Diversification is the key to success in rental income real estate investing. As we’ve discussed in previous posts, Jason Hartman advises new real estate investors to buy as many properties as they can in diverse markets and locations. This strategy not only maximizes your return on the investment but also offers some protection against a collapse in one area or another. For most new investors with a good credit score, it can be relatively easy to finance multiple properties.
One strategy advised by some lenders and agents for getting started in rental property investing is to buy a home as a personal residence and convert it to a rental property later. Loans for purchasing owner-occupied property typically require that the purchaser live in the house for a minimum of twelve months. Then, after twelve months of residency or longer, you can buy another property, rent the first one and start over again until you have as many properties as you want.
This strategy takes advantage of the low down, low interest financing available to owner occupants – terms which remain in place even when you move out and rent the property. It also allows you to take care of any upgrades and maintenance needed before you rent the property.
A variation on this kind of purchase is to buy a single property as a rental in a market that appears promising, either in your area or elsewhere, and maintain it as a landlord. Although you won’t get the same loan rates as you would with an owner occupied property, many distressed houses can be purchased with a low down payment and reasonable rates, offset by rental income.
But in both these scenarios, there’s a risk in investing all your resources in one property. If the market changes, or circumstances in the area require a quick sale, you may not get a reasonable return on the investment. Likewise, if the property remains empty due to a depressed economy and lack of a viable pool of tenants, you may end up covering all expenses yourself.
That’s why diversification, in as many ways as possible, remains the best way to launch a viable strategy for long-term success in rental income investing. With multiple properties in your “portfolio,” you’ll have some protection against loss of your rental income if a tenant vacates, or one of the properties needs maintenance. And, with tenants in place at one or more of your properties, you’ll probably be able to get security deposits and some pro-rated rent from the seller as well.
With good credit, it’s possible to work with a variety of lenders to purchase multiple properties. Here, too, it can be a good idea to assemble a package of different types of property, such as a single family home plus a duplex or two. And, as Jason also recommends, purchasing in different locations – not just your local area — is a key element in making diversification in real estate investing work for you.
The Jason Hartman Team
