Rental properties are a great way to build wealth. You can buy one and watch it grow in value over time, or you can rent it out to tenants and make money off of the rent. Whatever your motivation for investing in rental properties, there are many different types of rental properties to choose from. In this article, we’ll explain the pros and cons of the different types of rental properties so that you can decide which is best for your specific situation.
7 Types of Rental Properties
You might be thinking, “Isn’t there just one type of rental property?” For the most part, many new investors think that the only type of rental property investment available to them are single-family rental properties. You know, the three-bed, two-bath house you rent out to a nice couple and make a few hundred bucks a month?
Well, what if we told you there were more, many more, different types of rental properties you could build wealth with? Here are some of the most common ones:
- Single-Family: This is your standard house, and it’s what most people refer to when they say “rental property.”
- Multifamily: This is anything that has more than one unit. So a duplex, a triplex (three units), a quadplex (4 units), or more. Multifamily properties can be small multifamily (residential) or large multifamily (commercial). We’ll go more into these details later on.
- Condos: A condo is a home that is owned by an individual, but it’s part of a larger building with other units. Condos are usually managed by the HOA and can have amenities like pools, gyms, etc. Many investors stay away from condos due to their high HOA fees, but this isn’t always the best move to make.
- Townhomes: A townhome is a home that is part of a larger building, but it has its own front door. Townhomes are often cheaper than single-family homes and can provide an excellent investment opportunity for new investors or house hackers. But beware, like condos, many have high HOA fees.
- Apartment Complexes: These fit inside the multifamily umbrella, but are usually far bigger than a duplex. Apartment complexes can be anywhere from five to five hundred units. They have widely varying purchase prices, but are very good for scaling your portfolio.
- Commercial Properties: This is where you get into self-storage facilities, industrial warehouses, special-use buildings, and more. While it may sound complicated for a new investor, commercial rental properties can offer phenomenal returns with huge equity upside.
- Digital Real Estate: Virtual real estate investments can also build wealth, either through passive income or appreciation. Because these are high-risk, often speculative investments, we won’t go in-depth on them in this list. But, if you do want to learn more about them, check out your full article on digital real estate.
Most Popular Types of Rental Properties
Most people are comfortable investing in a single-family home, but there are other options to consider. If you’re interested in townhomes, multi-family properties, or apartment buildings, it can be beneficial to know what makes each unique.
Single-Family
For most investors, single-family homes are the gateway drug to the rest of real estate. They’re easy to start with, can be bought with very low money down, and provide excellent learning opportunities for the new investor.
Pros: Can be bought using low down payment, conventional loans. Very easy learning curve and is easy to find.
Cons: Difficult to scale, as you’ll need to buy a new property every time you want to add a unit to your portfolio.
Where to Look for Them: Everywhere! Zillow, Realtor, Redfin, or even off-market (for sale by owner) craigslist ads!
Best For New investors who want to learn the rental property game before investing in a different asset class or a bigger property.
Small Multifamily
Small multifamily properties (one to four units) are another great way to get started in real estate. These are some of the best properties to house hack, where you rent out the other units, live in one, and live for free (or make a profit!).
Pros: Can still be bought with low down payment, conventional loans. Great option for house hacking and can instantly give you life-changing cash flow upon purchase (if it’s a big enough property).
Cons: Harder to find, especially in coastal markets. You’ll have more tenants, but at only two to four units, it’s too small to hire an on-site property manager to fix issues when they arise.
Where to Look for Them: Zillow, Realtor, Redfin, as well as sites like Crexi and LoopNet.
Best For: House hackers, landlords with very little (or no) experience, or those trying to scale that only have one rental property.
Condos
Condos are often frowned upon by investors, but in certain situations, they are worth their weight in gold. If you can bake in the HOA fees into your rental property analysis, you could find some serious cash flow with condos. Check out our article Are condos a good investment?, to learn everything you need to know about investing in condos.
Pros: Shared utilities, if one thing breaks, the condo association will have to fix it. Often more amenities than single-family homes (pools, gyms, parks, etc.)
Cons: High HOA fees, shared walls, and lots of neighbors. Most condos WILL NOT allow short-term rentals.
Where to Look for Them: Zillow, Realtor, Redfin.
Best For: Mid-term rental and long-term rental investors. The added amenities will allow you to charge higher rent and shared utilities mean added insurance for your tenant.
Apartment Complexes
Apartment complexes (5+ units) are arguably one of the best ways to fast-track your wealth-building. When bought at the right price, and managed correctly, these properties can set you financially free!
Pros: Huge ability to scale, one property can add ten, twenty, or more than fifty units to your portfolio. The economies of scale also allow you to hire on-site property management, which takes headaches off of your plate.
Cons: Bigger costs, larger down payments, and will often require commercial financing (higher interest rates, 20%+ down).
Where to Look for Them: Crexi, Loopnet, and off-market!
Best For: These types of purchases should be done by experienced investors who have a solid game plan.
Factors That Make a Profitable Rental Property Area
You’ve picked your preferred rental property type. So what’s next? Here are the factors you should look at when searching for new deals either manually or with a rental property analysis tool like DealCheck.
Positive Growth Trends
If a property is located in a neighborhood that’s experiencing positive growth trends, that’s a good sign. It means that more people are moving into the area, which could mean higher demand for rentals as well as higher prices for homes (aka appreciation and equity upside for you!).
Low Property Taxes
Property taxes can be a huge burden for landlords. If you are looking at houses in a particular area, make sure to check out the property tax rates for each home. You may find that some properties have lower taxes because they’re located outside city limits or fall under certain tax exemptions.
Strong Price-to-Rent Ratio
Price-to-rent ratio is another important metric to consider when analyzing a market. If you’re looking to invest in real estate, you want to make sure that your property can at least cover its expenses and then some so that you have a chance at earning a profit. When comparing the price of homes in an area versus their rental prices, it’s helpful to look at the price-to-rent ratio (PRR), which is simply the price of an average home divided by its annual rent.
Landlord Friendly Laws
Landlord-friendly laws are a crucial metric for investors to consider. If an area has strict regulations on landlords, it can be very difficult to manage a rental property, process evictions, and collect rent. This can lead to more expenses down the line, which may eat into your profits or even make them non-existent!
Low Crime
Crime rates are another important metric to look at when determining whether a property is a good investment. If an area has a high crime rate, you may feel less secure in the neighborhood, which can lead to fewer renters and higher expenses.
Finding markets that fit these criteria can be a difficult task. Lucky for you, we did the heavy lifting and uncovered the best states to buy rental property and which markets you should avoid.
How to Pick the Best Type of Rental Property for You
Before you go out and buy the first rental property you see, remember to stay in your investing lane. Know how much time, money, and energy you can give towards the property and understand your goals. Someone who doesn’t have a ton of time, but wants to build a small rental property portfolio is fine sticking with single-family rentals. But, if you’re looking to build an empire of investment properties, take time to understand what it’ll take to get there.
Regardless of what you choose, buying profitable real estate is almost always a great move to make. And if you ever want to pivot positions in the future, you can (trust me, I’ve done it!).
FAQs About the Different Types of Rental Properties
You’re ready to get a rental. Woohoo! But before you go off on your search, here are a few FAQs that can help you out.
There are a lot of different types of rental properties out there. But, if you’re looking for the most common type, single-family homes are it. They make up about 65% of the rental market in America, which means that they’re probably what you’ll be looking at when searching for a property.
The most profitable type of rental property depends on your goals. If you’re looking for moderate cash flow and low risk, look into a single-family home or small multifamily property, you may want to consider buying a rental property out of state. Many people who get into real estate investing start with one of these types of properties because they’re easier to manage and can help build their portfolios while they learn more about the industry.
Yes, you can get rich from rental properties. But it’s important to remember that real estate is a long-term investment and isn’t something that will make you rich overnight. Many people get into the industry intending to get rich quickly, but they usually end up disappointed when they don’t see the results they were expecting.
