All the residential property types.
Rental properties come in all shapes and sizes and can be found anywhere. No matter what is going on in the real estate market at large, investors can still find a residential rental property with relatively low risk and the potential for high rewards.
The fact is that some types of rental properties can be better for investors than others. In this article, we’ll look at some of the pros and cons of different rental properties and explain how to choose the type of rental property that could make the best investment option for you.
What are the best types of rental properties for investing in real estate, how are they different, and where can you find them?
Rental properties are among the most common types of real estate investments due to their low risk and high reward when it comes to profits.
When you want to invest in rental properties, you will find many types of rental properties to choose from. Each type of rental property has its advantages and disadvantages, and the types of tenants that they attract are very different from one another.
When I’m talking about the different types of rental properties here, it is important to point out that I’m not talking about rental strategies, but the type of the property itself.
The difference is that rental strategies are the method that you want to use when renting out the property. These include short-term rentals and long-term rentals.
However, types of rental properties include different classes of properties based on their location, structure, size and the way they are managed.
Investing in rental properties is a great starting point for real estate investors. Rental properties can provide cash flow and generate value from appreciation. Investors also get tax incentives and deductions from owning real estate.
While it can be a lucrative method of real estate investing, there’s a lot to know before investing in rental properties. This comprehensive guide will show you how to start investing in rental properties as a beginner. We’ll go over what it takes to invest in rental properties, common mistakes to avoid, and things to know before you buy your first rental.
What Is Residential Rental Property?
Residential rental property refers to homes that are purchased by an investor and inhabited by tenants on a lease or other type of rental agreement. Residential property is the property zoned specifically for living or dwelling for individuals or households and may include standalone single-family dwellings to large, multi-unit apartment buildings.
The residential rental property may be contrasted with a commercial rental property, which is instead leased out to businesses in properties zoned explicitly for profit generation.
How Residential Rental Property Works
Residential real estate can be single-family homes, condominium units, apartments, townhouses, duplexes, and so on. The term residential rental property distinguishes this class of rental real estate investment from commercial properties where the tenant will generally be a corporate entity rather than a person or family, as well as hotels and motels where a tenant does not live in the property long term.
Residential rental property can be an attractive investment. Unlike stocks, futures, and other financial investments, many people have firsthand experience with both the rental market as tenants and the residential real estate market as homeowners. This familiarity with the process and the investment makes residential rental properties less intimidating than other investments. On top of the familiarity factor, residential rental properties can offer monthly cash flow, long-term appreciation, leverage using borrowed money, and the tax mentioned above advantages on the income the investment produces.
Owning a residential rental property can come with tax advantages that other, more indirect real estate investments like a real estate investment trust (REIT) do not confer to the holder. Of course, direct ownership of residential rental property also comes with the responsibility to act as a landlord or engage a property management company along with the risks involved from vacant units to tenant disputes.
The Risks of Residential Rental Property
Of course, there are some corresponding downsides to residential rental property. The key one is that residential rental property is not a very liquid investment. Cash flow and appreciation are great, but if a property stops delivering one or both due to mismanagement or market conditions, actually cutting losses and getting out of it can be difficult. To sell a struggling rental property, you need to find a buyer to find value in the investment that you no longer see or are not there.
There are also considerable headaches that come with acting as a landlord, although engaging a property management company can help. That cost eats further into the profit margin of the investment. Finally, there is the risk created by changing tax codes. The tax treatment of residential rental property can change, erasing some of the attractiveness of the investment.
Common Types of Rental Properties
When you’re looking for a rental property to invest in, there are a lot of different types to choose from. The most common types of rental properties include:
- Single-family houses that are detached from neighbouring properties
- Luxury property targeted toward the high-end renter
- Vacation homes for short-term stays such as Airbnb
- Townhomes or row houses that share a connecting wall, entryway, or front yard
- Condominiums and cooperatives that are privately owned units in a multi-tenant building
- Small multifamily buildings such as a duplex, triplex, or fourplex
- Apartment buildings built as a walk-up, low-rise, mid-rise, or high-rise
These common rental property types can also have sub-types. For example, single-family houses can be located in middle-class areas suitable for workforce tenants, condos can be designed as lofts or small studio units, and apartment rentals can be ground floor units with access to a small garden in an urban setting or a penthouse unit with countless amenities.
Different types of rental properties also have their unique benefits and drawbacks.
Depending on the market you’re investing in, millennials and families may be willing to pay a higher rent for a single-family house because they see the property as a home that they can live in for several years compared to a small, cramped apartment.
There are also significant differences in the construction and size, cost of ownership and property management, and the investment and exit strategy among the various types of rental property.
Virtually any type of real estate property can be a rental property. Even a parking space can be considered a rental property if you’re renting it out to people who want to park in it.
However, in this article, I will be focusing on residential properties. The most common types of residential rental properties include:
- Single-family homes
- Multifamily homes
- Luxury homes
- Vacation homes
- Getaway homes
Below are more details about each of these types of rental properties.
Single-family homes are the most common type of properties anywhere in the world. This is because the term single-family home can be applied to several property classes, even if they include other types of rental properties such as luxury homes or vacation homes.
Similar to single-family homes, condos and coops can be a general term to use for properties that are managed by a Property Owners Association of Australia, regardless of their type or class.
Some examples of condos and coops include apartment buildings, villas and other types of properties that are part of a larger complex. These properties will often share a common space with other units in that complex. They will be managed by an association that will handle several aspects of the property and the area surrounding it.
The most important aspect that should be pointed out about condos and coops is that if you want to invest in them, you should always keep in mind the POAA fees that you will have to pay as the owner of this property.
Multi Family homes are properties that include several units that can be rented out separately.
Unlike condos and coops, however, multi family homes are not part of a complex. Instead, apartment buildings with several units can be considered as multi family homes, as well as properties that are split into different units that you can rent out to multiple tenants or families separately.
Multi-family homes are typically the most complicated types of rental properties for analyzing because the performance of the property is based on the performance of each unit separately.
Also, multi family homes can sometimes be considered as commercial properties depending on the number of units in each property.
Luxury homes are types of rental properties that are typically modern and equipped with cutting-edge technologies and appliances.
These properties will include more utilities and amenities than other types of properties, making them among the most expensive types of rental properties to invest in.
Typically, luxury homes will have lower occupancy rates due to them having much higher rental rates. Meaning, if you own a luxury home, expect not to rent it out as often as other types of properties. But when you do find a tenant, expect that tenant to pay a large amount of money for their stay (as long as you provide them with the luxury).
This also makes luxury homes a high-risk investment to make, but when managed correctly, they can generate higher profits than other types of properties.
Vacation homes are types of rental properties that are located in areas that attract tourists and vacationists.
You will usually find these properties in coastal areas, or in areas that attract vacationists during the winter season.
Vacation homes are known to be highly seasonal rental properties. Meaning, these properties might not generate large amounts of money most of the year. Still, in the high seasons (usually summer or winter) their profits will increase significantly as the demand increases, allowing you to ask for higher rents without sacrificing your occupancy rate.
One of the biggest advantages of vacation homes is that the owner of the property can use it as a vacation home to stay in during their family vacations or as a leisure stay.
Getaway homes are types of rental properties that are usually located in remote areas outside of cities or isolated areas in the wilderness or the mountains.
These properties can be very cheap to purchase, and they are simple and small-sized properties that are made out of wood.
Most of these properties consist of a single story, with the possibility of a smaller second story. People who rent this type of properties are mostly people who want to enjoy some time away from the busy life of the city or to focus on certain tasks for a few months, which is why they are very popular among writers who rent them to focus on their writing and finish the books that they’ve been working on.
Types of rental properties that are included in this category can include cabins, cottages, bungalows, and chalets.
The type of property is something investors need to consider along with the best cities, home prices, proximity to retail and transit, quality neighbourhoods, tax districts, and which might have troublesome rent laws.
In some areas, properties might be temporarily devalued, much stocks that rise and fall on a weekly basis. And like picking stocks, you have to weigh whether apartments, duplexes, or single-family homes are the better choice. In this post, we look at the type and then a number of bedrooms.
During this pandemic, so far, renters have been good about paying their rent. In some lower-income neighbourhoods, and some cities and states, there are issues. However, this is part of your investment research into the best rental properties to buy.
Real estate is going through a tough time right now, which could mean a large number of properties such as small multifamily buildings, rental houses, apartments, condos, and small apartment buildings will be on the market this fall.
Rental House or Apartment?
Apartments and houses are the obvious starts for ambitious rental property investors and landlords. However, a lot of new creative types of rental units have been created. If the infectious disease is an ever-present factor in multifamily housing, rental properties will be undergoing big design changes. This might be an opportunity to capture renters who will pay higher rent prices.
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-family homes, which include:
- single-family homes,
- triplexes, and
Types of commercial rental properties include:
- multifamily (apartment complexes),
- industrial (such as a 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 upfront, and that often means that 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 managing twenty.
For these reasons, this comprehensive guide to investing in rental properties is focused on residential rentals.
Most investors buy a rental property with the goal of producing positive cash flow — earning more income each month than they spend on expenses. Not every rental has a positive cash flow at first, 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 have a direct influence on 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 demand 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
Recurring 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 all have a significant impact on how profitable a rental investment is.
If rents in the marketplace aren’t high enough to pay for the mortgage and operating expenses, the value of the property will be less and the growth potential lower.
A good property management company can be worth its weight in gold. Even in the same neighbourhood, some rental houses have a higher yield than others and generate outstanding returns—the reason why often has to do with the property manager. Experienced professional property managers understand the market, have an established network of cost-effective vendors, and know how to get vacancies filled fast.
There are several types of rental properties in real estate. Choosing the right property type for your investment will determine the amount of management that you will have to provide as well as what you can do with the property in order to maximize its returns.
Different types of properties require different levels of management and will attract very different types of tenants. For this reason, make sure to choose the type that suits your personality best, and do your research to figure out the best ways for managing the type that you chose.
The best type of rental property depends on your investment strategy and objectives.
Different property types attract different tenants, and some types of rental property are much easier to manage than others.