Residential Rental Properties - Five Types

There are many more than five kinds of residential rental properties depending on how you classify them. But from the perspective of basic investment differences, there are five types that come to mind, each with their own problems and advantages. The first type is single family homes.

Single Family Rental Properties

Houses are appealing to investors for a few basic reasons. First, they provide the easiest way to get into real estate investing, because of the financing options and possibility of a low down payment. Second, they can build equity fast during times of rising prices - even if rents are not rising. Third, they can be sold to other investors or home owners. These two markets make the eventual sale easier.

Of course they have problems too. First, it is very difficult to find houses that can produce cash flow after all expenditures are considered. Also, as a single unit, if you lose your tenant, you lose 100% of your income until it is rented again. If you own multiple homes, it can be a lot of work to collect rent and maintain them versus an apartment building with a similar number of units.

Apartment Buildings

The primary advantage of apartment buildings is that the prices are based on income, because unlike houses, only investors are buying them. This means decent cash flow is normal (otherwise why buy?). Also, because the prices are based on net income more than anything else, if you can find a building with low rents, you can quickly increase the value just by raising them. Of course, the primary problem with apartment buildings is the greater difficulty in financing them, and the larger down payment normally needed.

Small Multiple-Unit Residential Rental Properties

Between single family homes and apartment buildings are the duplexes, triplexes and four-plexes. As long as you stay under five units, you can finance these like a home. Though this is an advantage, it is also the reason it is tough to make this type of rental produce cash flow. There are many people out there buying them to live in one unit and get the equity gains from the whole property. Most of them are not thinking of cash flow, so they push the prices too high. It is convenient to live where your rentals are, though, so if you can come close to breaking even, the eventual gain from equity build-up may be worth it.

Low Income Housing

Mobile homes and small houses in need of repairs get their own category because this low income market has unique advantages and problems. Normally you'll have more late rent payments and other issues with tenants. You also will have more repairs. In general, investing in low income housing means more hassles and more time invested.

What makes it worth it? Cash flow. Suppose a normal three-bedroom house costs $130,000 and rents for $750 per month. You may find a three-bedroom mobile home on a lot nearby for $45,000, and get $600 per month in rent. Repairs, though more frequent perhaps, are cheaper, as is insurance and property taxes. You can see that there is greater potential for cash flow.

Low income housing is all about cash flow. As for the added hassles, there are ways to deal with that. I know a man who has forty rental properties with low income tenants (mostly mobile homes with real estate), and he gives free rent and a small salary to a handyman/manager who does everything from fix toilets to collecting rent.

Other Residential Rental Properties

This "other" category includes the less common residential rentals. Since these properties often don't have the advantages that the ones above have, people invest in them for one reason: cash flow. For example, a large house that would lose money every month as a normal rental might do well as a boarding house, with rooms rented out individually. This can be very profitable in a college town.

Even less common, but still potentially profitable, are rentals of RVs, or recreational vehicles. You'll see this more in the southwest than in other areas (it's almost common in Arizona). Conversion of old motels into residential rental properties is another way investors create cash flow. Certainly there are a few I have missed as well. Probably houseboats are rented by the month somewhere.