Five Types of Residential Rental Properties
By Steve Gillman - 2009
Naturally there are more than five kinds of residential rental
properties depending on how you classify these investments. Still,
in terms of the most important differences for investors, there
are five types that come to mind. Each has its own advantages
and problems. Let's start with the most common for new real estate
investors: the single family home.
Single family rental properties are appealing because they
provide the easiest way to get into real estate investing. There
are a multitude of financing options and the possibility of a
low down payment as well. They build equity for you quickly during
times of rising prices, even if rents are not going up, because
they can be sold to regular residential buyers.
But they have their problems too, starting with the difficulty
of finding houses that can produce cash flow after all expenditures.
Plus, as a single unit, when you lose your tenant, you lose 100%
of your income until it is again rented out. With multiple home
investments, collecting rent and maintaining the houses can be
a lot of work compared to an apartment building with a similar
number of units.
What About Apartment Buildings?
With apartment buildings the price is based on income, because
unlike houses, only investors are buying these properties. Decent
cash flow is normal (otherwise why buy?), unlike with single
family homes. Now, since the prices are based primarily on net
income, if you find a building with low rents, you can quickly
increase the value just by raising them to market rates.
Perhaps the biggest problem with apartment buildings is greater
difficulty in financing them. You also typically need a larger
down payment. Landlords "fudging" the books in preparation
for a sale is also a risk that you don't normally have with houses.
Multiple-Unit Residential Rental Properties
Duplexes, triplexes and four-plexes are different from either
single family homes or apartment buildings. Stay under five units,
and you can often finance these like a single family home. That's
an advantage, but it is also the reason it's tough to get cash
flow from these. Too many people are buying them to live in one
unit and get the equity gains from the whole property, and are
not thinking of cash flow, so they push the prices up. Living
where your rentals are is convenient, though, so if you can come
close to breaking even, the eventual gain from equity build-up
may make this a workable strategy.
Low Income Housing or Slumlording
Small houses in need of repairs and mobile homes get their
own category because this low income market has unique advantages
and issues. Late rent payments and other issues with tenants
are more common in general, and you'll also have more repairs.
Investing in low income housing means more hassles and more time
invested too, so why consider it?
Positive cash flow. Let's suppose that in your area a normal
three-bedroom house costs $130,000 and rents for $750 per month.
A three-bedroom mobile home on a lot nearby may sell for $45,000,
and get rent of $600 per month. Though repairs may be more frequent,
they are cheaper, as is insurance and property taxes and advertising
(because they rent quickly). With low income housing there is
greater potential for cash flow in most areas.
What about the added hassles? There are ways to deal with
that. For example, I know a man who has forty rental properties
with low income tenants (mobile homes with real estate for the
most part). He gives free rent and a small salary to a handyman/manager
who does everything from fix toilets to collecting rent for him.
Other Types of Residential Rental Properties
This category includes less common residential rentals which
often don't have the advantages that the ones above have. People
invest in them for one reason: cash flow. A good example is a
large house that would lose money every month as a normal rental,
but might do well as a boarding house, with rooms rented out
individually by the week or month. In a college town that can
be very profitable.
Rentals of RVs, or recreational vehicles, is another one in
this category. This is more common in the southwest than in other
areas (Arizona has a lot of these). Converting old motels into
residential rental properties is another way investors create
good cash flow investments. There are others I have missed as
well. For example, houseboats are probably rented by the month
somewhere in the country.