in one building.
That’s right, contrary to everything you’ve ever learned, when it comes to property, losses can be your best friend. Huh? Yup, you read that correctly. And I’ll be explaining it in my next post.