Breaking Down the 4 Most Common Residential Rental Property Types

What do picking an investment property type and karate have in common?

In either case, repetition leads to mastery. The famous martial artist, Bruce Lee, once said “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.”Lee’s message is clear: focus and consistent practice are key to becoming truly skilled. The same principle applies when choosing an investment property type. As a new real estate investor, it can be tempting to make offers on a variety of property types. However, if you try to master them all at once, you’ll never truly become an expert in any one area.

This article explores the four most common types of residential investment properties. By comparing them, you’ll have the opportunity to dive deeper into each one and determine which best aligns with your goals. 

Residential real estate property types: an overview

There are four main types of residential real estate, each with its own unique characteristics. It’s important to note that residential real estate differs from commercial (such as multi-unit buildings, office spaces, and retail properties) and industrial real estate, which serve different purposes and come with distinct considerations.

By understanding the various types of residential properties, you’ll be better equipped to make an informed decision when purchasing your next property. Each residential property type may align with or differ from your investment style, ultimately influencing your overall investment strategy.

Single-family houses

Single-family houses are standalone structures that are the most popular type of property in the United States. These properties offer privacy, ample space, and the potential for customization, which makes them desirable for both tenants and investors. 

Read more: This Colombian investor found success renting a single-family property.

Condos

Condos, or condominiums, are units within a complex governed by a homeowners association (HOA). When purchasing a condo, homeowners, landlords, and tenants must agree to adhere to the HOA’s rules and regulations. Depending on the association, the HOA dues may cover certain utilities, exterior maintenance, and the upkeep of shared spaces.

Townhomes

In many ways, townhomes are very similar to condos. They often have HOAs with rules that all residents must follow, and like condos, they share walls and common areas such as a gym or recreation room.

Perhaps the biggest difference between condos and townhomes is the layout. Townhomes often have multiple levels, making them feel more private. Townhomes are often in smaller complexes than condos, offering a more intimate living environment with fewer shared spaces.

Multi-family (2-4 units)

These properties consist of multiple separate rental units within a single building, allowing for several tenants to live under one roof. Although there may be common areas, each unit typically has its own entrance, kitchen, and living spaces.

Read more: This Canadian investor found success renting a multi-family property.

Pricing and income potential

Naturally, pricing and income potential play major roles in selecting an investment property. Location, demand, demographics, and the property type itself all play key roles in determining income potential. Understanding these factors will help you select the property type that best aligns with your investment strategy.

• Single-family: Typically located in suburban areas, single-family homes attract a variety of renters, including families and young professionals. While single-family homes tend to have higher purchase prices compared to condos or townhomes, they often command higher rents as well. For investors, a key consideration is the price-to-rent ratio, which compares the property’s purchase price to its rental income potential. Generally, investors are likely to find better price-to-rent ratios in the Midwest and South (for example Cincinnati, Jacksonville, and Houston),  away from the high-priced markets on the East and West Coasts.

• Condos and Townhomes: Condos and townhomes appeal to young professionals and renters seeking affordable housing in urban areas. With lower purchase prices than single-family homes, this is an advantage. However, landlords must factor in HOA fees when evaluating rental income and cash flow.

• Multi-family: Multi-family properties are often found in suburban and urban areas, attracting a variety of tenant types. These properties are more expensive relative to single-family houses, condos, and townhomes in a given area. With multiple units under one roof, the cash flow upside is often significantly higher compared to single-unit properties.

Maintenance and upkeep

When evaluating rental properties, it's important to consider the level of maintenance and upkeep required for each type. This will be a major factor in ensuring cash flow. Whether you plan to hire a property management company or self-manage the property from abroad, these considerations will play a key role in your decision-making process.

Easier maintenance and upkeep

Condos and townhomes tend to require less maintenance. In many cases, the HOA handles exterior maintenance, leaving you, as the landlord, responsible only for interior upkeep within your unit’s walls.

More maintenance and upkeep

Both single-family and multi-family properties generally require more maintenance and upkeep than condos or townhomes. These property types demand attention due to potential interior and exterior repairs, all of which are the landlord’s responsibility. Landlords must also handle tasks like landscaping and snow removal. Additionally, since these properties are typically larger, property insurance costs may be higher, though this can vary depending on location and other factors.

Financing

There are a variety of financing options available for various residential property types such as the ones mentioned above. Many foreign real estate investors use debt-service-coverage-ratio (DSCR) loans, though. 

These loans are based on the property's cash flow and performance, rather than the investor’s personal finances. This makes them particularly advantageous for foreign investors, as the underwriting process is more focused on the property's ability to generate income rather than individual financial history.  DSCR loans can be used to purchase all four residential property types. Even so, there are certain issues that may arise–particularly in condos and townhomes. For instance:

• Condos or townhomes located in co-ops are likely ineligible because the structure of ownership is owning shares of an entire community as opposed to a specific property.
  
  
• HOAs with restrictive rules could impact your ability to secure a loan. There are sometimes requirements that a certain percentage of ownership within the HOA are primary residents, not investors purchasing to rent out the unit.
  
  
• Lenders may consider the HOA’s financial health, such as pending special assessments. While you have no control over its financial standing when you purchase, you can certainly look into HOA documentation ahead of time to avoid running into issues at closing or during the underwriting process.

Crafting an exit strategy for different property types

You should always keep the end in mind when purchasing a property. Even if you plan on holding a property for a long time, at some point you’ll likely sell.

When the time comes to sell, it’s crucial to understand that different property types are perceived in unique ways by potential buyers. Understanding these nuances will help you better prepare for the future and make more informed decisions during your purchase. With that in mind, here’s an in-depth look at what you can expect from each property type and how they are typically viewed by buyers.

Buyer pool

The term “buyer pool” refers to the number of potential buyers that a given property type may have. Some properties will have wider appeal, whereas others may be more niche. Let’s break it down by property type, so you get a feel for what the market could look like if you decide to sell:

• Single-family: Single-family homes usually have the biggest buyer pool because they appeal to both homeowners and investors.
  
  
• Condos and townhomes: While condos and townhomes offer affordability and convenience, their buyer pool tends to be more limited. Buyers must also consider factors like the influence of HOA regulations, which can restrict flexibility. As a result, the market for these properties is often more niche.
  
  
• Multi-family: The buyer pool is more specific and limited. Multifamily buyers are often real estate investors interested in rental income and cash flow, rather than personal use or homeownership.

Appreciation potential

Historically speaking, U.S. real estate has usually increased in value over time. That growth is known as natural appreciation. Due to inflation, population growth, demand for housing, and improvements in infrastructure, property values have tended to rise over the long term. However, not all property types increase at the same rate:

• Single-family: Traditionally, single-family houses have seen the highest level of appreciation. The demand and wide buyer pool interested in purchasing this type of property make it more competitive and sought-after.
  
  
• Condos and townhomes: Condos and townhomes typically appreciate at a slower rate than single-family properties. During economic downturns, these properties are often the first to experience declines in value.
  
  
• Multi-family: Unlike other property types, which are typically purchased by homeowners, multi-family properties are primarily acquired by real estate investors. As such, they are valued based on their investment potential and cash flow. This is in contrast to all other residential property types which rely on comparable sales (comps) to measure value.

As you evaluate appreciation potential, also be sure to consider the rental market where you plan to invest. Some U.S. markets have seen more growth than others and will play a significant role in this equation.

Selecting the “right” rental property type

So, which residential rental property type is best? Only you can be the judge of that! 

For those who value convenience and minimal upkeep, low-maintenance options might be the best fit. On the other hand, if your priority is generating steady income and diversifying your investments, properties with multiple rental units could offer greater cash flow potential. Ultimately, the right property type will depend on your preferences, so be sure to weigh your options before deciding.

Get personalized investment property loan estimates with Waltz.

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