What Every Investor Needs to Know About the Types of Residential Property
Investing in residential property is a steady, consistent, and profitable way to leverage your capital. Not only does residential property grow in value (in almost all cases), it also brings a consistent income while you own it.
From single-family homes to large apartment buildings, residential property can be a wise investment, but you need to understand all the different types before making a purchase.
Note: San Diego Purchase Loans does not provide investment advice; this article is for general information only. Always speak with a qualified professional before making any investments.
A Closer Look at the Types of Residential-Property Investments
Probably the most in-demand type of property, single-family homes give your tenants a property that they can enjoy all to themselves, with no neighbors on the lot. Even in the slowest of housing markets, single-family homes tend to stay in high demand, so they remain a consistent earner through economic ups and downs. They are also easier to finance in general, especially if you can bring a strong downpayment, and they often come with a lower total price tag.
The downside is that compared to multiunit properties, the income from a single-family home requires one tenant (or a family) for 100% of the monthly rent. If that tenant moves out, the property earns nothing until a new tenant is found.
A duplex is simply a house that consists of two units. Most of them are side-by-side units with a wall between the two units, usually reinforced with noise-reduction material. These two units are often a direct mirror of each other. They can also be stacked, with one unit above the other.
The advantage for these properties is that you get two rent checks when the properties are filled, so if one tenant or family moves out, you’re still earning 50% of the total potential income. This reduces the risk of having no income whatsoever, which is a concern if you need to make mortgage payments.
Many residential purchase-loans offer financing on duplexes, and you can get a typical mortgage or an owner-occupant mortgage, which may have better terms.
Three or Four Units
Three-unit and four-unit properties, which are part of the “multiunit” category (a duplex is technically a multiunit), are excellent investment options, as you have the chance to bring in up to four rent checks per month, increasing the potential earnings while significantly reducing the risk of complete vacancy.
The one drawback is that these properties, because the structures are more complex, often have higher price tags, making the initial purchase or the monthly payments larger.
Why draw the line at four? Because with most loans, once a property has five or more units, it is treated like commercial property, even through it’s not used for business purposes.
This is the type of property that skirts the line between residential and commercial. Because it is classified by many lenders and appraisers as commercial (largely because of the building structure and the price tag, both of which are more similar to commercial property), these properties can be difficult to finance. They also have large price tags, but you’ll get dozens of units that you can rent out.
These buildings bring strong cashflow to your investment strategy, and they can be a reliable because of the numerous tenants. They appreciate in value well, especially in growing areas, giving added benefit to owning these properties.
Investing in condos can be an affordable option that brings reliable income. There are no direct maintenance costs, although you or the tenant will be paying through HOA fees, and there are often amenities like swimming pools and workout centers that help attract renters. Condos tend to be in areas with a dense population, so there is often a large pool of potential tenants.
However, there may be rental policies, and many associations have strict rules against renting the property. It can also be difficult to sell a condo, as they have an appeal that speaks only to the right buyer.
More affordable than single-family homes, but more expensive than condos (in general), townhouses or “townhomes” can be a good earner, especially if you find the right property in a high-demand area.
The appeal of townhomes is that tenants get a living space similar in size and layout to a single-family home, but they are often located in high-demand metro areas. Tenants can enjoy the space of a full house, the convenience of a condo, and a location that is not too far from the center of a major city. For these reasons, there are many people who love renting townhouses, so you should be able to find well-qualified tenants, many of whom have substantial incomes.
Although they may have a bad reputation among some circles, owning a trailer park is certainly a viable investment that can bring strong, consistent income. They are fairly low maintenance because you simply own the land and lease out the lot to residents; you don’t own, nor are you responsible for, the domicile.
Because you own the land but not the building, you don’t have to worry about furnace repair, re-roofing, foundational issues, or gutter replacement; as long as the lot is viable with power and plumbing, the rest is the tenant’s responsibility.
Whether you own the park or not, investing in mobile homes, also known as trailers, is an affordable way to increase your potential earnings. They are easy to purchase on a limited budget, although financing can be tricky because they tend to depreciate in value.
The depreciation also impacts your ability to profit, or even recoup your money, at the time of sale. However, if you want to experiment with being a landlord without making a significant initial investment, modular homes may be a good start.
While confused with mobile homes, manufactured housing is simply built in a more efficient, industrial-like fashion. They meet all the standards of typical housing, but certain sections, such as walls, are manufactured in a facility and shipped to the site.
Because they are built faster, they tend to be more affordable, but the falsely negative connotation of “manufactured” can keep some tenants away and could drive down the rental payments.
Quality Loans to Enhance Your Portfolio
When you are ready to add investment property to your portfolio, contact the staff at San Diego Purchase Loans. With a common-sense approach to underwriting, we’ll help you secure the right financing to enhance your investment earnings.
Interested in commercial property? Read our article on the various types of commercial property to learn more.