All the residential property types.
Rental properties come in different shapes and sizes. No matter the state of the property market, it is always possible for investors to find a residential rental property with low risk and high potential.
Some types of rental properties will suit certain investors over others. Let’s look at some of the pros and cons of different rental properties to help you choose the type of rental property that is the best investment option.
Rental properties are the most common type of real estate investment due to their low risk and high-profit rewards.
If you invest in rental properties, you will find many types of properties to choose from. Each class has advantages and disadvantages, and the types of tenants they attract are very different.
This is not about rental strategies but the property type itself.
A rental strategy is a method you use when renting out a short-term or long-term rental.
Rental properties include different property classes of location, structure, size and management type.
It can be a great starting point for investors, providing cash flow and generating value from appreciation. Investors can also get tax incentives and deductions for owning property.
While it can be a lucrative method, it pays to do your research before taking the plunge. Let’s look at how to start investing in rental properties by covering the types of properties, things to avoid, and things to know before you commit to buying your first rental.
What Is Residential Rental Property?
Residential rental property refers to homes purchased by an investor and inhabited by tenants on a lease or other rental agreement. Residential property is zoned specifically for living or dwelling for individuals or households. It can include stand-alone single-family residences to large, multi-unit apartment buildings.
The difference between this and commercial rental property is that the latter is leased to businesses in properties zoned for profit generation.
How Residential Rental Property Works
Residential real estate can be single-family homes, condos, apartments, townhouses, or duplexes. Commercial property is where the tenant will be a corporate entity rather than a person or family. Motels and hotels where a tenant does not live in the property long term also fall into this class.
Residential rental properties may be an attractive investment aside from stocks, futures, and other financial investments. Most people have had first-hand experience with the rental market as tenants or homeowners. This familiarity with the process can make investing in residential properties less intimidating than other investments. Additionally, residential rental properties can offer monthly cash flow, long-term appreciation, leverage using borrowed money, and tax advantages on the investment’s income.
Owning a residential rental property comes with tax advantages that other real estate investments like a real estate investment trust (REIT) do not. However, this comes with the responsibility to act as a landlord or engage a property management company, along with the risks from vacant units to tenant disputes.
The Risks of Residential Rental Property
A residential rental property’s downsides are that they are not a very liquid investment. Cash flow and appreciation are positive, but if a property stops delivering one or both due to mismanagement or market conditions, cutting losses and getting out of it will not be easy. You must find a buyer to find value in the investment you no longer see when selling a struggling property.
Acting as a landlord can bring challenges. However, engaging a trusted property management company can help. That cost will affect the profit margin of the investment. Also, there is a risk that the tax treatment of residential rental property can change, erasing some of the attractiveness of the investment.
Common Types of Rental Properties
There are many different types when looking for a rental property. Common types of rental properties include:
- Single-family houses detached from neighbouring properties
- Luxury properties
- Vacation homes for short-term stays (Airbnb)
- Townhomes or row houses with a connecting wall, entryway, or front yard
- Condos and coops of privately owned units in a multi-tenant building
- Small multi-family buildings such as a duplex, triplex, or fourplex
- Low-rise, mid-rise, or high-rise apartment buildings.
Some common rental property types also have sub-types. Single-family houses may be in middle-class areas suitable for workforce tenants. In contrast, apartment rentals can be ground-floor units with access to a small garden in an urban setting or a penthouse unit with multiple amenities.
Different types of rental properties also have unique pros and cons.
Depending on the market you’re investing in, families and single professionals may be willing to pay a higher rent for a single-family house. Why? Because they see the property as a spacious home they can live in for several years.
Any real estate property can be a rental property, including a parking space you’re renting out to people who need to park in it.
Common types of residential rental properties are:
- Single-family homes
- Multi-family homes
- Luxury homes
- Vacation homes
- Getaway homes
Types of rental properties.
Single-family homes make up the bulk of residential property anywhere in the world. They can be applied to several property classes, including other rental properties like luxury homes or vacation homes.
Like single-family homes, condos and coops are properties that a Property Owners Association of Australia manages, regardless of type or class.
They may include apartment buildings, villas and properties that are part of a larger complex. They often share a common space in the complex and will be managed by an association that handles the property and the surrounding area.
The most important aspect about condos and coops is that if you want to invest in them, you should always consider the fees you will have to pay as the property owner.
Multi-family homes include several units that can be rented out separately.
Unlike condos and coops, multi-family homes are not part of a complex. They are properties split into different units rented out to multiple tenants or families separately.
Multi-family homes are the most complicated rental properties for analysis because the property’s performance is based separately on each unit’s performance.
They also may sometimes be considered commercial properties depending on the units.
Luxury homes are the most expensive rental properties to invest in.
They tend to include more utilities and amenities than other types of properties and cutting-edge appliances in modern settings.
Luxury homes typically have lower occupancy rates due to their much higher rental rates. If you own a luxury home, you may not rent it out as often as other types of properties. But when you find a tenant, expect that tenant to pay a large amount for their stay.
They can be a high-risk investment, but when managed correctly, they can generate higher profits than other types of properties.
Vacation homes are types of rental properties located in tourist areas.
Vacation homes are highly seasonal rental properties as they might not generate large amounts of money most of the year. Still, in the high seasons, their profits can increase significantly as demand increases, allowing higher rents without sacrificing the occupancy rate.
An advantage of a vacation home is that the property owner can use it as a vacation home for themselves.
Getaway homes are rental properties usually located in remote areas outside cities or isolated places in the wilderness or the mountains.
These properties can be affordable and include cabins, cottages, bungalows, and chalets.
Most consist of a single storey, with the possibility of a smaller second storey. People who rent this type of property tend to want to enjoy some time away from busy lives or to focus on certain tasks for an extended time, like writers and artists.
When opting for this property class, it is important to consider location, home prices, proximity to amenities, quality neighbourhoods, tax districts, and rent laws.
In some areas, properties may be temporarily devalued, with stocks rising and falling weekly. Like picking stocks, it pays to research your choices.
Rental House or Apartment?
Apartments and houses are the obvious starts for rental property investors and landlords.
After considering your finances, risk tolerance, property management skills, and the current rental housing market, you may decide differently than you originally planned.
Residential rental properties are one to four-bed family homes, which include:
- single-family homes,
- triplexes, and
Types of commercial rental properties include:
- multi-family within apartment complexes,
- industrial (warehouse or self-storage),
- office space,
- retail space, and
Residential rental properties are often more accessible to beginners because they’re less expensive. Less money is required up front, which usually means it’s easier to get financing. While there are exceptions, residential rental properties are also typically easier to manage. In most cases, managing one tenant is easier than fifteen.
Most investors buy a rental property to produce positive cash flow. Not every rental initially has a positive cash flow, but building up to one is a common goal of rental investing.
Owning a rental property is an active form of real estate investing and requires time, dedication, and involvement. Being a landlord isn’t for everyone. As you’ll see, there’s much work involved in identifying, analyzing, buying, and managing a quality rental property.
While there are options for outsourcing some of these active tasks, it’s barely 100% passive, and there are always risks.
Six Factors Help Make a Rental Property Profitable
The words “best” and “good” can be very subjective, with the definition of each varying based on an investor’s strategy and goals. But when everything is said and done, real estate investors want to make a profit.
Here are six important factors that can help make a rental property investment profitable:
Population and job growth directly influence how strong the demand for rental housing is in the marketplace. When more people move to an area to work, housing prices generally rise, and the need for investment property increases.
Supply and demand
On the other hand, an area with a large number of “For Rent” signs could mean the rental market is cycling downward. When vacancies arise, market rents go down. The most qualified renters have more to choose from, forcing landlords to compete for the tenant with incentives and concessions.
Location of property
Factors that make the location of one property better than another include the quality of the neighbourhood, how good the local schools are, nearby amenities such as parks and shopping and the crime rate.
Cash flow and appreciation
Cash flow and market value appreciation over the long term are two of the biggest reasons for buying rental real estate. Market rents, property taxes, and growth potential significantly impact a rental investment’s profitability.
If rents aren’t high enough to pay for the mortgage and operating expenses, the property’s value may have less potential.
A good property management company can be the difference between rental houses having a higher yield than others and generating outstanding returns. Experienced, trusted property managers understand the market, have an established network of cost-effective vendors and know how to fill vacancies quickly.
Your property type will determine the amount of management you need to provide and what you can do with the property to maximize returns.
Different property types require different levels of management. They will attract very different tenants, so it’s wise to choose the style to suit your means and personality through diligent research.
Ultimately, the best type of rental property depends on your investment strategy and objectives.
Different property types attract a varied spectrum of tenants. And don’t forget that some types of rental property are much easier to manage than others.