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Five Types of Residential Rental Properties

By - 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.


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