Types of Residential Real Estate: Which Is Best for You?

Find the best option for your portfolio.

Residential real estate investing can be a lucrative way to grow your wealth. Despite recent cooling in the housing market, investors across the country are still buying homes in record amounts, according to CoreLogic, a data research firm.

Wondering what types of residential real estate best suit your investment goals? Real estate investors can invest in many different types of real estate properties, but the main categories include:

• Single-family homes
• Small multifamily
• Commercial multifamily
• Single-unit condos

Each residential property type has its own characteristics and potential risks and rewards. 

Here are the pros and cons of the most popular types of residential real estate investments. This can help you determine which real estate asset class may be the best fit for you.

1. Single-Family Homes

Single-family homes are residential buildings designed for one tenant or family to occupy. They’re also freestanding properties, which means they don’t share any walls and are built on their own land. 

These homes are the most common real estate transactions in residential real estate. They can make profitable investments for property owners as a long-term rental or vacation home.

Pros

The benefits of investing in a single-family home include:

• Stability: Tenants often live longer in single-family homes than in condos or multifamily units. This stability results in fewer vacancies and leasing fees.
• Pride of ownership:  Tenants living in a house tend to make it their home and are more likely to maintain it. This means your investment property may have less maintenance costs than other types of rental properties.
• Affordability:  Single-family homes usually cost less to buy than multifamily units. This makes them among the most accessible investments in the real estate industry. They also are more affordable to manage because they don’t share common areas or utilities.

Cons

Drawbacks of investing in a single-family home include:

• Vacancies substantially impact ROI:  You’re not making any income when your single-family home is vacant. In contrast, if one of your tenants vacates, you’re still collecting rent from the other tenants.
• Less cash flow:  It can take a long time to grow your real estate business if your real estate investing strategy is only based on single-family units. You’re likely to buy one unit at a time. Multifamily units allow you to buy entire apartment buildings at once to generate income.
• Values are market dependent: Your single-family home portfolio’s appreciated value depends on the residential real estate market. You could lose money on a sale if the housing market isn’t doing well and home prices drop. 

2. Small Multifamily

Small multifamily residential properties consist of two to four units. Common examples are duplexes, triplexes, and fourplexes. Each of these units is its own individual living space, usually with a private kitchen and bathroom.

Like single-family homes, small multifamily units can make an excellent beginner investment property. You’ll typically get multiple passive income streams without having to manage an overwhelming number of tenants. 

Pros

Benefits of investing in a small multifamily property include:

• Loans and finance:  Small multifamily units offer the best of both worlds for your real estate investment strategy. Because they’re fewer than five units, this keeps them from being classified as commercial properties. This means you can typically get conventional lending for them. They’re easier to finance because you’re getting more than one stream of rental income.
• Improved cash flow:  The more tenants you have, the more rental income you’ll bring in from your rental property. If you have a four-unit complex, that’s three more streams of income than you’d get with a single-family home.
• Less vacancy risk: Small multifamily properties have multiple units, which can help reduce the risk of vacancy. If one unit is vacant, you can still generate rental income from the other units.
• Scalable: More rental income equals more scalability. For example, say John buys one single-family home per year, and Betty buys one triplex per year. Betty will scale her real estate investments three times faster than John, even though they get the same net operating income per unit. 

Cons

Drawbacks of investing in a multifamily property include:

• Higher maintenance costs: The more you own as a real estate investor, the more you’re required to maintain. You’re responsible for the appliances and upkeep of all four units if you own a quadplex. This can be a costly, time-consuming real estate investment.
• More complex management: Small multifamily properties can be more complex real estate investments to manage than a single-family home. The landlord has to navigate issues such as tenant disputes, rent collection, and maintenance requests from multiple tenants.
• Increased competition: Multifamily properties are less available to buy as real estate investments than single-family units. They’re often considered more desirable to real estate investors because of their many benefits. As a result, breaking into this real estate market for business purposes may be more difficult.

3. Commercial Multifamily

Commercial multifamily properties consist of five or more units and fall under the commercial property category. Often, multifamily commercial real estate includes multistory apartment buildings, high rises and condominiums, garden apartments, townhouses, and bungalow courts.

Commercial multifamily property can be incredibly profitable but also requires a higher down payment than other property used for residential purposes. 

Pros

Here are the benefits of investing in a commercial multifamily property:

• Enhanced cash flow and scalability:  Enjoy getting three streams of rental income from your triplex? Imagine receiving 100 streams of monthly rental income from your apartment building. You’ll still receive 95% of rent checks every month, even if you have five vacancies. In contrast, your passive income is reduced by a third if one of your tenants moves out of your triplex.

• Loan and insurance simplicity: You can consolidate all of your loans and insurance policies when you invest in a commercial multifamily property. In other words, you can have one loan and lender instead of having 50 different ones for your commercial space. The same applies to your insurance policies.
• Excellent for long-term value:  Prices of single-family units fluctuate with the market and can be subjective. Multifamily properties—especially commercial multifamily properties—are primarily priced on their income-generating potential. Multifamily properties are more commonly bought and sold as investment properties, which makes them more stable for long-term growth. 

Cons

Here are the drawbacks of investing in a commercial multifamily property:

• High maintenance: Maintaining commercial real estate investments can be a full-time job. Often, your best option is to hire a property management company to do the work for you. The right company can save you a lot of time and headaches.
• High buy-in and experience required: Commercial multifamily properties are by far the most expensive and challenging of the types of real estate mentioned so far. It’s recommended to work up to these property types and learn as you go, instead of investing in a high-rise as a beginner. 

• Strict regulations:  Multifamily housing units are often subject to strict regulations. Research the laws of your state or consult with other real estate professionals regarding multifamily units before investing in these types of real estate properties. Failure to adhere to these regulations could result in fines or even imprisonment for the property owner.

If you’re interested in commercial real estate, you can also invest in real estate investment trusts (REITs) rather than real property. This way, you don’t have to actually buy and manage the property yourself. You can own equity stakes in private REITs or publicly traded REITs.

4. Single-Unit Condos

Single-unit condos are built for only one family or tenant, like single-family homes. But unlike single-family homes, condos are individually owned units that are a part of larger commercial complexes. 

Single-unit condos aren’t freestanding buildings. They share walls and don’t own the developed land they’re built on. 

Pros

Here are the benefits of investing in single-unit condos:

• Low buy-in: Single-unit condos are among the most affordable property types mentioned here. It’s simple to get conventional lending for them, and unless the market is going haywire, they’re usually easy to sell for a profit.
• Amenities and maintenance:  Condos offer residents convenient amenities (e.g., rooftops, gyms, pools, 24-hour security, parking spaces, and more), which justifies charging premium rents. Single-unit condos also require less maintenance because you don’t have to do landscaping or fix anything in the community areas. Typically, the homeowners association (HOA) or property management company does that for you.
• Variety: Condos aren’t all cookie-cutter units, contrary to popular belief. Often, complexes diversify their units to offer each tenant something unique. Even if your condo resembles others, you can customize it, as long as you abide by the terms of your HOA. 

Cons

Here are the drawbacks of investing in single-unit condos:

• Fees and rental policies:  Condos often have useful amenities, but they come at a price: HOA fees. Your HOA may also have strict rules about renting your unit, so carefully read the bylaws of a condominium unit before deciding to invest in this type of real estate.
• Subject to comparable sales:  Charging a higher rent or reselling at a premium is more difficult with condos because renters and potential buyers can compare your unit to others in the building. You may not reap much money from their total potential value, even if you make renovations.
• Difficult to scale quickly: Like single-family houses, single-unit condos are hard to scale quickly because you usually buy one unit at a time.

Which Residential Real Estate Property Type is Best for You?

In a general sense, the best real estate investments for beginner and part-time independent investors are single-family housing and small multifamily residential properties. You can easily get conventional funding for both types of real estate.

These are less risky than commercial real estate, such as multifamily properties. Single-family homes and multifamily properties also appreciate in value faster and are subject to fewer fees and regulations than single-unit condos. 

Single-family homes are abundantly available, and small multifamily units are easier to find than their commercial counterparts when it comes to investing in residential real estate.

Conclusion

Property types are as diverse as the people who invest in them. Investors have different reasons why they invest in real estate. They also have various skills, capital, connections, and lifestyles. 

Passive investors may want to consider investing in single-unit properties or hiring a real estate agent or property management company to handle most of the daily maintenance. 

If you want to be more hands-on, you can flip houses or invest in fixer-uppers and enjoy a low buy-in with the potential for higher returns. You can also purchase raw land for agricultural purposes or natural resources. 

Or you can build your undeveloped land from the ground up, including a water and sewer system to establish mobile home parks, vacation homes, or tiny homes. But keep in mind that undeveloped property can be challenging for the new investor unless you’re already skilled in other types of real estate investment. You may want to start with simpler, easier-to-manage types of real estate investments, like single-family housing and small multifamily properties, rather than an office building, industrial real estate, or vacant land.

That said, you may also want to try your hand at different types of commercial real estate investments, such as office space, retail stores, medical centers, grocery stores, shopping centers, gas stations, or strip malls. 

There are many different ways you can invest in the real estate industry. Do your due diligence to know what’s best for you.