Although this is the second article in my series labeled Buying Your Own Apartment Building, the first article is here. I wanted to give you an overview of some of the different niches with real estate. If you are already committed to using multifamily as your vehicle to generating wealth then just skip to the multifamily section and click on the links to the book recommendations. Now is the time to chose which niche you will focus on.
The difference between niches and strategies. Niches are the types of properties, strategies are the things you do to create value. So a niche may be single family homes, a strategy would be to buy and hold or to flip.
Real Estate is Multifaceted. There are many different niches and many different strategies. One of the many things I like about investing using real estate is that there are more than one way to skin the cat. We will discuss what a few of them are here. Pick which ones resonate with you and research them more in depth. Do not rush this process. The last thing you want to do it pick something blindly and find out in step 5 that you picked the wrong one and have to start over. Enjoy the journey, don’t try to rush it.
Single Family (SFR, SFH)
This is your typical house. This is where most people are comfortable as they have lived in one before and they are already familiar with them. You may already have purchased one and have experience with obtaining financing on them.
The value of SFR is based on the market. When they are vacant for any reason either the tenant moves, there is major work being done, or it’s just a routine turn, there is no income. With that being said buying a SFR gets you into the process. You can analyze what works and what doesn’t. Experience is the best teacher. A Single family homes value is based on the comps of the market. A widely recommended book on investing in SFR is John Schaub’s Building Wealth One house at a Time.
Duplexes, Tri’s, and Quads
A mix between the SFR and the MF. You start to see, albeit very small, economies of scale. Now you have one roof but are gaining multiple incomes. One furnace, one driveway, one yard, etc. You can start to implement systems into your business that will allow you to scale. If you eventually want to buy 25, 50, 100 doors this is the perfect introduction. You can also house hack here. Live in one unit rent the others out. Not for everyone but is a great option in the beginning. You can also start to implement your systems, systems that you can scale as you move into larger properties.
A good book to start with would be Larry Loftis one on Investing in Duplex’s, Triplex’s, and Quads
In the MF space you have small multifamily which is less than 100 doors and large multifamily which is more than 100 doors. There are very distinct differences between the two from how to source them to how to run them and how to underwrite them. The numbers become very different very quickly.
Multifamily regardless of doors offers tremendous benefits from economies of scale, now if you have 5 vacant units it’s not going to sink you. Greater tax benefits, to greater potential for returns. You have fewer roofs/foundations/septics/wells etc.
Smaller properties can be sourced many different ways, similar to SFR. Larger properties are through brokers. Multifamily allows you to help many more families at once. It offers better protection from downturns.
Another great benefit of MF is control. People will always say to you isn’t real estate risky. I say sure but it is my job to mitigate that risk. I do so through control. In MF I have much more control of the value as it is tied to the Net Operating Income (NOI). I seek out properties that are being mismanaged. Either through under market rents, expenses that are way to high, or the combination of the two. I am not behold-ant to a mutual fund or some CEO. I mitigate that risk by becoming an expert in my market.
Mobile Home Parks
Similar to MF as it offers economies of scale. There are a few niches within. The two you come across most fequently are parks that have all tenant owned homes (TOH) and collect just the pad rent. This is the most passive form. The other is parks the are all park owned homes (POH). This is most time intensive. Mobile home parks offer economies of scale, great returns and low property taxes, as compared to other forms of real estate. They are also not being built anymore so supply is limited by what is already in existence.
A quick read on MHP is Jamie Smith’s Trailer Cash
The absolute expert in this field is Frank Rolfe and Dave Reyolds
Probable the most known form as everyone wants to flip a house. Flipping can be a great way to build your nest egg to expand into other strategies. One of the key things that attracts me to real estate is the “passive” income. Flipping IS NOT passive. Flipping involves purchasing a property distressed in some form at a discount, fixing those items that are making it distress and selling it. Distress can be from management, maintenance, bad financing, anything that allows you to essentially buy low fix a problem and resell it in 60 to 90 days. Sometimes even much quicker. Most times flipping means rehabbing the property. Flipping properties, especially when rehabbing them is not easy. You need to be able to manage contractors and subs and make sure the project stays on schedule and budget, all the while sourcing more deals to keep the pipeline full.
J. Scott has a great book on the process The Book on Flipping Houses
Syndication is one of the most passive forms of investing. Syndicators find properties and raise money from both accredited and non-accredited investors. This is how large malls are built. Or those 30 million dollar apartment buildings are acquired. It is the pooling of funds. You give your dollars to the syndicator, he pools it with other investors and promises you a return typically 8%. You get paid quarterly and then upon the sale of the property. Most syndication’s last for 3 to 5 years and some as long as 7 depending on the market cycle. You can be as passive or involved as you like. YOU NEED TO KNOW WHAT YOU ARE LOOKING AT. Don’t invest in syndication’s like most people invest in the stock market. You are not just throwing your money away. You should understand and be able to tell if the investment presented to you makes sense. Build a relationship with the syndicator DO YOUR RESEARCH.
Office / Retail
This covers a lot of different types of properties. Medical, Retail, Supermarkets, strip malls, stand alone triple net, professional buildings. All having their own nuances. You are for the most part providing commercial space to businesses. Be careful which type of business will be using the space. With the advent of the internet this landscape is quickly changing.
Another fairly passive form is to become the bank. Hold the paper on the property. There are certain regulations to abide by and by using a third party to keep records this form of investing becomes pretty passive. Biggest con is you will not be getting the tax benefits that are allowed when you actual own the property.
A hedge against a market recession. It is amazing how much crap we acquire. Basements full, garages full and even the shed. Overhead expense’s are low. Maintenance is straight forward. There are very few client complaints. You can use this as an add on to vacant property you already own. Think MHP on the back nine and self storage on the front nine. When people have to downsize they don’t want to throw anything out so they will store it. Many say the self storage space is becoming saturated, but with more and more people choosing to rent they need a place to store the belongings.
We have only discuss a few Niches here. There are plenty more for you to research.
Student Housing, Short term rental, Air BnB, Assistant living, senior housing, 55+ MHP (or communities), NNN, International Student housing, Military Housing, mixed-used, historical properties.
There are many more ways of investing and then there are ways with in ways with in ways. Very much like one of those Russian Matryoshka dolls. Choosing the property type you will invest in really starts the car rolling. Next week we will dive deep into the weeds on picking a market. Once you have that completed the sky is the limit. So drill down and pick your niche and fasten your seat belt. We are about to throw it into overdrive.