Real-estate investing can be an effective way to generate passive income — if your property is cash-flow positive, meaning your monthly rental income exceeds monthly costs.
Business Insider has spoken with a handful of real-estate investors who own profitable properties and asked what they look for in the acquisition phase.
Here are three of their top strategies. Business Insider verified each investor’s property ownership claims.
1. Go for multi-family properties
A multi-family is a single building divided to house more than one family living separately and ranges from duplexes to triplexes and fourplexes. Buildings with four or more units are typically considered commercial real estate properties.
These types of properties offer some major benefits, according to financially independent investor Dana Bull.
There’s what she calls “the acquisition discount.” If you buy a multi-family, you’ll likely pay less than if you were to go out and buy two to four separate condos or apartments.
“Say you’re buying a three-family building that is $900,000,” she said. “If you were to buy each of those as condos, maybe you’d be paying a total of over $1 million. If you buy them all together, you get that discount.”
You also get economies of scale — the cost savings that come with larger operations — when you own a multi-family. Think about the maintenance required for a multi-family home versus a single-family home, said Bull, who owns multi-families in New England: “If you buy a three-family and the roof goes out, you only have one roof to replace. You have one driveway to shovel. You have the shared hallways to take care of.” That will lower your maintenance costs and, ultimately, put more money in your pocket.
Owning a duplex or triplex also gives you the ability to “house hack,” which many rookie investors use to get their start in real estate. House hacking a duplex would mean living in one of the units and renting the second unit. The idea is that your tenant’s rent will cover some (or all) of your housing costs.
It’s a low-risk way to dip your toe into real-estate investing and see if you even like it. If you enjoy buying, renting, and managing tenants and want to expand your portfolio from there, you then repeat the process, but at different levels of expense and effort.
Note that not all markets have an abundance of multi-family properties.
If this type of property isn’t prevalent in your area, look for something with an unfinished basement that you can turn into another unit and rent, or even a home with multiple rooms that you could rent.
2. Select an area with high rent demand
It’s important to take a step back and consider your market as a whole: Do people rent in the area you’re considering investing in?
“You need tenants,” emphasized Bull. “They are the lifeblood of your business. They’re the ones that are paying for everything.”
To understand rent demand, investor Nyasia Casey looks at days on market when looking at rental listings. This gives her an idea of whether she’ll be able to fill a property with a tenant quickly. If you notice a lot of vacancies in the area or rentals sitting on the market for weeks or months, there might not be a strong enough rental demand in the area.
Don’t assume that the pricey part of town is where renters are looking, said Casey: “For a lot of first-time investors, their knee-jerk reaction is, ‘I’m going to buy in the nicest town that I can afford.’ Well, that town may not be primed as a rental community. There might be more single-family homes and people who own.”
Look at job opportunities in the area, too, noted Bull: “You want people to stay in the community. I would be very hesitant to invest in an area that just has one big employer. If that company goes under, that’s a problem.”
3. Look for the ugly houses
“A rental doesn’t need to be 100% pristine,” said Casey, whose strategy is to buy undervalued properties, renovate them, and fill them with long-term tenants. Her first rental in Baltimore cash-flowed $1,000 a month. “When you’re looking for an investment property, you’re looking for something really under market that you can renovate.”
She advises looking at listings on sites like Zillow and Redfin and finding “the really ugly houses,” she said. Then, contact the agent associated with that property.
While that specific property may not be the right fit for you, “that agent understands and works with distressed properties,” said Casey, and they could be a good agent to work with.
You’ll want to ask them questions like, “Do you get other properties like this? Do you work with off-market properties?” she said. “Agents are constantly reaching out to sellers, so let them be the ones to bring you properties or let them be the ones to work those off-market leads.”