When it comes to real estate investing you are probably wondering which types of real estate properties you should invest your money in. The answer to that question is simple: real estate investing offers different types of investment properties that suit the needs of various real estate investors. Each type of real estate investment has its own potential benefits and pitfalls, including cash flows frequency, return on investment, cash on cash return and other factors that are discussed in this blog. So, what are the best types of real estate properties for investing?
Long-term vs Short-term Rental Properties
As a real estate investor, it is advised to set your investing strategy before browsing through different types of real estate properties. The choice between long-term and short-term rental strategies depends greatly on the finance method you opt for and the location of the real estate property. With a long-term rental, you are guaranteed a steady income that will pay your monthly mortgage payments, which is not always the case with short-term rentals, where location plays an important role in determining the occupancy rate of your rental property.
Long term rental properties, also known as traditional rentals or buy-and-holds, are without a doubt one of the most common types of real estate properties in this business. A long-term rental is purchased with the purpose of renting it out for a period of at least 6 months. Long-term rentals are favored among new and experienced real estate investors because they offer steady income that will eventually pay off the investment, appreciate over time and can be leveraged against home equity loans.
A major risk associated with long-term rental properties is vacancy, which can be mitigated by investing in a property in a good location that serves the tenants’ needs. For example, invest in single family homes in good school areas. Another downside of long-term rentals is dealing with tenants. Becoming a landlord is not an easy job, especially when dealing with demanding tenants. Hiring a property management company can relieve you from the stress of dealing with your tenants, but that surely comes at a cost.
Short-term rentals are rented out on a nightly basis for shorter periods of time (starting from one night up to 6 months). Property owners can rent out their own homes or buy investment properties for the sole purpose of renting them out on short-term rentals platforms such as Airbnb, HomeAway, VRBO, and others. A major advantage of owning a short-term rental property, especially one in a good location, is the higher profits gained when compared with renting the same property for a long period. However, due to the competitive nature of this business, landlords must create a competitive advantage for their rental properties to maintain high occupancy rates.
What are the Best Types of Real Estate Properties for Investing?
Single Family Homes
Single family homes are detached dwellings that typically house a single family. They are most common in suburban areas since land prices are much cheaper compared to urban lands. From all types of real estate properties, single family homes are probably the most favorite for several reasons.
- High-demand: even in the worst housing markets, there is always a demand for single family homes.
- Easy to finance: with a down payment of at least 20% of the purchase price, mortgage lenders are more than happy to finance your real estate investment.
- Affordable investment: when compared to other types of real estate properties, single family homes require less of an initial investment.
A downside of investing in single family homes is that you have to take full responsibility as a landlord. Even though you have the option to hire a property management company, from a cost/benefit perspective, that is not viable.
Multi Family Homes
Multi family homes are residential properties that include at least two separate housing units. What makes these types of real estate properties attractive for investment is the high positive cash flow they can generate. However, financing multi family homes is more complicated than single family homes. Not only are they a more expensive investment, but also to qualify for a residential real estate loan (typically 20% down payment), a multi family complex has to be 4 units or less.
Townhouses are residential properties that are more common in urban areas. These properties are characterized by their small square footage area per floor on multiple floors (usually 2-3 floors but can go up to 5). Generally speaking, townhouses are cheaper than single family homes because demand is higher for the latter, but of course, it all depends on the local housing market.
Are you a new real estate investor? Read this blog: What are the Best Types of Property for New Real Estate Investors?
A condo is a single unit within a large complex of apartments. The market for condos is typically made up of first-time buyers who are looking for a convenient residence with low maintenance and shared amenities like swimming pools. However, condos come with high fees that can range from $100 to $300 depending on the complex. For large real estate investors, buying multiple condos can be advantageous since sellers are willing to drop prices for packaged deals.
The Bottom Line
When it comes to real estate investing, it is difficult to say which of the different types of real estate properties is the best one. It all depends on the housing market in your area, how willing you are to become a landlord and your financing options.
Mashvisor’s property investment calculator is a must-have tool for any real estate investor. It provides you with important real estate metrics for properties across the U.S.
To learn more about our product, click here.