There are several investment property types that exist in the real estate market, with each having its own advantages and disadvantages, and some performing much better under certain circumstances or using certain strategies than others.
In order to decide on the most suitable property type for your investment, there are a number of factors that you should take into consideration, and more importantly, there are some investment strategies that will work better for certain property types than others.
So, what are the different investment property types, and what are the most suitable types of investment strategies for each?
Let’s find out!
What Are the Different Investment Property Types?
When you consider investing in real estate, you might come across several investment property types to choose from. But how can you decide on the best type of investment property that is most suitable for your investment needs?
There are several aspects that will affect your decision: from the limitations of your budget to the location of the property, these are aspects that will determine many facets of your personal decision, but there isn’t a general rule that would apply to them as they may differ from one real estate investor to another.
In this blog, however, we want to discuss a few different residential property types and what’s unique about them, and then go over several different real estate investment strategies and what types of investment properties best match with each strategy.
So, what are the most common residential investment property types?
Single-family homes are detached dwellings or separate houses that typically house a single-family or a small number of individuals. Single-family homes are the most typical type of residential property outside of metropolitan cities in the US, and they are usually surrounded by a private piece of land or a yard, have their own drive-through, and are usually very attractive for all types of tenants and occupants.
In urban areas, single-family homes can be more expensive because of occupying a larger piece of land than other residential property types. But since single-family homes are most common in suburban areas, they are considered relatively cheap taking into account that they usually come with a yard surrounding them, and in many cases also have their own private swimming pools.
Also called condos, they are the most typical type of non-apartments in urban areas and metropolitan cities. Condos are a type of real estate that is divided into several separate units over a large piece of land, and they are typically surrounded by common areas such as their own private parks and swimming pools that are shared by all residents of the condo complex.
Condos are generally cheaper than most other residential property types, but they also have certain rules and regulations related to them when it comes to taxes, insurance, and maintenance.
Townhouses are among the most common types of residential real estate in larger cities. They are a type of terraced housing, and they usually have a small footprint on multiple floors. Although they are usually narrow in size, townhouses have a large living space because of being comprised of a number of floors, which could go up to 6 or more floors in some areas.
Townhouses can be an expensive option where single-family homes are uncommon, which is typically in city areas where a piece of land is far more expensive than in the suburbs.
Luxury homes, as the name represents, are modern properties that are designed to be luxurious in a number of different ways. There are multiple interpretations of what a luxury home is, with some defining it based on its design, and others based on its location or its size. But generally, luxury homes have one thing in common: they are expensive.
Perhaps the most expensive type of residential property, luxury homes can usually be found in upper-class areas and in attractive locations such as near the Miami beach.
What Are the Different Investment Strategies?
In addition to the number of different property types, there are also a number of different investment strategies that every real estate investor would consider based on his/her preference and plans. Each investment strategy has its own advantages and disadvantages when it comes to its profitability, risk level, and amount of time needed for the strategy to take place.
Below are three of the most common types of investment strategies with their advantages and disadvantages as well as the best property type for each strategy.
Long-Term (Traditional) Rental
Long-term rental properties are the most common type of investment strategies, especially for entry-level investments and beginner investors. Long-term renting is a strategy that relies on purchasing a real estate property for the sole purpose of renting it out to tenants for 6 months or more. The owner of the property, the landlord, would sign a contract or a rental lease with the tenants who are renting the house, and the tenants would then pay a monthly rent to the landlord which can be used to cover the expenses of the property, its mortgage payments, its taxes, and insurance.
Long-term rentals are most commonly used for single-family homes and townhouses. They typically have the lowest rate of risk out of any investment strategy, and once the mortgage is fully paid off, they can start generating a very significant amount of rental income on a monthly basis.
The downside of long-term rentals is the long-term commitment and the long period of time that it takes before they start generating a considerable profit unless the property was purchased with 100% cash.
Short-Term (Airbnb) Rental
Short-term rental properties are very similar to traditional rentals, but they are rented out for shorter periods of time, typically days, weeks, or a few months. This type of rental properties has become much more popular in the recent years due to the emergence of websites, services, and companies such as Airbnb, VRBO, and HomeAway.
Short-term rentals typically utilize all types of real estate properties, but luxury homes, in particular, can be very profitable due to the above-average rental rates that a landlord could charge his/her tenants for renting the house.
The biggest disadvantage of short-term rental properties comes from the fact that several cities in the US enforce certain laws and regulations that prohibit or place restrictions on this investment strategy, making it illegal to rent out properties for short periods of time, or restricting it to a limited number of days each year.
Fix-and-flips are real estate properties that are in a bad condition and require a considerable amount of renovation and reparations before they are back in a habitable state. This type of investment strategy can be a great choice for real estate investors looking to make a quick profit on their investment, but they also have a high rate of risk associated with them due to the high amount of cash that needs to be invested in renovating the property and the large number of unexpected expenses that may arise throughout the investment.
Condos are typically a great choice for a fix-and-flip strategy due to the relatively small size of condos and low costs of renovating them. But any residential property can virtually be a great option for a fix-and-flip, with the exception of luxury homes, as most real estate properties that are in a bad enough condition to be viable for a fix-and-flip are typically on the market for a price that is much lower than average.
Although some property types may perform better for certain investment strategies than others, there are always unique opportunities on the market that can be suitable for your specific type of investment.
You can always visit Mashvisor to learn more about the opportunities that exist right now, and how each property on the market is performing, in addition to the projected returns that it is expected to make based on the rental strategy that you’re looking to use.
What are you waiting for? You next investment opportunity is out there, so go and search for it right now!