When deciding on the type of investment property you’d like to purchase, it’s important to know what different types of residential properties are available. You need to envision how your real estate business might evolve in the next five to ten years according to the rental property you plan on purchasing.
Buying a residential property is not an easy decision. Even if it’s for your own personal use or real estate investing purposes, buying residential properties needs meticulous thought. For this reason, I have provided for you the ultimate guide to the different types of residential properties in real estate in addition to the pros and cons of each type. Stick around and learn everything you need to know. Please feel free to leave any comments below or questions you may have.
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5 different types of residential properties
1. Single-family homes
Pros:
- Tenants rent longer
When searching for residential properties to invest in, investors always look for properties that guarantee high occupancy rates. Why? Investing in a property with longer leases can increase the annual return on investment for investors. Single-family homes are rented out for one or more years compared to other residential properties.
- Holds resale value
Good residential properties are those that do not lose their value over time. A single-family home that is located in a booming area and is well-maintained will hold a higher resale value.
- Lower property taxes
Commercial real estate properties are taxed differently than residential properties; that is why you need to familiarize yourself with tax regulations for each type of residential property. Compared to multi-family homes and apartments, single-family homes tend to have lower property taxes each year.
- Lower costs to manage
Since the majority of the people who rent out single-family homes are small families, the costs of property management can be lower on an annual basis. You want to look for tenants who can take care of the property. This can lower the number of repairs that are required with every lease renewal.
Related: Investing in Single Family Homes: Why It’s a Must
Cons:
- ROI decreases with vacancies
Single-family homes are vacant as soon as the lease agreement finishes. Unlike multi-family homes that contribute more than one source of income, a single-family home’s return on investment can decrease gradually with vacancies. It is common to lose revenue while costs increase when searching for a new tenant to occupy your property.
- Payable HOA Fees
Some areas require that you pay Homeowner Association (HOA) fees for your single-family property. There are neighborhoods that may also require monthly payment fees from property owners. Before anything, check to see what applies to your location.
- Decreased land size
The average single-family home is less than 1/4 acre in most neighborhoods. This can be a bad thing for families who prefer to rent out homes with more land.
2. Condos
Pros:
- Lower purchase price
The biggest advantage of investing in condos is the purchase price. The purchase price for condos is typically lower than other residential properties. Prices may vary according to different geographical areas, but in general, condos are often 25-30% less expensive than other types of residential properties.
Also, taxes and insurance are far less than that of single-family homes. The only responsibility the investor would have is for an injury to the tenant inside the condo unit.
- Fewer repairs to make
Since the owner of the condo is not responsible for the exterior part of the unit, there are fewer repairs to make. Investors don’t have to worry about fixing a roof or landscaping which can be quiet expensive. The condominium association is responsible for all of that work. All the condo investor has to do is take care of the interior part of the unit.
- Buyer’s market
The good thing about investing in condos is that there is less competition than other types of residential properties. Unless you live in an extremely hot real estate market, you may find there is a buyer’s market for condos. This a great advantage for investors searching for condos to buy.
- Greater amenities for tenants
Condos are very appealing to tenants since they can make use of the various amenities such as swimming pools and exercise rooms. Plus they don’t have to worry about mowing laws or watering plants. The amenities that condos offer make them highly desirable to rent quickly and for a good price.
Read Also: Invest in Condos or Single-Family Homes?
Cons:
- Monthly association dues
With all the benefits of condos such as lower purchase costs, tax, and insurance, it can be hard to enjoy them when there are monthly association dues to pay. Before buying a condo, check out the cost of association to see whether or not it is a smart investment decision.
- Condos are more difficult to sell
Like I said before, it’s a buyer’s market for condos, not a sellers’ market. When it comes time to sell your condo unit, you may find it takes more time than other residential properties. Plus, most of the buyers who you find will most likely be cash buyers. The number of approved FHA mortgages has decreased over time, so most buyers pay full cash for a condo.
- Condos are the first to drop in price in a down market
During the collapse of the housing market, a flood of condo foreclosures crushed the values of many condominium communities. Many of the first-time homebuyers who purchased condos had very few savings and had to hand back their keys to the banks. This seriously had a negative impact on the values of the condo market in general.
- Condos are the last asset to rise in price during a recovery
It’s sad to say that condos are the last asset to rise in value when the economy improves. Other types of residential properties like single-family homes recover their values much faster. With prices and interest rates depressed, the majority jumps on the single-family home bargains first and ignores the less expensive condos.
- Government regulations make selling a condo more difficult
Government laws and regulations make it difficult for condo owners to sell their units. FHA lenders place restrictions on any condo area that has a high ratio of rental units to owner-occupied units. More restrictions are implemented in areas that have too many foreclosures or have an immense amount of association dues in debt.
3. Townhouses
Pros:
- Cheaper to buy
Generally speaking, these types of residential properties tend to be a bit less expensive to purchase. This is because they’re less expensive for a real estate developer to build than single-family homes or multifamily property.
- Plenty of living space
When many people hear “townhouse”, they picture a small space and no room for movement. Many townhouses are as roomy as their detached counterparts, and those with particularly smart floor plans can feel like a much bigger home.
Cons:
- HOA Fees can get expensive
HOA fees can help owners of townhouses keep their yard looking good and make sure their trash is collected, but all that comes with a price. HOA fees can get expensive and add a huge amount of cost to your monthly expenses. So before anything, take these fees into consideration and see how much it will affect you.
- Pet Restrictions
Many townhouses have restrictions concerning pets. This can limit your tenant pool greatly, so check if these restrictions exist before investing in a townhome.
4. Multi-family houses
Pros:
- Cash flow
You are going to see more positive cash flow when investing in multi-family homes since you’ll be hosting multiple tenants in one property. Assuming that each tenant pays a margin over the actual costs of owning and maintaining the property, that means each additional family is going to increase your income and your profitability.
Related: Understanding Multi-Family Investment Property Returns and Benefits
- Loan simplicity
If you buy a multi-family property with a single mortgage loan, you’ll deal with less paperwork and headache than you would with the purchase of two single-family homes.
- Insurance simplicity
Likewise, when you buy a multifamily home, you’re only going to deal with one insurance policy. Of course, the insurance will be much more expensive than other residential properties, but you’ll get the same coverage across each individual unit.
- Less Risk
When buying a multifamily home, you’ll face less risk when it comes to tenants. The risk for complete vacancy will be very low since you’ll be dealing with multiple tenants in more than one unit. Even if one tenant moves out, you’ll have your other tenants to generate positive cash flow until you fill up the unit again.
- Less competition
The competition for buying and renting out single-family homes is somewhat high. When you change your investment strategy to investing in multifamily properties, you’ll have fewer people competing with you on available units to rent.
- Long-term value
Single-family homes are often priced based on what families find attractive, which can be subjective and vary based on changes within the neighborhood. On the contrary, multi-family homes are priced based on how much income-generating potential they have. These types of residential properties are bought and sold mainly as types of investments so they have more stable long-term growth.
Cons:
- More expensive
It’s obvious that multi-family homes are more expensive than other residential properties. When you start looking for multi-family homes, prices can be a real barrier to entry.
- Management time
Having multiple units means that more management responsibilities and time are required of you as a landlord. You will have to deal with multiple tenants and multiple problems randomly, so you must always be prepared.
- Demand for experience
Most real estate investors who chase after multi-family homes are highly experienced investors. This means that your competition will likely have years of experience on you. For that reason, you will need to gain as much experience as possible to find tenants for your investment property faster.
- Less availability
Multi-family homes tend to be less available than single-family homes for many reasons. This means that you will struggle to find a property that suits you and you won’t have many options to choose from.
- Strict laws
Compared to other residential properties, multi-family homes have very strict laws and regulations. Therefore, before anything, check to find out the laws in your state concerning multi-family properties.
Related: The Ins and Outs of a Multi-Family Investment Property
5. Vacation homes
Pros:
- Good rental revenue
Vacation homes in good locations generally provide investors with good rental revenue. This revenue can be used to pay off mortgage payments or other debts investors may have. Short-term rentals provide a higher return on investment than traditional rentals which is why most investors choose this as their optimal rental strategy.
- Online renting websites
Using an online home rental website like Airbnb makes it easier to manage your vacation rental home. Websites like Airbnb can help set the price, market your property, and make communicating with guests easier.
- Federal tax breaks and deductions
Short-term rentals like vacation homes may qualify for federal tax breaks and deductions. This may include everything from professional fees or commissions to cleaning and maintenance. Check your local area to see what investment property tax deductions apply to your property.
Cons:
- Costly to manage
Vacation rental properties can be expensive to manage both money wise and time wise. Since your vacation rental property will have tenants coming in and going out constantly, you will need to fix and repair in between tenants. You may experience higher renovation and repair costs with these types of residential properties than any other. Plus, most guests expect the latest appliances and furnishings, so you will have to update every few years.
- Sensitive to seasonal changes
Vacation rental properties are sensitive to seasonal fluctuations and economic downturns, which could leave you financially exposed if you suffer from a vacant property. This is especially true if your vacation home is located in an area that suffers from natural disasters like a beach location.
Related: How to Make Money with Airbnb During the Off-Season
- Strict short-term rental regulations
Many cities all over the country are imposing strict Airbnb regulations. Cities like New York, for example, have regulations that limit the period of time your property is rented out. This can be a huge downturn for investors thinking about investing in vacation rentals. Check your city’s Airbnb regulations on a regular basis since they are constantly changing.
There you have it, 5 different types of residential properties you can choose from. Keep in mind to weigh out all the pros and cons to see which property suits your needs best. Be sure to check out Mashvisor for all the latest tips and strategies for investing in residential properties.
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