When first getting into the business of being a landlord, it can be difficult to tell what you want to purchase when there are so many types of rental properties. Narrowing your options down can be hard, especially depending on your needs. There is also the option to buy property in an area far away from where you live, but the issue with this is that you will have a much harder time trying to manage it.
Evaluating Types of Rental Properties
Investing in a rental property requires a lot of forethought. As a new landlord or investor don’t fall into the trap of thinking about the ROI or rental comps when evaluating a purchase. Consider the big picture of your time investment and management tasks associated with the purchase. Different types of rental properties come with different long-term management concerns.
Common Types of Rental Properties
The Pros of Buying a Condo as a Rental Property
Condos are often for sale for a considerably lower price than any other type of rental property, which makes them easy for anyone wanting to start out. Maintenance issues also come up less often than with houses because the owner of the condo is not responsible for the exterior part of the unit. Issues like fixing a roof or maintaining the landscaping become non-existent, and you only need to deal with interior issues.
Because they are located in cities and popular areas, condos are also easy to rent out. This helps to avoid long vacancy periods and generate monthly income. Tenants are also drawn to condos because amenities are more plentiful than in other residences. Many condos share pools, fitness centers, and working spaces. Security is also an advantage as there are also secured entrances or a front desk concierge.
The Downsides of Condos for Landlords
There is less privacy for your tenants with a condo as opposed to a single, or even multifamily property. As a result, you will most likely be able to hear your neighbors and they will be able to hear you. Since a condo is not a detached residence, your tenants will also be around their neighbors more than they may necessarily want. HOA fees are also generally required to cover the maintenance of amenities for the building. Depending on where the condo is located, these fees can be quite high and can increase your monthly costs. The HOA can also establish rules such as not allowing pets, or making changes to your unit without approval.
Learn more about how HOAs can affect your renters: Renter’s Guide to Understanding HOAs
The Pros of Buying Single-Family Rental Properties
One of the most common types of rental properties are single-family homes. A single-family home is defined as a detached unit that doesn’t share any necessities, heating, or yards with any other units. They can be located on any sized property, but are designed to be a single-dwelling unit, which means you will have fewer tenants than other rental opportunities. High occupancy rates are almost always guaranteed; while you are dependent on only one tenant for your income, the majority of tenants that rent from you will live there for multiple years at a time. This type of unit is one of the most common and is easy to both find and purchase.
Your tenants can help you to reduce costs. Typically, when you rent out a single-family home, the tenants are able to pay utilities. Tenants can also help lower your costs of repairs if you give them some of the responsibility of taking care of the property. The single-family home also holds its value over time and can even gain resale value. This is especially true if the home is well maintained and located in a popular area.
The Cons of Single-Family Rental Properties
Unfortunately, the single-family home also comes with some drawbacks. Tenant turnover can end up costing more with a single-family home than with a condo or a multifamily property. There is only one tenant that is providing you with revenue, and once they leave, you lose that income until you get another tenant. You may also need to take into consideration the cost of Homeowner Association (HOA) fees. These fees are generally monthly payments that are required from property owners in the area.
The Benefits of Purchasing a Multifamily Home
Another popular, but harder to purchase, type of rental property is the multifamily property. The properties have the big benefit of letting you have multiple tenants on one property, and therefore more cash flow. Because each tenant pays rent, maintenance, and utilities, your income and profitability will continue to increase. Tenant turnover is also less of a risk than with a single-family property because even if one tenant moves out, you have others that will generate revenue while you look for a new tenant.
Because all of the units are on one property, a lot of headache is saved when it comes to loans and insurance. There will likely only need to be one loan and one insurance policy, which is much simpler than what it would be if you were purchasing a couple of single-family homes. However, there are struggles that come with multifamily properties, particularly that they are difficult to find.
The Downsides of Purchasing a Multifamily Home
Fewer multifamily properties are going to be for sale than other residential properties. Because of their value and number of units, they are also more expensive than condos or single-family options and it can be difficult to find one that perfectly suits your needs. Check into your local laws and regulations as well, because multifamily properties tend to be more highly regulated. The fact also remains that managing multiple units is more involved than only managing one, especially if the tenants are on the same property. This may mean that you need to hire a property manager and increase your costs.