What is the Best Type of Real Estate to Invest in?

If you're just starting out as a real estate investor, you may be wondering which property type you should invest in.  There are plenty for you to choose from: Residential, Commercial, Short-term rentals, and more.  Today we'll look at the pros and cons of each property type so that you can decide which one is best for you.

First, let's take a quick list of the properties types you could potentially invest in.

Here's a list of the various kinds of properties you can invest in:

Of course, there are other kinds of investment properties such as hotels, motels, hospitals, and mobile home parks but they are a little different from your normal rental property investments.  So we'll take a look at those another time.

Single-Family Homes / Condos

Single-family homes are the main types of investments you think of when considering investing in real estate. They are the traditional homes that you see advertised on Zillow, Redfin, Trulia, etc.  

There are many different kinds of single-family homes that you could purchase, such as a detached home, a row home, a townhouse, mobile homes, condominiums, and co-ops.

Condos and co-ops are a little different from what is usually thought of as a single-family home because they are units in a much larger building similar to an apartment.  The only difference is you would own it.

Unlike single family homes, some condos will come with the added perks of a gym, an indoor pool, lounge areas, and other amenities.  

Let's check out the pros and cons of investing in this kind of property.

The Pros

• There's an abundance of them (you can take your pick)
• Easier to manage (just one tenant)
• Relatively low maintenance (can have tenant take care of lawn mowing, snow removal, utilities, etc.)
• Most familiar type of investment property
• You could move into the property yourself then receive tax-free gains (up to $500,000) when you sell the property years later 
• Easy to get financing from a bank

The Cons

• Vacancies can greatly reduces your yearly cash flow
• Higher rental rates might make it more difficult to rent out
• The market controls rental rates not you
• With only one unit, you must make sure the purchase price is right or you could end up with a property that costs you money
• With only one tenant, it must be rented for you to make money
• Might have to deal with late night emergencies

Multi-Family Properties 

Multi-family properties are those properties that contain 2 - 4 units all under a shared roof or with a few shared walls.  These are usually called Duplexes, Triplexes, or Quadplexes depending on the number of units it has.  

These are much harder to find than single-family homes but they can be well worth it because of the revenue they supply.

The Pros

• With more units, greater potential for good cash flow
• Vacancies don't affect cash flow as much as single family homes
• Can live in one unit and rent out the others for free housing and passive income
• If you have separately metered units, it's easy to manage and deal with maintenance
• Just as easy to get financing from a bank as a single-family home

The Cons

• Higher maintenance costs (more than one unit and they tend to be older than single family homes)
• Less abundant than single family homes
• Recently, there has been fierce competition for these
• Requires more management
• Might have to deal with late night emergencies

Apartment Complexes

Similar to multi-family homes, apartment complexes have multiple living units under one roof.  But, in this case, there are more than 4 units.  And, in some cases, these apartment buildings  can house over 1,000 units.

While the cash flow from this property type can be amazing, there are other pros and cons that you need to consider. 

The Pros

• Strong cash flow (thanks to the additional units)
• Vacancies don't affect cash flow as much as single or multi-family homes
• Can live in one unit and rent out the others for free housing and passive income
• Easy to rent (rents tend to be cheaper than houses)
• You can make even more money through laundry machines, parking, on-site storage, etc.

The Cons

• More of a learning curve especially with the bigger apartment complexes
• High maintenance cost (especially in the common areas)
• May need to hire a property manager (difficult to manage by yourself)
• Metering may not be separated
• Structural issues or units that are not up to par can create problems for everyone
• High turnover rate (so it will cost more to keep cleaning and leasing units)

Office Buildings

These kinds of buildings fall under the category of commercial buildings which includes retail and industrial properties as well.  But since they all bring with them different perks and downsides, we will look at them each individually.

The Pros

• Potential to get long-term renters (steady cash flow)
• Comes in all shapes and sizes for any budget
• You can make even more money with services such as high speed internet, vending machines, parking, administrative services, etc. 
• Limited hours of operation so usually no late night emergencies

The Cons

• Need more specialized knowledge to buy office buildings (must research the market well or it may be very difficult to rent out)
• Should be knowledgeable about office space rental contracts and the provisions that are typically included
• Renting to a company or business might be a harder sell than renting a house to an individual or family
• Work from home / the pandemic might have slowed this market down a bit (along with the increase in co-working facilities)

Retail Space

Another type of commercial real estate is retail.  This includes such properties as clothing stores, supermarkets, department stores, and shopping malls.

These offer a completely different type of clientele than those renting office space so the pros and cons will be different as well.

The Pros

• Can have tenants take care of utilities, property taxes, etc.
• You can make more money by charging for trash pick up services, etc.
• Flexible for your budget (can buy small single store fronts or big shopping strips)
• Possibility of long-term tenants
• Limited hours of operation so usually no late night emergencies

The Cons

• Location is very very very important here so it requires a lot of market research
• Need specialized knowledge about retail centers such as "tenant mix"
• Must learn about special provisions in retail contracts
• The continued rise of online shopping may see the profit of these complexes fall a bit

Industrial Properties

These types of commercial real estate refer to properties used to develop, manufacture, and produce goods as well as those providing space for the storage of those goods.

There are 3 types of industrial properties: manufacturing, storage and distribution, and flex spaces.  Examples of industrial buildings are warehouses, manufacturing plants and factories, data housing centers, and storage facilities.

The Pros

• Can have tenants take care of utilities, property taxes, etc.
• Higher income potential
• Low Maintenance (for storage facilities)
• Easy to manage facilities with only one or a few tenants
• High returns for storage facilities & good financing terms
• Increased demand for storage and distribution centers with the rise of online shopping
• Goods are always going to need to be manufactured somewhere (long-term prospects)

The Cons

• Potential for high maintenance costs (professional help may be necessary)
• Possibility of environmental contamination could lead to expensive remediation costs
• Harder to find industrial buildings for sale 

Short-term Rentals

With the Airbnb craze, came lots of short-term rentals.  These are properties that are rented out for a day or two, a few weeks, or a few months.  They offer a more intimate alternative to staying in a hotel, motel, or hostel.

Many times short-term rentals can provide much greater returns than simply finding one long-term tenant.  So it is not surprising that they have become very popular in the past few years.

But it's not without its downsides.  Let's check out the pros and cons for short-term rentals.

The Pros

• Typically, has higher cash flow than regular single family homes / condos
• Can use as a vacation home
• Don't need a real estate agent (can list the property yourself on Airbnb, Vrbo, etc.)
• Flexible (can rent just a room instead of the whole house)

The Cons

• Someone has to clean and reset the property between guests (higher maintenance)
• Requires more management than other investment types
• Income might come and go with the seasons (not steady income)
• There may be special laws/restrictions regarding short-term rentals in your state

Land 

This type of real estate investment is very different from the other forms and requires a unique set of skills.  You cannot just buy any land and expect to lease it immediately.

You may have to hold it for years to find someone who'll lease it.  Or if you plan on building on it, it may take months to get a permit.

Buying land comes with its own unique difficulties and problems that take skill and know-how to navigate successfully.  So make sure you learn all you can and talk to someone who has been successful in investing in raw land.

With any property type there are always pros and cons, so let's check these out below.

The Pros

• Possibility of leasing your land into perpetuity (easy passive income, one and done)
• Many possibilities: can sell, lease, or develop on your land
• Low tax bills
• Minimal maintenance costs (if any)
• Direct ownership as its usually paid in cash
• Cheaper overall

The Cons

• Specialized skill and knowledge necessary to be successful with raw land (flat lots may have water runoff issues, lots in a valley might have flooding issues, etc.)
• More difficult to finance
• Less tax advantages
• May take time to cash flow (not immediate)

All in All

Investing in real estate can be life changing.  It is the fastest way to increase your net worth exponentially and build generational wealth.

There are many different routes you can take when deciding to invest in real estate.  Hopefully, the pros and cons of each type of real estate analyzed here has helped you decide which type is right for you.

I personally love real estate and I hope you will dive in and make it work for you!

Happy Investing!