Investment Specialist, Team Denver Homes - RE/MAX Professionals.
Wherever you are on your real estate investment journey — whether you’re a first-time homebuyer or a seasoned investor — you need to be thoughtful and strategic about how you spend your hard-earned money.
You have many different investment routes to choose from, which can sometimes be overwhelming and leave you with more questions than answers. What’s a better investment, multi-unit properties or single-family homes? Should you fix and flip or fix and hold? When should you live a property first before renting it out?
Through my work as a realtor helping both new and experienced real estate investors, and as an investor myself, I have identified three strategies that reliably maximize the value of an investment property.
1. Buy a multi-unit property and live in one.
If you are just getting started in real estate investment, purchasing a multifamily property and living in one of the units is a great first step.
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Multifamily dwellings with up to four units are considered residential, not commercial, for financing purposes. This means you can purchase a multi-unit property with a residential loan — including an FHA or VA loan that has a relatively low interest rate — and rent out the remaining units. You will be able to generate income as soon as you move in, helping you offset the cost of your mortgage and building a passive income stream.
I recently sold a multi-unit property to a first-time homebuyer who financed the mortgage with an FHA loan and paid the bare minimum down payment, far below the traditional 20%. Instead of purchasing a single-family home, he opted to spend a comparable amount on a quadplex, living in one unit and renting out the others.
This is a fantastic strategy for first-time homebuyers. If you want to begin building your real estate investment portfolio, but you don’t have much capital, start small. Instead of buying a single-family home in a suburban neighborhood, buy a duplex, triplex or quadplex in an urban market and generate ongoing income.
2. Buy and renovate a multi-unit property you don’t live in.
If you’re a more experienced investor, consider expanding your real estate portfolio with a multifamily property that needs some renovation. Take a long-term, fix-and-hold approach, refurbishing one unit at a time and renting out the rest. You’ll be able to leverage your rental income to pay for construction expenses, spreading them out over several years instead of in one lump sum.
That said, renovating a multi-unit property is a big undertaking. Ask these questions before you commit to a project:
• Do you have any previous remodeling experience? Do you have a team of professionals you trust to help you with the work? Go in with eyes wide open about how much time and money each unit will require.
• What are the changes you need to make to the units? Are they standard cosmetic jobs, like replacing flooring, cabinets and appliances? Or do you have to make building-wide upgrades that will be more expensive and extensive? Steer clear of properties that have major structural problems that will prevent you from renting out units while going construction.
• How much do you expect your property to appreciate after you renovate? Will your rental rates increase significantly? Do your homework, researching the rents of similar properties in the area. I like to know what renters are actually paying for properties, not just what they’re listed for online, so I’ll even knock on neighbors’ doors and ask them directly.
One of my clients bought a quadplex a few years ago, and he is renovating one of the units each year. When the lease expires for a unit, he lets the tenant go and starts renovations, while the other units remain occupied. This gradual process allows him to invest in one unit at a time, knowing that he still has stable income from the other three.
3. Buy a single-family home with an additional dwelling unit.
Another smart way to maximize your real estate investment is to buy a single-family home that includes an additional dwelling unit (ADU) or mother-in-law suite — essentially two properties in one. You can choose to live in one unit and rent out the other, or rent out both for double the income.
I have seen a growing demand for single-family homes with ADUs in the Denver market, as people are interested in subleasing as a way to offset their mortgage. In general, I believe these types of properties are going to appreciate at a higher rate than a typical single-family home.
I recently had two listings that were nearly identical in location, area, size, price and condition; one was a single-family home with an ADU, and the other was a single-family home with a few more upgrades. The interest in the home with the ADU was incredible. It received multiple offers, over asking price, with three back-up offers. I also own a similar property and rent out the two units to different tenants for a steady passive income stream.
If you are interested in this path:
• Check with your county about ADU zoning permits. Does the property already have a permit? If not, will you be able to get one? Building or refurbishing an illegal ADU can cause you trouble down the line.
• Verify that the ADU has a full kitchen, a full bathroom and a separate exterior access. For example, if your property has a basement unit with all three of these features, you are much more likely to be able to rent it while living upstairs, or renting both units to two different tenants.
No matter what your experience level is in real estate, you can take action to enhance the value of your properties. Start with these proven strategies to make the most of your investment.