The Many Types of Real Estate
By Steve Gillman - 2013
Of the many different kinds of real estate you might invest
in, single-family homes are perhaps the ones that you are most
familiar with. As an investment they have their advantages and
disadvantages, which will be touched on briefly below. Following
that are ten other types of real estate and/or ways to invest
that you might want to consider. We can't say which is best in
a general sense, because that depends on what the market is doing
where you are, and on what you specifically need.
1. Single Family Rental Houses
In many areas of the country, investing in single family homes
is the easiest way to get started in real estate investing. This
is because they are typically the easiest to finance and vacancies
are (generally) less of a problem than with other types of real
estate. That being said, it's worth noting that for those who
bought houses eight or nine years ago, they may have been just
about the worst investment possible.
We are back to rising prices at the moment, making this a
better time to benefit from long term appreciation, but to avoid
potential losses here's a simple formula: buy for the long haul
and buy only houses that will yield enough positive monthly cash
flow to give you a decent return on your money. Had you done
that (if it was possible -- and if not, there's a clue about
a possible bubble market) in 2005, the drop in value of your
rental homes would have meant lower property taxes and therefore
a higher return while you wait for prices to rebound.
One big advantage of single-family homes as rentals is that
when you sell you have two markets; investors and owner-occupants.
Home prices might have risen even if rents did not, allowing
you to sell at a gain. What are the disadvantages of these properties?
Being a landlord isn't much fun, and you typically wait a long
time for the big pay-off.
2. Condominium Rentals
The primary advantage at the moment (in most areas) is that
you can buy condos for less than houses. It is also true that
there are (generally) fewer surprises about the building itself,
or at least fewer that affect your pocketbook. This is because
the homeowners association is usually responsible for the roof
and all exterior parts of the unit. The disadvantage is that
cash flow can be affected by increases in the HOA dues. If property
taxes or other expenses go up for houses, they tend to affect
all homes in the area, so rents will be raised by most landlords.
But if a particular condo association decides to raise the dues
by $100 per month to catch up on deferred maintenance, there
is not necessarily any way to raise the rent to cover that, since
tenants can find cheaper rent elsewhere, so it comes straight
out of your cash flow.
3. Low Income Rentals
The advantages of renting cheap places are the same as with
any rentals, but they often generate a better return on your
money. The disadvantages are also the same as with other rentals,
but with the addition (usually) of more repairs and tenant problems.
(There is more about being a "slumlord" further down
A quick return on your investment can be had with a house
or other property that you buy, fix, and sell. This can also
be very creative work. We have many pages addressing this scattered
throughout the site (see the home page or site map to find them).
Also, in times when prices might be dropping you can sometimes
be in and out before the falling prices affect you too much.
Of course you face higher risk (many unpredictable expenses and
problems) than with other types of investing, and you will probably
be taxed heavily on the gain.
Buying and selling small lots is perhaps one of the most difficult
ways to make money. Speculating on price increases is fraught
with risks. Prices might fall, or might not rise fast enough
to cover your carrying costs (mainly just property taxes if you
buy for cash) and leave a decent profit after the costs of the
sale. But there is one way to make it faster and safer. Buy as
cheap as you can and sell the lot for payments. You can sell
for substantially more when you make it easy for a buyer, and
you profit from the increased price as well as the interest you
Larger parcels of land are also a very tricky investment,
although it is easier to see what you are getting than with other
types of properties (no hidden foundation problems or flooding
basements). As a speculation you better do your research well
because, you need prices to rise fast enough to cover your taxes
and the costs of buying and selling, and then provide more gain
than you would have made just investing in something like safe
bonds. But one way to make land pay is to buy land that can be
split into smaller parcels. Forty acres that you buy for $120,000
might be split into eight five-acre home sites that can be sold
for $30,000 each. You can do the math.
7. Boarding Houses
Advantages: You can get a lot more cash flow renting a house
by the room, especially in a college town. Disadvantages: You
can get a lot more headaches renting a house by the room, especially
in a college town.
8. Commercial Real Estate
Advantages: Long term triple-net leases mean little management
and high rates of return. Disadvantages: Tough market to break
into, and you can lose income on vacant storefronts for a year
or more at a time.
9. Profit From Your Own Home
You can buy cheap, fix and live in a home for two years (minimum),
and then sell it for a big tax-free profit, then start the process
again. The obvious disadvantage of this strategy is that you
have to move a lot.
10. Sell Lease Options
When you buy a house and then sell on a rent-to-own arrangement
you get higher rent, and the buyer is usually responsible for
maintenance (a typical agreement might require the tenant to
cover any repairs under $200). Disadvantages: The bookkeeping
is tricky, and most tenants don't complete the purchase (this
can be an advantage too, but it does mean more work for you).
Advantages: Buying in the path of growth and holding until
values rise can yield large gains, especially if you buy low
to start. Disadvantages: Prices aren't that predictable, you
have expenses with no revenue while you're waiting, and transaction
costs can eat much of the profits. To overcome this, consider
buying land that has an old rented house or mobile home on it,
and use the rent to cover all the holding costs and other expenses.
How to Be a Slumlord
Okay, I got your attention, but I really don't recommend endangering
renters with unsafe housing. Much of what people call slumlording
though, is simply providing reasonable housing for those with
low incomes. It is of benefit to the renter and the landlord.
Why Do People Rent Dumps?
People rent not-so-nice places because they can afford to.
A house that needs paint, has old rusty hinges on the doors,
and a dirt driveway - this is a house that cost less to buy,
and therefore can be rented for less. Anything major that the
landlord does to improve it will result in higher rents, and
possibly drive the renter away.
In fact, this often happens. A few years ago my own town enacted
its first rental regulations. The fifteen pages of new rules
included many non-safety-related requirements, like a minimum
of windows, to allow natural lighting, bedroom square-footage
requirements, and no peeling paint.
These things are done in the name of poorer renters, and yet
the result is always the same: higher rent. With that and the
regulations against mobiles homes, poor families are moving further
away from town and jobs. I mention all this to let you know that
if you offer an ugly, but safe and affordable rental, you are
providing a real service.
Why Consider Low Rent Housing?
A nice two bedroom house in a small town might costs $130,000
and rent for $800, while an old mobile home on a lot in that
same town might cost $40,000 and rent for $500. Notice that the
house costs three times as much, but the rent you get isn't even
doubled. This will usually mean that the mobile home gives you
more cash flow. That is why old houses and mobile homes (on land)
are good investments.
It's important to know you'll have more risk and management
problems with low rent housing. Repairs come up more often, and
rent will be late more often (on average). This is why you deserve
a better rate of return. Otherwise, who would want to provide
low-cost rentals? Treat your renters well, and make your places
safe, and you can do well and sleep well - even if some people
want to call you a slumlord.
Note: for more on the different types of real estate
and ways to invest in them, see our big list here: 100
Ways to Profit from Real Estate