Which Types of Rental Income Property Should you Buy?
Income Property investment is one of the best investment vehicles going and offers the amazing combination of great cash flow and big capital appreciation. Just what any investor hopes for.
You could begin with many different strategies revolving around your income goals, rent yields, tenant profiles, property management resources you have, types of properties available, cities, down payment and financing, or ability to hedge risk.
So many variables to assess in the property investment equation. From where to what to why, this post might get you better oriented to buying right.
House or Apartment?
One of the top decisions many new property investors consider is whether to buy a single family home or a multifamily apartment. The best choice? It depends. In fact starting with this decision might be missing the point for good investment.
The value and revenue potential of either property is only one consideration. Taxes, property management fees, HOA fees, and cost risk can change your opinion quickly.
A luxury house in Hawaii for instance, may be a better choice than 4 fixer upper apartments in San Francisco Bay Area where rent controls might be enacted. An old house in Sacramento, that’s harder to rent however, and manage, might have some big renovation and upkeep issues that could ruin your financial life.
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 Condos Are in Demand
You have plenty to choose from such as apartments, condos, townhouses, semi-detached houses, detached houses, student housing apartments, and more.
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.
What Would Property Management Companies 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 you buy has big implications for profitability. Let’s take a look at the benefits and pitfalls of each:
Multifamily apartments/condos – owning several apartments in the same building may help you buy more properties and lower management costs. In some cases, however, HOA fees can be a negative. Comparatively, your price to rent ratio will be lower.
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. They’re usually the most affordable type of apartment or condo. They’re often located near transit, near employment, and appeal to Millennials whose salaries are quickly rising.
The Millennials – The Largest Pool of Prospective Renters
Find out more about Millennial aged renters and how to attract them. Which cities represent the best opportunities for property investment? Demographics may be driving local US economies as well as demand for housing, especially the Millennial group.
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.
See also: Property Management | Accounting for Property Managers | Property Management Company Staffing | California Housing Market 2019 | UK Housing Market | Australia Housing Prices | Toronto Housing Market | Toronto Condo Prices | Cloud Property Software | Multifamily Housing | Los Angeles Rent Prices | Online Rent Payment | How to Increase Rental Returns | Property Management Trends | Property Management Metrics | HOA Management Software | San Francisco Apartment Prices | New York Apartment Prices | Housing Market | Apartment Rental Prices | Best Cities for Rental Property | Grow Rental Yields | California Property Management Services