Have you ever thought about investing in real estate? I think many of us have, but it can be intimidating to get started with the large up-front costs and the uncertainties about what it takes to be a landlord. Sure, it can be intimidating, but it’s just a matter of searching for and learning the right information.
I am in the process of paying off my mortgage so that I can purchase my first real estate investment without having a seemingly huge amount of debt hanging over my head. I have known that real estate investing is for me, but the major question lately has been, “What type of real estate investment is best?” I mean, there are so many options of what you can purchase and rent out:
- Single Family Home
- Quad Plex
- Office Space
- Manufacturing Facility
Those are the major real estate investment options. Today I want to focus mainly on the living quarters: the duplex vs. the quad plex vs. the 12-plex. To compare these three options, we’ll simply take the total cost of each property divided by the yearly income to find how long it would take to recoup the total cost of the investment. The lower the number, the better the investment. This isn’t a perfect method, but it will allow us to compare all three options with a single number.
Purchase Price / Yearly Rental Cash Flow = # of Years
It’s obvious that the duplex will be the least expensive out of our three options, but is it the best investment? I looked up a duplex that is in my neck of the woods. It is located in a decent area, is basically two houses that are attached, and costs only $127,500. Each unit has 3 bedrooms and a full bath, which is quite large for a rental unit. This will no-doubt fetch a larger rental price – most likely in the neighborhood of $700 a month.
At a price of $127,500, a 30-year mortgage payment would be $677 a month (includes mortgage payment, insurance, and taxes). Your maximum income for this investment (which is obviously unrealistic because we did not factor in maintenance costs) is $723 a month.
$127,500 / ($723*12) = 14.7 years
So, with the income after expenses, it would take us 14.7 years to total the purchase price of the duplex, $127,500. Let’s take a look at the next two options to see if the payoff period is less.
This quad-plex is also very close to my residence and peaked my interest a couple of months ago. The real estate investment has 4 units – each one with 2 bedrooms and 1 bath. The area is quite nice and the entire complex is listed for $199,000. This is obviously more than the duplex (as expected), but not by a ton considering we’ll be able to rent out 4 units rather than just two. The expected rent from each unit is $600, which totals $2,400 a month. According to Zillow.com, the expected mortgage payment is $1,064. This means the maximum income per month is $1,336.
$199,000 / ($1,336*12) = 12.4 years
The payoff period for this investment is 12.4 years. Not that much better than the duplex surprisingly.
This option is obviously the most expensive at $379,000, but it comes with the greatest potential reward. With 11 units able to fetch $600 a month and the final one-bedroom unit renting out at $550, your income each month is $7,150. With your 30-year mortgage, your payments come out to $1,973. The income minus the mortgage expense leaves you with a maximum income of $5,177 each month.
$379,000 / (5,177*12) = 6.1 years
Higher Risk = Greater Reward
I assumed that the best investment would house the largest amount of rental units (more units under one roof decreases the initial expense compared to the income), but I didn’t expect the difference in years to be so large! The duplex earns $2,400 a month, but costs $1,000 for the mortgage, which only leaves $1,400 in profit each month. The 12-plex, on the other hand, earns $7,200 and costs only $2,000 for the mortgage, which means there is $5,200 in potential profit! And, if you put those profits toward the mortgage, you could have a completely paid-for investment property in 6 years. You would be debt-free and bringing in $5,200 every month. Can somebody say retirement?!
While the numbers look great, the largest complex obviously comes with a greater potential expense and more work in regards to vacancies and renter demands. But, with greater risk comes greater reward. If you are able to attract quality renters that stay in your unit long-term, then you can certainly earn a large income with the 12-plex building.
While I know this is where the “big money” is, for me personally, I would start small in order the learn the complexities of real estate. Once I gained some experience and understood the risk involved, only then would I move up to the larger complexes.
What about you? Would you invest in the 12-plex over the rest?