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Investment Property Types: Which You Should Choose
Deciding what type of property to invest in depends on various factors, including how much capital you're willing to put down.
Investment properties come in all shapes and sizes. As a new investor, you may think that, based on your budget, you're limited to purchasing single-family homes. However, there are some surprisingly affordable multifamily and commercial properties available to new investors on the market today.
Deciding to invest in one of these properties means taking the time to research the pros and cons. We've devised a list of both regarding all three types of properties to give you a head start on the process.
The American Apartment Owners Association states single-family homes offer investors a cheaper alternative to multifamily and commercial properties by a typically substantial margin. Additionally, the AAOA says many renters prefer to live in a one-family residence so they don't have to share a living space with others, which means attracting applicants could be easier for this property than another type.
In terms of financing, you'll likely find it simpler to secure a loan to purchase a single-family investment property than multifamily and commercial properties, the AAOA states. Also, chances are, you're down payment for a one-family home should be markedly lower than for any other kind of residence.
Since a single-family home is smaller than a multifamily property and commercial building, maintenance should be much easier to take care of, the source states. With fewer residents living at the property, you may find you can spend more time meeting needs of the tenants than multiple renters at a large residence.
According to Home Real Estate and Investor, the chances of making substantial revenues from a single-family property will likely be far less than a multi-renter property. Additionally, after various expenses, you may not see considerable profits from this investment property as you would from a multifamily residence or commercial building.
The most steady return on investment, or ROI, generally comes from the multifamily sector, Investopedia says. If you lose tenants at a single-family property, you'll have to work quickly to get new renters to avoid losing money on the investment. However, with a multifamily property, losing renters from one unit still leaves you with tenants at all other units, meaning there's still a stable stream of cash flow going to you.
Also, investment property expert Scott Ficek, who works for RE/MAX Advantage Plus, states on his blog that even though you'd have to deal with multiple tenants at your property, there's still only one front door, one exterior and one roof to deal with in terms of maintenance. This can keep your expenses used to maintain the residence low.
According to the AAOA, more tenants may mean more revenues for you, but if even one resident turns into a problem renter, that can create issues for you and the others living at the residence. Ensuring tenants are adequately screened by property management to make sure they are fit to lease your units is essential.
Additionally, Ficek adds that should a number of things go wrong with appliances and utilities at a multifamily property, you may find yourself spending more money to maintain the residence than initially planned. If you're not well prepared to handle the magnitude of this property, you could end up draining your funds.
Economies of scale increase again with this type of property, Investopedia says. Rents are typically charged by commercial property owners by the square foot. Also, they tend to appeal to high-end renters, which could mean substantial revenues for you if you invest in the right property in the right market.
While the risk in these properties is considerable, Investopedia states the return could be well worth it.
Ficek states that buildings with five or more units will require commercial financing, which often carries higher interest rates than loans for single-family and multifamily properties.
In addition, Investopedia adds that experienced investors generally find it easier to buy commercial real estate, while first-time investors may need some help from an advisor to get a full grasp regarding how to effectively operate the property.