Choosing the Right Real Estate Investment Strategy is a Big Deal

Robert Kiyosaki has long been a fan of real-estate investing. In fact, of the four main
asset types—paper assets, commodities (like precious metals), business ventures, and
real estate—real estate is his clear favorite.

But he also knows that personal preferences, financial situations, and investing styles
differ from one investor to another, and so the appropriateness of real estate as an
investment target is likely to vary among investors. And even for those individuals for
whom real-estate investing is a great choice, there are a wide variety of types of real
estate that one might wish to consider.

With that interest in mind, here is a quick list of the pros and cons of different classes of
real-estate investments to help you find the real-estate niche that’s exactly right for you.

The Pros & Cons of Real-Estate Investing in Itself

Before looking at individual real-estate types, let’s consider a more basic question: Is
real-estate the best investment target for you? A few years ago, Robert addressed this
very question, and here were some of his thoughts.

The pros of real-estate investing. Robert identified at least seven major advantages
of real-estate investing in general:
• Using other people’s money (OPM). When investing in real estate, most of
the money is the bank’s—only a small percentage is your own.
• Cash flow. If a rental real-estate property is purchased and managed wisely, it
often can provide a significant, regular cash flow.
• Appreciation. Although Robert doesn’t believe that investing primarily for
appreciation is a smart choice, he does agree that increases in rents and
property values can provide an important supplementary revenue stream.
• Control. Real-estate investors have far more control over the income and
expenses associated with their investments than do most other investors.
• Stability. Although the value of all investments can ebb and flow with national
and local economic conditions, cash-flowing properties are generally less
subject to the daily ups and downs of the market than are other types of
investments.
• Tax advantages. There are significant tax advantages with real-estate
investments, such as depreciation and other tax write-offs, that are not
available to other forms of investment.
• Comprehensible. Although many forms of real-estate investing can be quite
complex, the basics of real-estate purchases and calculations are familiar to
anyone who has ever bought a home.

The cons of real-estate investing. As much as Robert loves real-estate investing,

he admits that it may not be for everyone. Here are a few of the cautionary factors he
suggests that any would-be real-estate investor should keep in mind:
• Due diligence. Other than investing in businesses, real-estate investing requires
more time-consuming upfront due-diligence than other forms of investing.

© 2019 Professional Education Institute 2

Choosing the Right Real Estate Investment Strategy is a Big Deal

• Liquidity. Liquidity is the ability to quickly convert an asset into cash. In most
cases, it can take weeks or months—and sometimes even longer—to get into
and out of real estate.
• Management. Investing in real estate usually requires more time-consuming—
and typically more hands-on—management than do other forms of
investments.

If these challenges seem acceptable to you—especially in light of the tremendous

advantages of real-estate investing—then real estate may well be just the right type
of investment for you. But making that decision takes you only part way toward the
investment starting line. You also need to determine which types of real estate you
want in your investment portfolio.

Here are some considerations you might want to keep in mind:

The Pros & Cons of Different Real-Estate Investment Types

There are a wide range of real-estate investment types, from the simple to the very
complex, but we’ll look at six of the most popular here.

Single-family Rental Homes

Single-family rental homes are single-family homes that you purchase, often fix up
(perhaps a little or perhaps a lot), and then lease to individuals or families who prefer
detached-home living but who either do not have the resources for or do not want the
burden of purchasing a home.

Pros of single-family rental-home investing. Some of the key advantages of

single-family rental-home investing are the following:
• Single-family rental homes generally hold their value better than other types
of residential property, especially for well-maintained homes in prosperous or
improving communities.
• Tenants tend to stay longer in single-family rental homes than for other forms
of residential rental properties, reducing turnover and marketing expenses and
increasing ROI.
• It’s usually easier to attract responsible renters for well-maintained homes than
for other types of residential rental properties, thereby protecting property value
while reducing management costs.
• There tend to be fewer maintenance and repair requests with single-tenant
homes than with multiple-tenant properties, like apartment buildings, both
because of the better upkeep and because there is only a single tenant per
home.
• In most jurisdictions, property taxes tend to be proportionately lower for single-
family homes than for multi-family housing, apartments, or commercial property.

© 2019 Professional Education Institute 3

Choosing the Right Real Estate Investment Strategy is a Big Deal

• Should you decide to sell your property, single-family homes tend to sell faster
than multi-family properties, apartments, or commercial property, not only
because of their relatively lower cost, but because you can sell single-family
homes to non-investors, whereas multi-family and apartment housing and
commercial property are typically sold only to other investors

Cons of single-family rental-home investing. Some of the main disadvantages of

single-family rental-home investing are the following:
• When the tenant moves out, your vacancy rate is 100%, and all of your cash-
flow income ceases until you can lease the property again.
• Because rental homes tend to have more square footage as well as
landscaping, fences, and other amenities, per-unit maintenance and upkeep
costs can be greater than for many multi-family and apartment residences.
• Some rental homes in more well-to-do areas have monthly homeowner
association (HOA) fees, which sometimes can be steep and which can be
difficult to pass on to tenants.
• The rental-home market is usually much smaller than other residential rental
markets: most people who can afford to and want to rent a home often can
afford to buy one as well.
• Vandalism and theft are more common with vacant single-family homes than
with vacant multi-family or apartment units.

Multi-family Properties
Multi-family properties include duplexes, triplexes, quadraplexes, and condominium
and townhouse communities. As with single-family rental homes, multi-family properties
are properties that you purchase, typically fix up (perhaps a little or perhaps a great
deal), and then lease to individuals or families who prefer the autonomy of non-
apartment living but do not want (or cannot afford) the added expense of maintaining a
single-family home.

Pros of multi-family investing. Some of the main benefits of multi-family-property

investing are:
• There is a lower risk of having no cash flow, since there are more residents.
• The cost of repairs and improvements can be spread out across a number of
units.
• A single multi-family community is easier to manage than the equivalent number
of homes dispersed over a wide geographical area.
• It’s easier to upwardly adjust rents in a multi-family dwelling than it is for single-
family homes, since you can raise rents for future residents while keeping them
stable for current residents (or at least for current leases).
• Lessees in well-maintained multi-family properties tend to be more responsible,
reducing management costs and preserving property values.
• These lessees also may feel more obligated to maintain their properties for the
sake of their neighbors or community.
• If desired, you may be able to live onsite in a multi-family unit, giving you a
continuous ability to monitor the property’s physical condition, neighborhood,
and tenants.

© 2019 Professional Education Institute 4

Choosing the Right Real Estate Investment Strategy is a Big Deal

• Financing is often as easy to secure for small (less than four units) multi-family
properties as it is for single-family homes, since both types of properties
typically can use the same long-term, low-interest loan programs.

Cons of multi-family investing. Some of the possible downsides of investing in

multi-family-properties are:
• Management of landscaping, services (e.g., snow and trash removal), and
amenities are typically much greater than for otherwise equivalent single-family
homes.
• The turnover rate in multi-family dwellings tends to be higher than for single-
family homes, increasing vacancy, cleaning, and marketing costs.
• In some cases, multi-family residents may take less responsibility for the care of
their property than single-family-home renters will.
• For multi-family properties with more than four units, financing can be more
difficult and expensive to obtain, as you will typically need to guarantee the loan
and maintain a financial reserve.

Apartments
Apartment complexes are rental properties with as few as five to as many as a few
hundred units. Apartment complexes can be small or large one- or two-story properties
or (especially in urban areas) they may be high-rise buildings that have a few to dozens
of floors. Although there are many luxury apartment buildings (particularly in cities like
New York City), renters who seek out more pedestrian apartments tend either to have
relatively lower incomes or prefer low-maintenance living.

Pros of apartment investing. Apartment investing offers a number of benefits to

investors, such as the following:
• Because of the generally larger number of tenants, cash flows for apartment
investments are generally uninterrupted and more predictable, and the ROI is
often quite high.
• Apartments tend to rent more quickly than other residential rental properties—in
fact, in some apartment complexes, there are long waiting lists such that units
can be rented almost immediately after they are vacated.
• As with multi-family properties, it’s easier to upwardly adjust rents in an
apartment complex than it is for a single-family home, since you can raise rents
for future residents while keeping them stable for current residents (or at least
for current leases).
• Management costs in apartment complexes are distributed over often large
numbers of units, and the per-unit costs of landscaping and amenities are
typically lower as well.
• Apartments are also easier to manage than offices and even smaller, multi-
family properties, since the leases and the individual units in apartment
complexes all tend to be similar if not identical.
• Any improvements that you make (such as adding a pool) increase the value of
all of the units in a complex rather than just one (as with single-family homes) or
a few (as with multi-family residences).
• Longer-term revenue opportunities exist, such as remodeling, upscaling, and
conversions to condos.

© 2019 Professional Education Institute 5

Choosing the Right Real Estate Investment Strategy is a Big Deal

Cons of apartment investing. There are also some notable downsides to apartment
investing:
• Apartment complexes are typically more expensive to purchase than rental
homes or multi-family housing, and usually require more complex financing.
• Management costs can be relatively high on a per-unit basis—especially if you
need to hire a property manager—and the frequency of service calls can be high.
• Except in luxury or other well-maintained apartment complexes, the level of
tenant responsibility and care may be less, resulting in more repair expenses
and reduced property values.
• Turnover rates can be high, and (depending on the property) nonpayment of
rent and the need for evictions can be greater than for other residential rental
properties, increasing marketing and legal costs.
• Among all of the residential-property types, apartment complexes tend to be
the most illiquid because they are usually far more expensive than single-family
homes and multi-family dwellings and because the potential purchaser market
is smaller.

Resale Homes
Resale homes, often referred to as “fix & flip” properties, are usually single-family
homes that are purchased and renovated, not for the purpose of renting, but with the
intent of quickly reselling the property for a (hoped-for) profit. The potential buyer class
for such properties generally parallels the population of purchases of other (non-flipped)
previously-occupied single-family homes.

Pros of fix-and-flip investing. There several potential advantages of fix-and-flip

investing:
• With in-depth market research, good judgment, and sometimes a little luck on
your part, fix-and-flip investments often can produce relatively quick and sizable
returns.
• The return on investment on distressed properties—particularly in otherwise
quality neighborhoods—can be especially high.
• Once a return is generated, there is no further obligation to the property, and
hence no ongoing management or maintenance costs.
• Only one transaction is needed to generate a return, rather than a continuing
stream of rental solicitations.
• There are no tenant-associated repair and maintenance costs: the investor has
full control over the property’s quality.
• The more properties you flip, the more skilled you will become, and hence the
higher your likely ROI will be.

Cons of fix-and-flip investing. In addition to these advantages, fix-and-flip investing

also poses some nontrivial risks:
• There is no cash flow associated with fix-and-flip properties, only the prospect
of appreciation and capital gains.
• The cost of purchasing and then repairing or renovating a property can be
quite high.

© 2019 Professional Education Institute 6

Choosing the Right Real Estate Investment Strategy is a Big Deal

• Depending on the particular property and the market, it may take a

considerable time for a fix-and-flip property to resell, especially if the local
market declines or doesn’t grow as expected.
• Selling costs for fix-and-flip properties, as with any home, are typically much
higher than the marketing costs for rental properties.
• You could wind up losing rather than making money, especially if the fix-up
costs are high, you face unexpected expenses, or you have to hold a property
for a long period of time.

Commercial Properties
Commercial properties come in a wide variety of types, but primarily include office
space, warehouses and industrial property, and retail complexes like strip malls and
shopping centers. There are substantial differences among commercial property types
and their tenants, but some of the most common advantages commercial-property
investment are:
• Lease periods tend to be much longer than they are for residential properties.
• Because of longer leases and the higher rates that can be charged, the ROI
from commercial property tends to be from three to six times greater than it is
for residential-property investments.
• Most commercial tenants tend to have a vested interested in maintaining the
appearance of their property, which reduces maintenance and repair costs.
• In fact, with many commercial properties, the leases are set forth on a “triple
net” basis, meaning that the tenant covers all fixed costs, such as property
insurance and taxes, in addition to maintenance, repairs, and utilities.
• And, since most business users go home at night, there is less likelihood of
having to deal with night-time service calls than with residential property.

On the other hand, because of their typically larger size, commercial-property

purchases tend to be costly and complex (although flexible financing is sometimes
available), and management of the properties (because of more diverse units and the
need for a professional property manager) tend to be more time-consuming and/or
more expensive. Also, because these properties usually have far more people on the
premises (including visitors) than residential properties do, the potential legal liabilities
can be comparatively much greater.

Here are some additional factors to keep in mind for each of the three types of
commercial property just mentioned.

Office property. Depending upon the building or complex, office tenants are
often willing to pay premium rents. Management of such properties also can be
more straightforward, since all of the units are in the same physical location. On
the downside, many office properties require large maintenance, landscaping, and
sometimes amenity costs, and vacancies can soar and rental rates can fall sharply
during national or regional economic downturns.

© 2019 Professional Education Institute 7

Choosing the Right Real Estate Investment Strategy is a Big Deal

Retail property. Again depending upon the property and location, retail rental rates
can be quite high, and non-forced turnover (e.g., companies going out of business or
closing stores) is usually low. In retail settings where there are “anchor stores,” it is also
possible to charge a percentage-of-sales override in addition to basic monthly rent.
However, as with office space, retail properties can have high maintenance costs and,
in some cases, high landscaping and amenity costs. In addition, rental income can
be heavily influenced by economic conditions, and the ecommerce-induced waning
fortunes of both brick-and-mortar retailers and shopping centers make at least some
retail space a somewhat uncertain investment prospect.

Warehouses and industrial property. Warehouses and industrial properties typically

have more stable tenancy than other commercial property because of tenants’ relatively
high cost of moving. And because the visual appearance of such properties is less
important than for office or retail space, purchase and maintenance costs are often
less. On the other hand, the market for these properties can be more limited to specific
types of renters than it is for more general office or retail space, and such properties
can be subject to economic slowdowns in the same way that other commercial
properties can be.

Land
Undeveloped land is the most basic—and yet the most speculative—form of real-
estate investing. Undeveloped land can be purchased and held for resale, or it can be
developed (e.g., with homes, an office park, etc.), and the individual units sold or rented
out. The relative benefits of land investing, as with many real-estate-investment types,
depends both on the location of the land and the purpose for which it is purchased.
However, there are a few commonalities that are worth reviewing.

Pros of investing in land. Investing in land can offer a number of potential benefits,
including the following:
• Purchases of land are generally less expensive, less complex, and less time-
consuming than are purchases of already-developed property.
• Typically, land is purchased “as is,” generally eliminating the need for expensive
repairs or renovations.
• Because there are no tenants, there are no late payments, no evictions, no
midnight service calls, and no property repairs.
• The value of undeveloped land typically rises or falls in concert with the value of
the surrounding areas: if they are appreciating, the land typically will appreciate
as well.
• The value of land is also heavily dependent upon traffic patterns and nearby
amenities: since these are relatively predictable, so is the value of many land
parcels.
• In most areas, there is less competition for land than for other types of
properties, and so investors often can charge comparatively more when
offering it for sale.

© 2019 Professional Education Institute 8

Choosing the Right Real Estate Investment Strategy is a Big Deal

Cons of investing in land. While investing in undeveloped land affords some

significant benefits, there are also some serious potential risks worth noting:
• The uses to which land can be put—and hence its value—is often determined
by local zoning ordinances, which can change, often unpredictably, over time.
• Lack of utilities, road access, and other factors can negatively influence the
value of land.
• Certain local conditions, such as the presence of major employers, can have a
large and ongoing impact on the value of land.
• Among all real-estate investment types, land is perhaps most subject to
national and local economic vagaries: if an area is declining economically, land
will lose its value even faster than developed property, since there will be less
need for expansion space.
• ROI for land depends exclusively on appreciation, and yet there is no guarantee
that the value of a given parcel of land will appreciate; in fact, the value could
even plummet with adverse discoveries, such as the presence of toxic wastes.
• There are fewer tax advantage for undeveloped land than for developed real
estate.

Which Real-Estate Niche is Right for You?

The above survey presents what we believe are some tantalizing options for investing
in real estate. But which real-estate niche is right for you? Only you and your financial
advisors can determine that. But if you think carefully, make prudent judgments,
and pursue your real-estate investing goals with enthusiasm and determination, the
chances of your being successful in your selected niche may be high indeed.

© 2019 Professional Education Institute 9