Investing in real estate does not have to be complicated nor concentrated in a specific type of property. Most experienced investors and financial planners have a plan or a strategy to accomplish their goals. One good strategy, and if you have the capital to acquire more property, is to buy various types of property or properties in different locations such as appreciating areas, ones that demonstrate cash flow, some speculation and possibly overseas.

The strategy of investing in different types of property is a safe and good long term plan which shields you from the up and downs of the market. It is called being diversified. In real estate markets that appreciate rapidly, properties can decrease as well, especially if you invested at the end of the real estate cycle. Once that happens, we see investors bail out and move towards cash flow properties. Cash flow properties are ones that cover your mortgage payment in excess. Your mortgage payment consists of principal, interest, taxes and insurance, also known as P.I.T.I. Cash flow properties are mainly multi-unit properties such as a duplex, triplex, fourplex or apartment buildings. Depending on the location, these may also be called two-family, three-family and four-family homes respectively. Two or more unit properties generate cash flow better than single family homes because they have two or more units.

As rents go up over the years, these properties’ rents increase quicker than a single family home because there are multiple units. All of the units increase while a single family home sees it rent increase as well. The key word here is a “single unit” increases while “multiple units” increase on a multi-family home.

For example, we have two properties in the same neighborhood; one is a 3 bedroom single family home with 1500 square feet valued at $350,000 and used as an investment property brings in rent of $1,500 per month. The other is a side by side two-family home with 1600 square feet, consisting of (2) 2 bedroom units valued at $350,000 brings in rent from each unit at $800 per month.

Four years later, all tenants move out for some reason. Currently, the single family yields rent of $1,700 while the two-family units bring in rent of $950 for each unit. The single family rent increased 3.25% per year, while the two-family home increased 4.75% per year. We used these figures to demonstrate that the average person will choose a unit that rents for $950 with one less bedroom vs. a unit with one more bedroom that rents for almost $800 more per month in a declining or up market. It’s even better if one of the two-family homes has a three bedroom unit.

In addition, which property do you think will appreciate faster? It seems that the two-family is undervalued since it has four bedrooms if one were to convert it to a single family home.

The cash flow comparison is even more eye-catching when using a single family home or a two to four-family home against an apartment building which is defined as five or more units. Imagine the five unit buildings incremental increase in rents. A vacant unit in a multi-unit property can be handled easier than a vacancy in a single family home because the other unit(s) are still bringing in rental income. Therefore, diversifying your real estate investments into two to four unit properties or apartment investing is a wise choice.

Frank Collins is an active real estate professional and an editor for Tristar Property