When thinking about investments a few thing come to mind: Dave Ramsey, snowball debt, nightmare renters, tycoon, and portfolio, to name a few. But the reality is that rental property is an investment for the knowledgeable. It is not a step to be taken lightly and it is better to be well-versed in real estate 101 and to have done your homework on a number of factors before pouring money and financial obligation into a property. That is why investing in a small home (or small homes) is a more logical move. There is less initial investment and less risk. There are three concepts though about real estate investing that should be highlighted before any decision is made on any size house.
RISK MAKES FOR REWARD. Buying stocks carry more risks than buying bonds or mutual funds or even CDs. However there is a potential for a larger return (read: profit margin). That is a simple enough concept in and of itself. But that is oversimplifying the matter.
Continuing with the stock analogy, there are some stocks that are riskier and more rewarding than other. An industry giant like Apple or Ford are not likely to collapse overnight. On the other hand though, it is less likely that those stocks will see incredible growth or huge returns on small investments. It’s a low risk / low reward proposition. A new tech startup may flop as easily as it becomes the next Instagram. More risk equals more reward. Risk and reward are a marriage for a lifetime.
When searching for a small home investment consider:
- Turnover rate
- Vacancy rate
- Stable values
- Low risk assessment
REWARD WITHIN RISK. Every home purchase will have a reward that is proportionate to its risk. If I buy the home at 123 Main Street and my buddy buys 125 Main Street, he may receive Y percent returns while I only get X percent returns. That information alone is meaningless though because it does not take into consideration the reward within the risk. Let’s return to our stocks/bonds analogy.
A 10% return from IBM stock is not at all the same as getting a 10% return from a government bond. If you’re comparing apples to oranges, X does not equal X. This sort of math doesn’t require a degree from MIT to understand though. It does require a basic understanding or risk-adjusted return though. Here is a great tutorial on the subject.
DIVERSIFY. Mutual funds exist to trade in diversified holdings under the watchful eye of professional brokers. It is the safest investment because it is a predetermined diversification in the market. It can be applied to real estate though and should be.
If you are thinking of making an entry into real estate investment, you should diversify only enough to spread your investments, but not so much that you lose focus. Consider outlining your investment parameters.
As an interested real estate investor I would personally specialize in small homes in bedroom communities (just outside major urban centers) in coastal Carolina.
I don’t care to invest in land. I don’t care to invest in commercial properties. I don’t even care to invest outside of 35 miles from a major urban area. I also couldn’t spend over $100,000 on a single property.
It is completely fair to say that I would be missing some opportunities. True enough. I have developed my comfort zone though and I know my market. Within that niche I try to diversify as much as possible. I would hold properties both rural and “in town”, that have land and exist on a “postage stamp.”
There is no one tried and true method of investing in small homes for the sake of having investment holdings. However, the above are three considerations that should be made and have helped me. What about you though?
Do you invest in real estate? What considerations do you make? Do you tend to invest in smaller properties? Why or why not?