Which type of real estate property should you buy as a long term investment?
One of the many choices property investors have to make is which type of investment property they should buy. A beginner real estate investor might go for the first investment property that comes his/her way, or even just pick a certain property because it’s the cheapest one available. Doing this is a major mistake in real estate investing! When you’re considering which type of investment property you should buy, the first thing to take into account is your investment strategy – whether you’re in the real estate investing business for a short term or long term investment.
Many property investors agree that investing in long term investment properties is the best investment strategy. This holds true as long as you’re investing in the right type of real estate property! In order to have a successful real estate investing career for the long term, the type of your investment property has to match this real estate investment strategy.
In general, two types of rental properties work best as a long term investment: single-family and multi-family homes. Other investments (not properties) to consider are real estate investment trusts. In this article, we’ll explain why these types of investments are the best to consider for a long term investment in real estate. So, without further ado, let’s dive right in!
Best Long Term Investment Property – Single-Family Home!
Single-family homes (SFHs) are residential real estate properties consisting of one unit which houses only one family, are built on a single lot and are not attached to anyone else’s residence. These rental properties are highly recommended to property investors – especially beginners. Here’s what makes single-family homes the best long term investment:
Related: Looking for the Best Real Estate Investments? Buy Single-family Homes!
Desirable Among Renters
Let’s face it, who wouldn’t want to live in a single-family home? These long term investment properties offer more privacy and space compared to other types of real estate properties. Generally, this type of investment property is desired by many Americans – especially families – who are renting. In fact, according to the National Rental Home Council, single-family homes make up about 40% of the total rental market!
Being more desirable means there’s higher demand and supply for these long term investment properties in almost every housing market in the United States! Therefore, whether you’re a beginner real estate investor searching for your first rental property, or a real estate investor thinking of buying another rental property to grow your investment portfolio, you’ll have a higher chance of finding single-family homes for sale.
Fast Appreciation
The main reason people enter the real estate investing business is the many financial rewards it has to offer for property investors. While both single-family and multi-family homes provide a real estate investor with cash flow in the form of monthly rent collected from tenants, single-family property investors can also make money from their long term investment properties through appreciation!
In simple terms, appreciation is the increase of the rental property’s value over time. This allows a real estate investor to sell his/her rental property later in the future for a much higher price than the initial purchase price and make a profit. Since single-family homes are always in demand, they tend to appreciate at a much faster rate than other types of rental properties. This is another reason why they’re the best long term investment properties.
Related: Real Estate Investing for Positive Cash Flow vs. Appreciation
Less Property Management
Another feature that makes single-family homes the best long term investment properties is the inexpensive property management. A real estate investor owning a single-family home has to deal with only one tenant. Moreover, tenants of single-family homes treat the rental property with more caution seeing as it’s basically their home and they’ll be living in it for a long time. Thus, they’re less likely to cause any serious damage to the rental property, which further leads to property investors spending less money on managing and maintaining their SFHs.
Another reason why these long term investment properties require less property management is because they’re smaller in size compared to other types of rental properties like multi-family and commercial real estate properties. As a result, single-family property investors can perfectly manage the rental property themselves instead of hiring professional property management and paying management fees.
To start looking for and analyzing the best single-family rental properties in your city and neighborhood of choice, click here.
Best Long Term Investment Property – Multi-Family Home!
Multi-family homes (MFH) are other types of residential real estate properties, but they consist of more than one unit and house more than one family. Before pointing out what makes these rental properties great for a long term investment, it should be mentioned that MFHs are recommended to experienced property investors looking to grow their real estate investment portfolio.
Related: Understanding Multi-Family Investment Property Returns and Benefits
High Return on Investment
As mentioned earlier, the ultimate goal of every real estate investor is to make money. In real estate investing, money is made through cash flow and appreciation. In terms of cash flow, property investors have a higher chance of securing positive cash flow (and a higher ROI) with multi-family homes. This is because these long term investment properties contain more residential units and thus, more tenants paying monthly rent.
In addition, even though SFHs appreciate at a faster rate, this does not mean MFHs don’t appreciate. Property investors owning this type of long term investment can actually force appreciation on their real estate properties! For example, adding amenities such as a laundry room or a parking space, providing extra services, or renovating the curb appeal of the rental property are a few ways for a real estate investor to force appreciation.
Doing so not only allows for forced appreciation on the long term investment, but property investors can charge extra for providing such services and amenities. Thus, they can boost their rental income and generate a positive cash flow, which leads to higher rate of return on investment!
Related: Real Estate Questions: What Is a Good Return on Investment?
Easy to Finance
Even though multi-family homes are expensive, they’re still easy to finance. How so? Well, thanks to positive cash flow banks and loan lenders are more motivated to give a mortgage to multi-family rental property investors because they guarantee enough rental income to cover the loan payments. It seems that lenders also believe multi-family homes make the best long term investment!
Moreover, it’s easier (and makes more financial sense) to obtain one loan to cover a number of residential units than to obtain multiple loans to cover multiple rental properties, each with only one residential unit.
Occupancy Rate
Lastly, MFHs are of the best long term investment because property investors don’t have to worry about vacancies. As long as you’re investing in the right location in which demand for real estate investing is high and people would rather rent than buy real estate properties, it’s highly unlikely to get a 100% vacancy rate. In such locations, multi-family homes are the best long term investment properties because there’ll always be a pool of potential tenants and occupancy rates are high.
To start looking for and analyzing the best multi-family rental properties in your city and neighborhood of choice, click here.
Best Long Term Investment – REIT
Real Estate Investment Trusts (REITs for short) are companies that own real estate properties from different types ranging from apartment buildings, office buildings, to large shopping malls and skyscrapers. This long term investment is one of the best because:
- It does not involve direct property ownership which is great for an investor interested in real estate investing without the hassle of becoming a landlord and playing an active role (passive long term investment)
- You don’t have to invest a big capital and you’ll have minimal responsibilities
- When you invest your money in a real estate investment trust, you receive a passive income (in the form of dividends)
- Since a real estate investment trust owns more than one investment property, being a part of this long term investment allows you to have a diverse investment portfolio
The Bottom Line
Matching your real estate investment strategy with the type of investment property to buy is essential for a successful real estate investing career. Single-family homes and multi-family homes are the best property types to consider when you’re going for a long term investment. Another investment to consider for the long term is a REIT which own and manages real estate properties on behalf of the investors. As a real estate investor, you have to learn the pros and cons each type to reach a final answer regarding which makes a better long term investment for you.
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