Asset Class, Painting Your Lane
We created our business! The goal of our company, Barcis Ohio, is to create a real estate portfolio that will give us passive income, so that when we retire from our 9-5 jobs, we can work because we want to, not because we have to. We listened BiggerPockets and read books on the topic, also we have a couple of properties personally. Now, we’re ready to throw ourselves into real estate investing! First step, what type of asset class do we want to choose?
Selecting the Asset Class
Throwing darts at a dartboard seems like the logical first step. But, before you start throwing, you might want to know which dartboard you’re aiming at. The last thing you want to do is to hit lane 2’s board when you’re playing on lane 1. Ok, analogies aside, the first thing you should do is decide what type of product/service you want to specialize. In this case, what type of real estate does my newly formed company want to purchase to start our investment journey. There are a couple of opportunities that have positives and negatives.
Single Family Homes (SFH)
Single family homes (SFH) are the most common residential properties around. These are properties that give you ownership of a structure that can contains one dwelling resident or family. SFH are the most affordable property with the largest amount of funding options. Typically, you can get into these properties for as little as 3% down, but in our case as investors, we’re looking at 20% down regardless. The downside is the competition consists of everyone, investor or not (mainly not), who are likely trying to buy a home for their family. The advantage we have is having the BRRRR mindset, we are looking for properties that typical families aren’t going to want.
Small Multifamily Homes
Small multifamily homes are properties with 2-4 dwelling units as part of the property. These are duplex, triplex, or fourplex properties. Unlike condominiums where the SFH are connected by a wall, in small multifamily you own the whole structure. These properties are great because you’re competing only against other investors. The average family does not look at these properties for their families. Also, the funding stream is the same as SFH. So, it is easier to obtain funding. The downside is it takes more capital to purchase. Since the property is worth more, the 20% is naturally higher. Also, often, small multifamily housing properties are found in less than ideal neighborhoods.
Large Multifamily Properties
The last of the residential choices is actually not a residential investment anymore. Large multifamily properties are considered commercial real estate in the eyes of lending. These properties consist of 5 or more housing units on a single property. The valuation of these properties are no longer what comparable properties are going for, but for how much the property makes in a year. The banks look at these numbers for lending purposes. The benefits to these properties are the economies of scale; however, funding is much harder to come by and the amount of capital needed to start is higher.
Our Asset Class Choice
We reviewed all three of the asset types for residential real estate and decided to start with single family homes. The reason for this came down to funding. Initially, we looked at properties that fit into SFH and small multifamily categories, looking for deals. We found a couple, then went hunting for investors to help us with this journey. Unfortunately, we hit walls with regards to a lack of “proof of concept.” With me being a civil engineer that has performed many cost estimate and run projects, and my partner having a logistics and supply chain management background, we tried to not be offended. So, we set forth, using our own money to show investors our capabilities for future projects.
Next Step
Now that we have chosen our asset type, we need to decide on a target market. Not all property types are created equal in the US markets. The return on investments in California are wildly different than those in Indiana, for example. Choosing the right market is key to success.
Disclaimer
Once again, I am not a financial advisor. These tips are some things I have validated with my own personal experiences. If you feel you need more personal advice, please consult a professional financial advisor. Dont forget to check out the Book List for published authors on this topic!
