Did you know there are 5 types of rental properties that you can own?
Each has their own set of pros and cons, but all of them can generate cash flow that can be used for retirement, investment, or adding additional income for other expenses.
Here at Compass, we are experts when it comes to managing any rental property. We can help you make the right decision for your portfolio then help you throughout the process from acquisition to disposition.
With every major decision in life, you want to make sure you do your homework and create a plan that will protect you for the next 5 to 10 years. Our staff of experienced agents and brokers can help you craft a plan and provide rental comps on everyone home you intend to purchase before you commit put money down.
The 5 types of rental properties are single-family homes, condos, townhouses, multi-family houses, and vacation homes. While we don’t currently manage vacation homes, we feel that it is important for you to know about this type of investment.
Single-family homes
The majority of our portfolio is single-family homes and we love them! The average resident will occupy a single-family home for 2 years unlike the 1 year average of multi-family homes. These homes also increase in value over time making them a great investment when you are ready to sell. You can also get a break on property taxes as single-family homes have lower property taxes than all other types.
Now for the cons – there’s not many and some of these cons depend on where the house is located.
Vacancies can take a toll of your return on investment because you don’t have any rental income and you have to spend money to market your house. However, we aim to keep our vacancies as short as possible. One way we can shorten vacancy is by placing the right resident that will maintain the property and we will put the home on the market soon after the residents give the notice to vacate and before they actually vacate. If we can’t place a new resident in your property, then we will fully stand by our 21-day resident placement guarantee.
Another area of concern is a homeowner’s association in the property’s neighborhood. There can be restrictions on how you can rent the home or there may be extra fees involved. It’s best to check with your association to learn the rules before you determine if renting the home is the best thing to do.
Condos
The best part of owning a condo as a rental property is the purchase price. Condos can be anywhere from 25-30% cheaper than the other types of properties and currently, most areas for condos are in a buyer’s market so you have plenty of options to pick from. You also don’t have to worry about any exterior parts of the home as the condominium association will take care it all.
Condos are like apartments in some ways because residents will have access to swimming pools, gyms, and more. All the amenities will attract potential renters looking for a low maintenance place to live.
While condos may be cheaper to purchase upfront if you ever plan on selling the property you may find yourself in a tight situation.
One of the biggest cons to owning a condo is the ability to sell the property after you rent it. Remember when we said right now most condos are in a buyer’s market? Well, it’s been that way for a while and it doesn’t look like that will be changing. Association dues can be higher than the typical HOA and government regulations can make it hard to sell these types of homes due to many areas having high foreclosure rates.
Townhouses
Just like condos, townhouses are cheaper to purchase and offer plenty of living space for your residents. Your residents won’t have a large yard to maintain, but they will have just as much space as your typical single-family home on the inside. Many of them even have two-car garages!
A common con of the last two types of homes has been the association dues. The same goes for townhouses. Remember to always check the do’s and don’ts of your HOA before purchasing a rental property in that area.
Multi-family houses
Many people think of multi-family housing as apartments, which is technically correct, however, you can also include duplexes. This type of property is one of the highest earners of positive cash flow due to the fact that multiple residents are residing on the same property.
You also don’t have to worry about tons of paperwork when purchasing because you only need to apply for one loan. Same goes for insurance.
You almost never have to worry about complete vacancy and in some areas, there can be less competition for renters to be aware of.
But the cost of just about every aspect goes up when purchasing a multi-family property. The purchase price is higher, insurance is higher, and maintenance costs can be higher. You’ll also need tons of time on your hands to manage or you need to hire an experienced property manager to handle the day-to-day tasks.
You also need to be aware that there are different laws and regulations that govern multi-family properties.
Vacation homes
Vacation homes are great are giving you a higher return in a short amount of time. You can also benefit from online listing services like Airbnb to help you market the property.
One thing you need to be aware of with vacation homes is that seasonal changes can impact your ability to rent the home. For example, most beach homes will not have consistent renters during the cooler months.
You also need to check your local regulations for information about how you can run a short-term rental. New York has a regulation stating how long a property can be rented before it’s considered a long-term rental.
These 5 types of rental properties all have pros and cons, but your portfolio or goals may be attracted to one type over another. It’s always best to contact us when looking to purchase a new rental so we can give you our best guess of how each property will perform. No one wants to purchase a property that will sit vacant for months or cost you lots of money in the end.
Resource: Mashvisor