Want to purchase a rental property? You have a wide range of options, including single-family homes, multi-family properties (e.g. apartments, condominiums, townhouses), and more. When you first start out as a rental property owner, it can be tough to choose what to buy because there are so many types of rental properties out there. There is also the option of purchasing a property far from where your primary residence is, but this will be considerably more challenging to manage. (Unless, of course, you partner with a property management firm.)
Plus, certain types of rental properties are better than others, particularly for first-time property owners. Below, we will take a look at some of the benefits and drawbacks of these rental properties. That way, you can narrow down your choices and purchase the property that’s best – and most profitable – for your specific situation.
Single-family homes are the most common type of residential real estate. In fact, there are about 14.7 million renter-occupied single-family homes in the US. As the name suggests, single-family homes are rented to a single family. Its structure stands alone and does not share walls with other rentals.
Pros of Single-Family Homes
Single-family homes are so common. With that said, you won’t have trouble finding a property management agent willing to oversee its day-to-day demands. Property management agents are also familiar with the “workings” of a single-family home (e.g. maintenance), so they’re easier to manage. Plus, from a real estate investor’s point of view, single-family homes are more likely to be in-demand year-round. Tenants are also more likely to stay for a longer period of time, which is good news for your cash flow.
One of the benefits of single-family homes is that you’ll have to deal with a single family. You won’t have to deal with disputes, which are common in rental properties that share a wall (such as in a townhouse). In other words, you won’t have to be the mediator in the event of tenant disputes that involve, say, noise.
The obvious benefit is that you don’t have to deal with more than one unit. You will be responsible for only one property, plus your tenants will also care for the property. In addition, the value of these properties tends to go up, particularly in popular areas where there’s great employment growth.
Cons of Single-Family Homes
Counting on a single-family home as an investment comes with certain disadvantages. Tenant turnover can be more costly in a single-family home than in a multi-family property, as you are relying on one tenant for income. Therefore, if they leave, you will lose your revenue until you can find a replacement tenant.
Your single-family home may also be in a neighborhood that’s governed by a homeowners association (HOA). You may also need to raise your rent to cover the costs of HOA fees – this cost can deter tenants that are on a tight budget. Unfortunately, these fees are often compulsory.
Any residential real estate with more than one unit is classified as a multi-family property. Multi-family homes can be rented to multiple tenants at a time, and they commonly share amenities such as parking spots, parks, and so on. Multi-family homes with two to four units are pricier in comparison to other residential properties.
Pros of Multi-Family Properties
Many of the disadvantages of single-family homes are advantages of multi-family dwellings. With multi-family real estate, you will be able to grow your earnings considerably faster, as you will obviously have more tenants. If a single-family home generates $1,000 a month, that could double, triple, etc. in a multi-family!
In the event of tenant turnover, your other tenants can “cushion the blow”. Even if one or two tenants move out, you’ll still have other tenants to cover the costs while you look for a replacement tenant.
And since the units are on the same property, you can save time and money on insurance. You will likely need only one insurance policy – this is significantly simpler than managing multiple insurance policies for multiple single-family homes.
Cons of Multi-Family Properties
The disadvantage of investing in a multi-family home is the initial investment. In certain cities, you can buy a single-family home for as low as $50,000, but a multi-family home will cost considerably more. This is why first-time rental property owners start with single-family homes.
Although you don’t need to pay the entire purchase price in cash, it can be challenging to get a mortgage. Multi-family houses are also rare, and if you find one for sale, seasoned investors will probably beat you to it.
Tenants in multi-family properties are also prone to conflicts with other tenants. Don’t be surprised if your tenant calls you to complain about their neighbors in the middle of the night! If you don’t want to deal with this, you can always work the costs of a property management company into your budget.
Commercial Real Estate
Commercial real estate is any real estate that’s solely for commercial activities.
Pros of Commercial Real Estate
Commercial real estate is a money-maker, and you won’t have to be as hands-on as you would be with residential real estate. As long as you fill your vacancies with vendors, you will have a consistent cash flow for years to come. In most cases, your commercial tenants will pay for their own expenses, too. Commercial leases last longer, as well – around 10 years.
Cons of Commercial Real Estate
The problem with commercial real estate is its barrier to entry. Commercial properties are not cheap – even if you finance them, you’ll have to put down at least a 30 percent downpayment.
Whatever Property You Choose, Partner With the Pros
If you can’t decide which property to invest in, consult the pros at Luxury Property Care. We will review your situation to pinpoint which property meets your investment aims. Once you’ve invested in real estate, we’ll also lend a hand with property management to make sure you grow your earnings over time. In short, we’ll make sure you succeed.