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If you’re planning to buy a house to rent out, you may wonder which type of house would be the best investment. Some popular options include single-family homes, townhouses, single-unit condominiums, and multi-family homes.
Keep reading as we examine each of these to help you decide which is the best fit for your goals.
Single-Family Home
When the term “house” is mentioned, most people envision a single-family home that stands alone on its plot of land. If you purchase a single-family home as an investment property, you can rent it to an individual or a family. They’ll pay you rent, which you can use to pay off your mortgage and other expenses. The leftover amount would be free cash flow for you.
Here are a few benefits of investing in single-family homes:
- Higher Appreciation: Single-family homes tend to appreciate faster than inflation, creating long-term wealth.
- Add Value: You can easily add value to the home by completing upgrades, renovations, or repairs. This will allow you to increase the rental prices.
- Accessible Financing: Financing is more accessible for single-family homes than for several other home types.
- Lower Turnover: Single-family homes often have lower turnover than other housing types, such as apartments. The reasoning is that many families want to stay in a single-family home for several years. This lowers the vacancy rates and replacement costs.
“Single-family homes have historically shown robust appreciation and less volatility, which makes them a safer bet for those looking for steady, long-term growth,” says Scott Beloian, Broker/Owner, Westcoe Realtors. “These properties typically attract longer-term tenants or can be resold to families, which often results in lower turnover costs and more predictable returns.”
Townhouse
A townhouse is a row house that shares side walls with other units. It typically has several floors and is taller than it is wide. Most, but not all townhouses can be more affordable than single-family homes. Many townhouses have homeowners associations (HOA) to manage any common spaces and ensure the cohesiveness of the individual townhouses in the community.
Here are a few features that make townhouses attractive to investors.
- Broad appeal for potential tenants: Townhouses can be an appealing option for young families, couples, older childless adults, or roommates.
- Flexible financing available: Their financing options are similar to single-family homes.
- House hacking potential: If you purchase a duplex townhouse, you can live in one unit while renting out the other. If the rental prices work out, the rental side could pay for most of the mortgage payment, allowing you to live for nearly free.
Single-Unit Condo
When you purchase a single-unit condominium, you purchase one unit within a larger complex. You can then rent the condo to an individual, family or even roommates.
Condo buildings have several appealing perks for potential tenants:
- Amenities: Condos offer residents amenities like 24-hour security, parking spaces, rooftops, gyms, pools, and more. However, having access to these amenities will typically come with a monthly assessment. The goal would then be to price this into the rent charged.
- Less maintenance: Single-unit condos require less maintenance because you don’t have to maintain the landscaping or community areas. Typically, an HOA or property management company does that work and is paid out of HOA dues.
Single-unit condos are among the most affordable types of investment property, and conventional lending is easy to obtain for them. Even if your condo is similar to others in the building, you can customize it with upgrades, repairs, or decor as long as you abide by the terms of your HOA.
Multi-Family Units
Multi-family buildings tend to be the most profitable type of rental property. When you buy a multi-family home as an investment, you typically purchase an entire building of individual apartments. In some areas of the country, finding tenants for a single-family house is easier since rent is cheaper, meaning lower vacancy rates. Plus, more units mean more rental income potential.
Here are a couple of other things to consider about multi-family units:
- Cost per door: When searching for properties, investors often consider how much a property costs per door and what the corresponding profit could be. Multi-family homes will usually have a lower acquisition cost per door than you’d have from other property types.
- Lower down payments: While total down payments will be greater, the down payment you need per door could be substantially less when purchasing a multi-family building instead of a single-family home.
“Multi-family properties often provide a higher return on investment due to their economies of scale,” says Sara Levy-Lambert, head of operations, Awning.com. “With multiple units, you’re not just relying on a single source of income; multiple rent checks roll in monthly, which can stabilize your cash flow and reduce the impact of vacancies.”
Levy-Lambert also said that managing multiple units within a single building can be more time- and cost-effective than having multiple single-family homes spread out over different locations.
The Bottom Line
Buying an investment property is a big step. Do your research to ensure you choose the right property for your goals, location and effort levels.