In this article, I will share the seven best types of rental properties to invest in as a beginner, with their pros and cons, by analyzing the market trend, location, capital appreciation, and cash flow opportunity.
But before you choose any of the following niches, you must have a complete understanding of the below list if you want to succeed quicker, as these are the base of rental property investing, and just selecting a niche will not be good enough.
Seven Best Types of Rental Properties to Invest
So here is the list you must check.
- Demand and supply of the local market.
- Market trends and the flow of it with the direction.
- Location of property with neighborhood details.
- Average rental cash flow in the area with possible new opportunities.
- Capital appreciation data in the last ten years.
- Landlord-tenant laws, and can you cope with that?
- Available property management service nearby.
Each and every analysis will take time and money to perform. That is why try to invest in an area you are familiar with. That way, your analysis cost will be less, and you will have better opportunities to identify good investments because of your known network. So here are the best types of rental properties you can invest in.
Table of Contents
1. Single-Family Rentals
Single-family homes are the most common type of rental units on the planet. As the name suggests, these are small homes built for a small family with no more than two kids. It costs less, with an average price of $300,000 in an average neighborhood. Banks are ready to finance the purchase, and most agents are familiar with this property type.
The biggest benefit of single-family homes is that you are in control and never have to worry about noise from the neighbor next door. But the initial cost may scare you as these homes are not easy to buy. If you are getting started in the rental property world, single-family units are the way to go, and then over time, you can move to multifamily housing for more cash-flow options.
Read also: When to buy and sell a rental property
2. Multi-Family Rentals
Multi-family rentals are expensive, with an average price of $1 million. But it makes the most money. Buildings with two or four units, known as small multi-family homes, can be purchased for under a million dollars, but the bigger ones will cost more.
The biggest advantage is that the cash flow is consistent, and the appreciation factor is in your hand. You can increase it by adding some value to the property, like a faster internet connection, a renovation, or any amenity that will help the property look more livable. The ROI here is the highest compared to other types of rental properties.
Again the upfront cost is not suitable for beginners, and the tenant’s problem will be there. Good management is required, and good relationships must be maintained with all those tenants. But despite all these problems, investors choose multi-family investment over anything.
3. Luxury Homes
Next is luxury rental homes. The average cost is over $500,000, and not too many investors are after it. But when the pandemic blasted, luxury homes were the first niche that recovered earlier than other rental types.
When you become a PRO after investing in single-family homes or in a small multifamily you can try luxury homes. They give amazing cash flow but can remain vacant because of their price. So here the location is everything.
4. Condo and Townhome Rentals
Condo is a form of a single-family home, and a townhouse is like a small multi-family unit. Each unit is owned by separate individuals but with shared amenities like a pool, truck, or gym. All these facilities are provided and maintained by a homeowner association (HOA).
The biggest benefit is that the HOA will handle everything on the property without disturbing you, like repairs, lawn care, snow removal, and a little maintenance work if needed. But all these are not free. They will cost you some money which may reduce your cash flow.
They also have strict rules and restrictions on how you can use the property. These rules may change over time, and the association has the power not to allow you to rent out your unit for a long time. It’s like you own the rental unit but have no control over it.
The price for a condo is low. You can get one of these for under $200,000 with a good rental opportunity and no maintenance problems. But you will lose control.
5. Commercial Property Rentals
Commercial real estate means offices, shops, grocery stores, restaurants, and other places where business happens. These are expensive once and take more effort to generate positive cash flow.
In commercial property, the Owner does not work that much as the tenant will pay all the bills and perform maintenance. The lease terms are a minimum of five years and go up to ten years. Plus, if your property is on rent and generating cash flow, then the value of that property may increase exceptionally, as it has become more valuable than ever.
But you can not rent it out to anyone. You need to find somebody who can do the business and pay you on time. Commercial units are the hardest types of rental properties than other investments made only for professional investors.
6. Vacation Homes
Vacation is one of the best types of rental property adventurous for people. In vacation homes, the winter months will remain vacant, and in the summer months, the whole neighborhood will fill with tenants, and the demand will be high.
You can change double the rent in the summer and by doing that you can make up those vacant months. It is how vacation homes work. The average price is similar to medium single-family homes but not built for a beginner.
7. Apartment Rentals
Our last rental property is apartment buildings. It’s a multifamily property buy big multifamily with 100s of units. It’s expensive, and most billionaire investors own multifamily properties, as managing those tenants and solving any property-related problems in one place is easier.
It’s a true way to build wealth. It’s a business that needs an LLC, a property management company, bank financing, and partners to manage all those. It’s a complicated investment and not for beginners.
So these are the best types of rental properties out there to start investing in. Start with the small single-family homes and then move to the multifamily. The commercial rentals are not good to start with, except for the small retail shops, as those cost less. In the end, it’s your choice what to do. Rental property investing involves many headaches, and you must be ready mentally to tackle all of those.