Owning fully-rented, residential rental properties is a surefire way to receive income every month. Not only do these properties generate cash flow, they also offer a good return on equity, both as the mortgage debt used to finance the properties goes down with each monthly payment and the value of the properties rises over time.
Nonetheless, an inexperienced real estate investor must carefully consider what type of rental property to buy. There are many types from which to choose:
- single-family homes
- two-family homes (also known as duplexes)
- three-family homes (triplexes)
- four-family homes (fourplexes or quadplexes)
- large buildings with five or more apartments
- buildings with one or more apartments and a commercial unit
Single Family Homes as a Start
“It is a great time, right now, to invest in residential real estate,” Rhonda Duffy, broker of Duffy Realty of Atlanta, wrote recently in an e-mail response to questions. She added, “The easiest property to buy, prepare, and flip is by far the single family home, and it should be the choice of the novice investor.”
In fact, many investors start off with a single-family house as a way to get their feet wet as landlords. Not only do these investors learn what it takes to maintain and even improve the physical features of the property, they start to understand how to select tenants, what to cover in a lease, how to set the parameters of the landlord/tenant relationship (for example, how each of them will handle emergency repairs, how late to accept non-emergency calls), and how to keep good tenants and oust bad ones. A variation on buying a single-family home as an investment is buying a duplex to live in one unit while renting out the other unit.
From there, investors may go on to buy additional single family houses to gain experience as landlords of more than one rental unit. Alternatively, investors may buy multi-unit properties.
Rental Property Considerations
Here are a few things to consider when deciding how large a rental property to take on:
Per-unit cost. The more units a building has, the lower the price of its individual units. Some investors find it more profitable, manageable, and efficient to own one building of five or more apartments than to own and manage several smaller rental properties.
Building control. In some ways, a landlord loses more and more control the larger a rental property is. In many states, tenant protection laws apply to buildings with three or more apartments and dictate how and when tenants get notices of rent increases and evictions. Local rent-control or rent-stabilization ordinances may limit the amount of annual rental increases, even if the landlord has made extensive repairs or improvements at the property. Tenants in a multi-unit building also may organize a rent strike over perceived failings by the landlord.
Financing programs. Most lenders define their residential-loan category to include properties of one to four units. Even with today’s stricter eligibility requirements, this category presents good opportunities for buyers. For example, there are loan guarantee programs for first-time homebuyers through mortgage lenders and the Federal Housing Authority (FHA) that allow as little as a 3.5 percent down payment as long as the buyer lives in one of the units; most of the closing costs and fees can be included in the loan.
Bright Rental Market
According to a recent e-mail from Alan Brymer, a Utah-based real estate investor and blogger, “It is easy to rent houses now that few people can qualify for a loan.” Brymer noted that the demand for rental units allows investors the choice to sell their rental properties when the real estate market picks up or to hold the properties “for the long haul.”