What is the Best Type of Rental Property?

Is there ever a time when buying rental income properties doesn't make sense? With mortgage rates falling and the economy potentially picking up in the second half of 2024, investors may be looking to dive into the rental property market. The question then becomes, what is the best type of rental property to invest in?

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Fundamentals to Find that Great Property

The key to buying rental properties lies in finding a good price-to-rent ratio and choosing properties that can be financed and maintained cost-effectively. It may sound appealing to have a mix of properties across a city or state, but in practice, the logistics of servicing such a diverse portfolio may prove challenging. However, digital property management software can significantly reduce costs, improve cash flow, and help with tenant selection.

It's also crucial to consider the type and quality of a property. Seeking the expertise of inspectors and realtors can help objectively assess properties and neighborhoods. Here are the top basic features to look for in investible properties:

• Great neighborhood, well-maintained with conscientious neighbors
• Low property taxes with no expected hikes
• Nearby schools
• Low crime rate
• Local amenities
• High occupancy rates and a low number of rental listings
• Lower price-to-rent ratio
• Fixer-uppers that won't require significant financing

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Evaluating Opportunity

In 2023, the focus is on rental income strategies, as capital appreciation is expected to be weak to negative. To assess rental property performance potential, it's essential to know the property's ROI or Gross Rent Multiplier (GRM). This evaluation helps identify properties that are likely to generate good returns. The GRM formula is GRM = Property Price or Value / Gross Rental Income.

Once you have the GRM evaluation, you can start searching for great houses, apartments, condos, or townhomes. A lower GRM means you can pay off your rental property mortgage sooner.

Which Type of Property to Buy?

The type of property you should buy depends on rental demand and market trends. Rental houses are always in demand due to the severe shortage. However, other options such as manufactured modular homes are gaining popularity as investment properties. Apartments and multifamily offerings may provide better cash flow with lower maintenance costs.

When considering houses, factors such as the number of bedrooms and bathrooms, lot size, square footage, and condition must be taken into account. It's also important to consider other factors like the best cities to buy, proximity to retail and transit, neighborhood quality, utility costs, and rent laws in different districts.

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Institutional Investors' Preferences

Corporate institutional buyers are active in both the single-family and multifamily markets, making it more competitive to find good deals. Property investment professionals often prefer condos and multifamily developments for their capacity to generate more rent revenue and easier management. However, they are also buying houses.

Individual investors may opt for condos and houses in affordable neighborhoods, where they can manage properties themselves and reduce costs. So, you're not only competing with institutional investors but also with other individual buyers.

Benefits and Pitfalls of Different Properties

Let's take a closer look at the benefits and pitfalls of different rental property types:

• Multifamily Apartments/Condos - Owning several apartments in the same building can lead to lower management costs. However, potential downsides include high HOA fees and potential issues with building maintenance. It's important to research the building owner's financial situation.
• Single Family Houses - Detached houses have appreciated strongly in recent years, making them less attractive for investment purposes. They are typically bought for price appreciation, but in the current market, this may not be significant. Managing one tenant can be challenging, and the liquidity of houses makes them easier to sell.
• Student Housing - The student housing market has seen significant growth due to a lack of supply from colleges and universities. However, potential changes in immigration policies could impact this market segment.
• Hi Rise vs Low Rise Apartments - In a low supply market, apartments in buildings over four stories are worth considering. Hi-rise apartments are more affordable and are often located near urban centers. Low-rise apartments, townhouses, or condos are in high demand and can offer strong rent price growth.

Efficient property management is crucial to profitability, especially as your portfolio grows. Digital solutions like ManageCasa's platform can help with lease processing, accounting, online rent collection, maintenance, and more.

In conclusion, finding the best type of rental property depends on factors such as rental demand, market trends, property features, and personal preferences. Analyzing the fundamentals and evaluating opportunities will help you make informed investment decisions in the rental property market.

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