Housing costs less, but there's a lot of vacancy.
As rents soar across the country, many individuals with extra funds are interested in leasing.
There are two main ways to invest residential property for rental purposes. It is a general house (including condo & townhouse) and apartment.
The two real estates have different management methods, so it is advisable for investors to think first about which form to choose.
Some people prefer housing, while others prefer apartments. What are the pros and cons of investing in homes and apartments?
◆ House
Advantages: The biggest advantage is that less money is invested.
Condos and townhouses can be bought in two or three bedrooms for roughly $ 500,000 to $ 800,000, unless they are very expensive.
Single-family homes cost more, but you don't have to choose expensive neighborhoods for rent.
Thus, investments in homes can start with less than $ 1 million.
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The second advantage is that the tenant is a family. Communicating with tenants is important to maintaining a good rental property. Having just one home means that it is easier to manage.
Building management is also smaller than apartments, so it can be said that there is little problem.
It is also not difficult to manage tenants without a manager alone.
Disadvantages: As a tenant is in a house, there is no rent income if there is a vacancy.
If you have to pay a mortgage payment on a monthly rent, this can be a financial burden to your homeowner.
According to Freddie Mac, a national mortgage agency, rental housing in the country is 91.75%. There is a probability that there will be a vacancy, but only one in ten homes will make it difficult to find a tenant.
Another disadvantage is that even if you raise the rent, there is no effect on the house price. This is because ordinary homes have no special correlation between house prices and rent.
Thus, the value of a general rental home has a drawback that it depends only on the overall price increase, not the rent.
One of the disadvantages is that you have to make a lot of down payment to make some income.
If you buy a $ 500,000 two-bed condo at a 30% down rate, your monthly payment will be about $ 1800 with a 30-year fixed interest rate of 4.5% for $ 350,000. If you add about $ 350 in administrative expenses and add $ 500 per month in property taxes, the monthly payment your homeowner will pay is $ 2650 per month. If you set aside $ 100 a month as a repair fee, you will need to pay at least $ 2750 per month to get profit.
It is calculated that if you deduct all expenses and make a rental profit of more than $ 1000 per month, you must cut down half.
Apartment
Pros: With a lot of units, apartment mortgage payments aren't too much for one or two tenants. Nowadays, the apartment vacancy rate is less than 5% nationwide, so it is almost completely occupied.
Unlike ordinary houses, it is an advantage that rental revenue is generated even with relatively low down payment.
And as rent increases every year, building prices go up.
This is because commercial real estate, such as apartments, are based on Net Operating Income (NOI) in determining building value.
The NOI is the income left after deducting all expenses except mortgage payments from the apartment rental income. The price of an apartment building is divided by the cap rate, which is called the return on investment.
In other words, if the apartment's annual NOI is $ 120,000 and the cap rate is 5%, the price of the apartment is $ 2.4 million. If the rent increased and the NOI increased to $ 125,000, the apartment price would rise to $ 2.5 million.
In addition, the price increases as the overall real estate price rises. The rise in apartment prices is dependent on two factors, unlike ordinary houses.
In particular, as rents continue to rise, apartment prices continue to rise.
Disadvantages: With many tenants, there are many places to repair the building. Hiring an apartment manager does not bother you, but you have to spend 7-10% of your monthly rental income.
In the areas where rent control is applied, such as Los Angeles, it is not possible to raise the rent more than 3% by 4%.
The amount of investment is also higher than that of housing. In the case of LA Korean Town, four units in a good location can be purchased for at least $ 1.5 million.
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