Should You Buy a Single-Family Home, Duplex, Triplex, Fourplex, or a Condo?
Once you decide that you want to purchase a rental property and have identified your ideal location and price range, the next step is figuring out what type of property is best for you.
Residential properties can have up to four units: single-family homes, duplexes, triplexes, fourplexes, condominiums, and townhomes are all residential properties. Are there certain reasons to favor one type of property over another? Absolutely. Nonetheless, the right choice for you will depend on what you are looking for. Let’s look at some of the pros and cons of each type of rental property.
Before we dive in, remember to look up your local rules on rent control when you’re looking at a duplex, triplex, fourplex, or a condominium. Rent control laws can impair your rental yield and even artificially depress the resale value of your property.
Single-Family Rentals (SFR): Single-Family Rentals (often abbreviated as ‘SFR’) are the darlings of the U.S. housing market and a favorite amongst small landlords. In fact, according to Freddie Mac Multifamily, over 88% of the single-family rentals in the country are owned by landlords with 10 or fewer properties. Single-family rentals are the most common type of rental property; nearly 60% of the renters in the United States live in single-family rentals.
Pros and Cons of Single-Family Rentals: There are many appeals to a single-family rental from a tenant’s perspective—the size, the privacy, and the yards for children or pets.
Benefits: For the landlord/owner, the benefits of single-family rentals lie in the numbers. First, whenever you decide to sell your rental, there will be more buyers for a single-family home than a duplex, triplex or fourplex. This means that if you are selling in a down market, single-family homes will have the highest liquidity. This also means that if you have not already purchased your rental, that you likely have far more selection of single-family properties versus other types of homes. The second main benefit to landlords is that single-family homes tend to appreciate faster. This is tied to the fact that there are usually more buyers for single-family homes than multi-unit homes.
Downsides: Even though there are plenty of reasons for choosing a single-family rental, there are also downsides. The biggest downside is maintenance. On the maintenance list are things like more yard space to maintain, roofs and gutter systems (which are usually not an owner’s issue for most condos), pools or hot tubs (which are also typically shared for condos or townhomes), heating and A/C units (which are often a building responsibility for most condos), etc. You will also want to factor in costs around pool maintenance, tree trimming, annual gutter cleaning, pest control, and so forth.
Duplex, Triplex, and Fourplex (Multi-unit homes): A multi-unit home is designed for a landlord. These homes are connected, meaning they share a roof and gutter system, but often have separate front entrances. As far as utilities, sometimes the multi-unit home will have individual meters for electric service so that each unit can pay separately. Most of the time the multi-unit homes look very similar inside. For example, in a duplex, there is a high chance the layouts of both units are similar and they may share similar types of appliances and design.
Benefits: If you plan to own and manage a rental for a long time, a multi-plex may be a great fit for you. This is because compared to a single-family home, the multi-plex offers more leverage for your time. For example, if you are visiting your rentals for an annual check-up, rather than drive around to four different single-family homes, you can simply go to one fourplex destination. Other examples include scheduling gutter cleaning, repairperson service, replacing appliances, and so forth. In some cases, landlords will live in one of the units themselves and rent the other available units to tenants. This allows landlords to closely oversee their rental property and also allows the owner to qualify for owner-occupied financing for the property (which results in a lower interest rate for your mortgage versus financing an investment property). Another reason landlords will buy a duplex, triplex or fourplex is that these homes often have higher rental yield than a single family home. This is not 100% guaranteed, so you will still need to model out the numbers for yourself, but typically landlords who buy these types of properties are finding ways to maximize cash flow.
Downsides: The disadvantages of the duplex, triplex or fourplex strategy are related to smaller supply and smaller demand as compared to single-family homes. This means that if your goal is to purchase a fourplex, there might not be many available for sale in the neighborhood you are targeting. Furthermore, when you look to sell that rental property in the future, the pool of buyers might not be very large. Multi-unit homes have lower liquidity than single family homes in general, and because both the supply and demand are lower, the rate of appreciation in home value is also slower than a single-family home. In addition, there are other issues. For example, if you have a pest infestation, you likely have to deal with all the units and not just one. Also, consider that because these units often share a wall, there may be more noise complaints than a single family home. As the landlord of both units, you may be pulled in to manage tenant disputes with neighbors. It takes only one bad neighbor for things to go downhill from there.
Condominiums (condos): Note that not every condominium can be rented out to tenants. Before you purchase a condo for the purposes of a rental, be sure to check with the Homeowners Association (HOA) to make sure that there are no written rules in the bylaws that prohibit you from renting out the condo. Once you’ve made sure the condo can be rented out, you’ll also want to carefully calculate the rental yield. This is because after you factor in the HOA monthly dues, the rental yields for a condo are often not as attractive as other types of properties.
HOA monthly dues can also increase, which causes rental yields to fall. Sometimes the HOA can set rules that create inconveniences for your renters. For example, some complexes do not allow vacuuming after 6 pm for fear of disturbing neighbors.
Benefits: The main benefit of renting out a condo is that much of the maintenance duties fall on the building and the Homeowners Association as opposed to the individual owner. For example, a leaky roof, gutter cleaning, a broken front gate, a pool or hot tub that needs repair—these types of costs would be covered by the HOA. This means landlords save time and don’t need to pay for as many expenses out of pocket. The HOA fees may also encompass insurance, basic utilities, and shared spaces such as pools, gyms, the lobby, or a gated garage.
Downsides: The disadvantages of condominium rentals lie in the monthly association fees as well as increased restrictions around remodeling. Many condos will have specific processes where homeowners need to apply in order to remodel their own homes. Associations range in how strict their rules can be, but it is not uncommon for an association to require neighbors to approve a plan before the homeowner can begin any type of remodel. There may even be rules on what hours of day contractors are allowed to work.
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