Investing in a residential property can be an excellent way to generate passive income, while accumulating long-term wealth. According to Statista, a growing percentage of millennials in the US expect to always rent, reaching 25% in 2022, which means there will be an expanding pool of prospective tenants looking for a wide-range of rental properties.
There are various types of residential properties to consider as investment opportunities, especially during the summer homebuying season. These property types include: single-family homes; urban center condominiums; oceanfront condos; multi-family homes; and vacation homes.
With this in mind, we explore the investment potential of these five most popular types of residential investment properties.
Table of Contents
- Benefits of Investing in Residential Properties During the Summer
- Factors to Consider When Choosing a Residential Property
- 5 Most Popular Types of Residential Investment Properties
Benefits of Investing in Residential Properties During the Summer
Investing in residential property during summer months can be advantageous for several reasons:
- The peak homebuying season enables you to discover and see more properties
- The weather is more favorable for inspecting, buying, repairing and renovating prospective properties
- Summer months are conducive for taking advantage of seasonal discounts offered by home improvement retailers and service providers
- Purchasing a property during the summer also grants you sufficient time to make critical repairs well in advance of harsher winter weather months
- Seeing the property during the summer is especially important if targeting vacation rental properties (e.g. tourist demand, local amenities, weather patterns, competitive rental rates, ad hoc marketing research, etc.)
Factors to Consider When Choosing a Residential Investment Property
Before investing in a residential property, you will need to consider the customary factors of buying any real estate property, specifically:
- Property Type & Size
- Lot Type & Size
- On-Going Ownership Costs
- Historical Appreciation
- Future Appreciation Based on Expected Years of Ownership
However, you will also need to think like your prospective targeted renters – be they long-term, vacationers, families, young professionals, college students, or temporary corporate transplants – to align the traits and amenities of a given property with their key needs.
Focusing on a specific target rental group will allow you to conduct invaluable local market research to understand what the market is willing to pay for a given residential rental property. A target rental goal (e.g. yearly rate; monthly rate; weekly rate; nightly rate) can then be used to calculate how long it will take to recoup any repairs and upgrades necessary to achieve a given level of recurring income.
Not surprisingly, location plays a crucial role in the profitability of a property. Properties with highly desirable traits and amenities, within highly desirable neighborhoods will always justifiably command the highest rental rates. Keep in mind, however, that a highly desirable neighborhood can be attractive for different reasons depending on the type of renter.
For example, rental properties located close to a college will need to be differentiated depending on if they are targeting groups of students, or visiting professors and research professionals. Understandably families will have dramatically different needs than say that of single, young professionals who spend little time at home.
In tandem with your target rental group, you will need to align the type and condition of your investment property with your preferred ownership style and capabilities. A property that requires extensive repairs or renovations can increase your expenses, decrease your profits, and make unexpected and inconvenient demands on your time.
If you have few home maintenance skills or will be unable to attend to tenant repair requests promptly, you will need to allocate funds for a newer or upgraded property, or for a professional property management firm, or for both. An ideal cost-effective situation would be for a highly skilled DIY homeowner living in a duplex, next door to their tenant for convenient access to address any on-going tenant maintenance requests.
In general, it’s always better to invest in a property that is well-maintained and requires minimal repairs. If a property is not in great condition you will need to make it such that it meets the market standards of your income goals, as well as match your ownership capabilities and lifestyle preferences.
5 Most Popular Types of Residential Investment Properties
In recent years, real estate investors have flocked to the following types of residential properties:
- Single-Family Homes
- Urban Center Condominiums
- Oceanfront Condominiums
- Multi-Family Properties
- Vacation Homes
1. Single-Family Homes
There’s little doubt that single-family homes have always been a popular choice for real estate investors due to the many benefits and advantages they offer. That said, investors of all types and experience are primarily drawn to single-family homes as long-term investments because their values reliably appreciate over time.
Moreover, investors can often earn sufficient income from renting a single-family home that covers all or a large portion of its mortgage and ongoing ownership costs. Homeowners can also become instant investors if converting their current home into a rental property.
Why You Should Invest in a Single-Family Home
Investing in a single-family home not only serves as a safety net as a future place to live, but it also helps you earn money in the near-term, as families are always seeking safe and convenient neighborhoods for their busy lifestyles.
Single-Family rental homes can be highly profitable when located in highly desirable school districts, as well. Families have been known to make temporary moves in order to qualify their children for local public high schools, for example.
Regarding appreciation, each year the average price of existing single-family homes increases by 14.5%, according to an estimation by the National Association of Realtors for 2020.
2. Urban Center Condominiums
Condominiums are often a good option for investors who want to own a property within highly sought-after prime locations. Modern condos are well-known and desired for their luxury amenities, such as: private parking; swimming pools; modern gyms; entertainment clubhouses; spectacular views; security; on-call maintenance; concierge services; and more. All of these offerings make condos attractive to prospective tenants from college students to young professionals to traveling consultants to corporate clients, and even retirees.
Condominiums that are located in or nearby to urban centers are especially sought-after by affluent renters as they are convenient for busy tenants who are willing to pay a premium for convenience and time-savings. A centrally located condo can also eliminate the need for owning a car and paying for a parking space when located within hybrid, mix-use neighborhoods, nearby to comprehensive transit systems.
Though condos can often come with sizeable monthly HOA fees, these fees can cover services that make it convenient for owners, especially those who desire minimal responsibilities as a landlord. Critical to choosing a condominium as an investor is confirming upfront the rental policies of a given HOA, especially pertaining to short-term rentals (e.g. monthly corporate rentals; vacation properties; and daily Airbnb rentals).
Why You Should Invest in an Urban Condominium
Investing in a condo with modern amenities is often profitable when situated in highly coveted urban centers. Though ownership of condos can be costly with HOA fees, ever-rising competitive demand for best-in-class condo units will enable owners to maintain profitable rental rates.
For the best potential for appreciation, it is often necessary to follow closely the development plans of commerce and cultural centers to buy in at lower rates due to higher perceived risks.
Parents of college students have also been known to purchase condominiums in college centers in lieu of paying four years or more of housing.
3. Oceanfront Condominiums
When considering the high investment potential of urban condominiums, this is also especially true of ocean view condos, an exclusive niche of condominiums which can serve as highly lucrative vacation properties.
Experiencing the lifestyle of an oceanfront condo can be both luxuriously relaxing and endlessly active, especially during warmer months when availing of all of the indoor and outdoor amenities. Oceanfront destinations and communities are a consistent draw for persons of all walks of life, who are willing to pay a premium for this lifestyle, even for just fleeting periods of time. As a result, investing in an oceanfront property, particularly a condo, can generate significant income.
As with all types of condominiums, be sure to research the HOA bylaws pertaining to rentals, especially short-term vacation rentals.
Why You Should Invest in an Oceanfront Condo
Investing in any condo can be profitable, but the profit potential can significantly increase when the property is located near the ocean. For instance, the official site of Ocean City, Maryland states that the popular tourist destination averages 8 million visitors each year, with most visiting during the summer months. The site also estimates that there are just 10,000 hotel rooms and 25,000 condo units, which bodes well for hoteliers and condo owners in our opinion!
Those who are willing to invest in a vacation or second home can consider, for example, the condos in Golden Sands Ocean City, MD. A typical condo in Golden Sands sells for around $700,000. So, it is a great choice for those who are looking to buy an oceanfront condo for financial gain.
As previously mentioned, always be sure to understand the HOA bylaws of rental policies. Though many oceanfront condos, especially in popular tourist locations, have favorable rental policies for investor owners, make sure that the policies will fit your expected income plans and personal usage of the property.
4. Multi-Family Properties
Multi-family properties are also profitable options, whether renting them now or holding onto them to sell in the distant future. Besides the prospect of earning rental income from multiple tenants, multi-family homes, like duplexes or triplexes, offer the unique advantage of being an “on-site landlord” by living in one of the units. Similar to single-family homes, the rental income can often cover all of your on-going ownership costs, including your mortgage, under the right circumstances.
The investment approach of living in one unit of a duplex, while renting the other unit, became a popular example of “house hacking”, the concept of creatively making homeownership more affordable and profitable.
Additionally, there are several tax benefits that are associated with multi-family homes. Therefore, you can go for a duplex or triplex after comparing which one offers greater tax benefits.
Why You Should Invest in a Multi-Family Property
Though single-family homes are the most desirable type of residential property, multi-family properties are attractive to both buyers and renters as they are an affordable option to migrate from smaller apartments, as well living in or closer to more costly urban centers.
The National Association of Home Builders (NAHB) reports that the demand for multi-family homes will likely grow in the upcoming years because of the rising population and trend toward urban living.
5. Vacation Homes
Just like a single-family or multi-family home, you can use a vacation home for both rental income and personal use. The term “vacation home” is used in general, which can define any type of home. The only condition is that the home must be used for vacation purposes.
Unlike other types of residential properties, vacation homes are mostly considered commercial properties. However, it doesn’t necessarily mean a hotel or commercial apartment. It can be a home for personal use, as well. In fact, vacation homes are also a great option for investors who want to use the property for personal use during the off-season.
Why You Should Invest in a Vacation Home
After analyzing data in 2020, the National Association of Realtors reported that vacation homes were selling for 16.4% more, and the average price of such homes increased by 14.2%.
A vacation home gives you the benefit of enjoying your leisure time with your family in a private residence, as well as renting the property to tourists when you are not staying.
If possible, try to buy a vacation home in coastal territories, such as Florida, Alaska, California or Maine, since they have strong track records of strong capital gains and are known to command premium rental rates during peak vacation periods.
Legal Disclaimer: The information provided in this article and on this website does not, and is not intended to, constitute investment or legal advice; instead, all information, content, and materials available in this article and on this site are for general informational purposes only.
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