Best Types of Rental Income Property to Buy
Rental Income Properties are still some of the best investment vehicles going today, even during the Pandemic period.
Looking ahead to the summer of 2021, tenants’ job and income situation should stabilize. That will improve most landlords’ financial statements, making rental properties a more profitable venture.
The big questions for property investors, both related to Covid 19, is regarding which cities are best and which types of rental properties will perform well going forward.
How to Evaluate Opportunity
The type of property can be evaluated many different ways such as apartments vs houses, and numbers of bedrooms, square footage, rentable units, and yard space. These are vital evaluations added to additional investment criteria: best cities, home prices, proximity to retail and transit, quality neighborhoods, tax districts, and which districts might have troublesome rent laws.
During this pandemic, so far, house renters have been good about paying their rent. In some lower-income neighborhoods, and some cities and states, there are issues, however apartments have seen cash flow problems. It seems ludicrous to consider apartments and multifamily, yet with Covid 19 controlled, those vacancies will once again be filled.
Whether a house, townhouse, semi-detached unit, rowhouse, high rise or low rise condo, you want one with the features in demand.
Real estate is going through a tough time right now, which could mean a large number of properties such as small multifamily buildings, rental houses, apartment, condos, and small apartment buildings will be on the market this spring.
Rental House or Apartment?
Apartments and houses are the obvious start for ambitious rental property investors and landlords. However, a lot of new creative types of rental units have been created. If communicable disease is an ever present factor in multifamily housing, rental properties will be undergoing big design changes enforced by law.
This might be an opportunity to capture renters who will pay justifiably higher rent prices. The regulation changes might your chance to fund and writeoff valuable upgrades.
After considering your finances, risk tolerance, property management skills, and the current rental housing market, you may decide differently than you originally planned.
2 Bedroom Houses and Large Low Rise Condos Are in Demand
Amidst those choices, you have variations in the number of bedrooms, bathrooms, and parking spaces. This chart courtesy of simplybusiness in the UK, shows rental yields are best for 2 bedroom apartments or houses. That’s where demand is highest.
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Yet, do these stats reveal the actual reasons renters rented the 2 bedroom unit? The real issue can be the 1 parking space, 1 bathroom, and no basement for storage that other units suffer from. You’ll need to consider whether the unit you’re contemplating can be upgraded to offer these benefits.
With the multifamily construction market booming right now in the US, you’ll have good opportunity to buy high rise condos. In Australia, the market is turning however and you may be able to pick up a condo at a very good price. In Canada, condo prices continue to rise, and in Toronto and Vancouver, they are predominantly high rise units.
If you need to live in the rental house/building you buy, then you’ll need to consider how the building is divided and how many units it can divided into. There are big old houses that are divided into as many 6 units. Whereas a modern duplex might have basement apartments built. Crunch the numbers for each and it may surprise you.
Which Do Institutional Investors Buy?
Property investment professionals are often more interested in the condo and multifamily developments because they can buy more units, generate more rent revenue, and they’re usually easier to manage.
For them, the cash flow is the big thing which is why they prefer apartments and condos in working class neighborhoods.
Individual investors may prefer to buy condos and houses in affordable neighborhoods where they can do property management themselves and save on costs.
Benefits and Pitfalls
The type of rental you buy has big implications for profitability. Let’s take a look at the benefits and pitfalls of each:
- Multifamily Apartments
- Single Family Houses
- Student Housing
- Hi Rise Vs Low Rise
Because demand for apartments is so strong, you can still get a good rent price on an apartment in a B grade building.
If you’re into property investing, choosing multifamily units gives you cash flow, better cost efficiencies, and you can buy 2 apartments at the price of one house. Lower priced units are of interest to a larger pool of renters so there’s less risk in vacancies.
Multifamily involves many more tenants and thus more issues and problems you may have to face.
Single Family Houses – detached houses have appreciated strongly across the country, and in some cities, price growth isn’t ending. There is insatiable demand. Single family homes are normally bought for price appreciation because their price to rent ratio is high.
You’ll be managing one tenant usually. Houses are a more liquid investment than multifamily and easier to sell. However it’s riskier to have one property with a smaller pool of potential renters (because of the higher rent price).
It’s difficult to create ROI from an expensive home in California. However, in up and coming cities such as Philadelphia, Omaha, or Charlotte, the price may be right.
Student Housing – this market has enjoyed phenomenal growth. Yet with the US government stand on immigration and free trade, it may be in for a big letdown as foreign students decide not to study here. Like other forms of housing, student housing is in big demand and will likely continue because of poor student housing stock (colleges and universities aren’t supplying accommodation anymore) supply, and these units can allow more beds per unit thus maximizing your rental income.
Hi Rise vs Low Rise Apartments- In a low supply market, units in buildings over 4 stories are worth looking at. “Shoeboxes in the sky” as some call them are becoming more plentiful due to land shortages.
The price appreciation in cities such as Toronto have been rapid. Hi rise is usually the most affordable type of apartment or condo. They’re often located near CBDs, transit, employment, and appeal to Millennials whose salaries are quickly rising.
Low rise in Big Demand
Low rise, 4 stories or less, whether townhouses or condos at the beach or in the city, are in high demand and may enjoy strong rent price growth too. Many buyers have kids or do not like heights, and these are easier to maintain and renovate than condos 25 to 60 floors up.
The more units you have, the lower the per unit cost property management companies will charge and the better the financing you might get from banks.
I hope we’ve gotten the point across that the comparison of house vs apartment for property investors is likely missing the point of good investment results.
In the San Jose, Toronto, Los Angeles, Miami, or San Francisco housing markets, you’re more likely going to be investing in high rise condos. Using a good cloud based property management software solution, you may be able to manage them yourself.
Keep your monthly costs down and manage smartly until you’ve got sufficient properties to hire a property management company.
Try out ManageCasa for free today and see its full communications capabilities. You’ll be impressed and on your way to higher ROI.
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