I have clients who want to own investment properties. And 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.
Regarding real estate, 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. (The CPA then works his/her magic by factoring in mortgage interest and depreciation deductions, but that’s something for the next day.)
Investment advisors will often frown on the idea of holding a single family home as an investment, arguing if it’s vacant you have a vacancy factor of 100%. A four-unit building, on the other 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 philosophies.
So, here’s the dilemma my clients face: they want a multi-unit investment portfolio, and because they want to buy in already established A+ areas, the buildings will be somewhat pricey — and they don’t necessarily want to place such a large chunk of change on a single asset. Which is when I introduce them to the strategy of buying a multi-unit portfolio, one unit at a time.
Surprisingly, when thinking about investments, people usually don’t think about houses or individual condos, mainly because we’re conditioned to think of them as living units — which is exactly what they are — but that doesn’t mean that my clients are the ones who have to live there… Which is why God created renters.
For people who don’t want all of their eggs in one building, they can get into the multi-unit game by starting with two small condos — simple one bedrooms near a local 2 or four year college. For the truly risk adverse, I’d even recommend picking two different sides of town (in LA let’s say one near Loyola, the other near Pasadena City).
Starting with college locations almost always ensures a strong rental pool. Additionally, it affords owners 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.
Depending on how they are held, the biggest plus of owning multiple properties, even single units, is loss, because 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 investing, losses can be your best friend. Huh? Yup, you read that correctly. And I’ll be explaining it in my next post: “It’s Only A Paper Moon, And It’s Only A Paper Loss.”