Investing in Rental Properties
So, you’ve decided that you want to invest in rental properties, but aren’t exactly sure what kind of property is right for you. Don’t worry, we’re here to help!
To make it as simple as possible, you have essentially 3 different asset classes to choose from:
- Single-Family Properties
- Multi-Family Properties
- Condominiums
The purpose of this article is to explain each type of the 3 main asset classes when investing in rental properties, cover the pros and cons of each, and hopefully help you decide what’s right for your investment needs.
Single-Family Property
Definition: A single-family home is a free standing residential building designed to be used as a single-dwelling unit.
Pros of Single-Family Properties:
- Tend to attract renters who stay longer, reducing turnover
- You’re often able to make the resident responsible for utility expenses
- The value of the property is not necessarily dependent on the rental income that it generates
- Fairly easy to sell
- Widely available
- Will potential rent at a higher rate than a multi-family counterpart
- Resident usually responsible for all landscaping and snow removal at the property
Cons of Single-Family Properties:
- When you do have turnover, there’s only one unit so you have zero income from that property during turnover
- They’re typically more expensive on a per-unit basis because you’re only purchasing one unit (for the same price as a duplex, for example)
Multi-Family Property
Definition: A multi-family property is a property with 2 or more residential units.
Pros of Multi-Family Properties:
- You can typically realize efficiencies of scale – you have one roof over multiple units
- Each unit often has the same floor plan as well
- Turnover time tends to be lower because they’re usually smaller than single-family
- Typically easy to rent – there will always be someone looking for a one bedroom apartment
- Cost per unit to purchase tends to be lower than single-family
- If one of the units is vacant, you still have the ability to generate rental income from the other occupied unit(s)
Cons of Multi-Family Properties:
- Often more difficult to find
- Typically smaller units, which lead to higher turnover rates (usually only 1-2 bedrooms)
- Attracts singles or someone with a roommate, shorter overall average residency
- Often have shared utility expenses
- For example, one water meter for a two-unit duplex
- Value of the property is oftentimes directly correlated to the income that the property generates
- Value of property directly relates to rental prices you have (value depending on the rent)
- Increased risk of disputes between tenants
- Usually shared common spaces
- Shared lawn or shared sidewalk means owner is responsible for snow removal and lawn care
Condominiums (Condos)
Definition: Condominiums (or condos, for short) are an ownership structure whereby a building is divided into several units that are each separately owned (via Wikipedia.com).
Pros of Condominiums:
- HOA fees – oftentimes, they’re inclusive of exterior maintenance (roof leak, condo association will pay for it) making monthly expenses more predictable
- Don’t have to worry about landscaping
- Neighbors are more likely to have higher level of respect for the property giving a greater sense of community
- Oftentimes in desirable locations
- Could lead to making units more attractive to potential renters
- Some offer amenities like a gym, pool, tennis court, etc.
- Another factor that can make units more attractive to potential renters
Cons of Condominiums:
- HOA fees – could cut into monthly cash flow
- Sometimes the HOA has limitations or restrictions on how many units can be rented within the association or imposes fees for rental registration
- Can be difficult to insure
- Shared common areas or shared walls with other condo owners
- An elected HOA board makes the decisions for the community, politics are often involved
Overall…
When choosing an asset class to invest in, there are pros and cons to each.
As an investor, you have to evaluate each of those and determine what’s best for your particular investment strategy.
However, if you’d like to discuss any of this further, or need help finding out which type of asset class is the best option for you and your investment strategy, please contact us for a free consultation!
