Your First Rental Property: House, Apartments, or Something Else?
For your first residential real estate investment, there’s one big decision you’ll have to make first: what type of property will it be? Will it be a free-standing house, an apartment building, or something in between, like a condo or a townhouse?
At the end of the day, the type of property you purchase should depend on the type of renter you want to attract, as well as the level of commitment you’re comfortable with as a landlord. Of course, the size of your initial investment — the amount of money you’re willing and able to put up — will have no small impact on the type of property you buy.
The typical person’s first investment property is usually a house. Rental houses, built to house an entire family, will appeal to younger parents still saving up for their own home. Of course, the type of tenants ultimately attract will depend on the location of the property as well as the type of property it is; if the house is located in an urban area or near university campuses, you’ll probably get attention from students and young professionals at the beginning of their careers. In other words, roommate situations.
Don’t buy a house with the assumption you’ll be able to rent it to a reliable family with stable income. You might end up having to choose the best from a batch of complicated shared housing arrangements, subject to the turbulence that comes with split leases, like incongruous or late payments and sudden exits. Of course, many landlords don’t run into this problem, and if you screen your tenants properly, you won’t either.
Usually, entry-level investors choose a house over an apartment building because it’s a smaller investment that requires less regular upkeep. Managing a building with multiple different tenants will often result in more involved maintenance efforts, whereas the wear and tear on a single house by a family or roommates can be less burdensome. At any rate, you’ll have one lease to deal with at a time, rather than several.
Of course, if you’re able to afford an apartment building, or some other multi-tenant property, you’ll potentially reap greater monthly income through rent. Apartments rent faster than houses in urban areas where work and nightlife keep tenants busy enough to settle for a smaller space. Even if half of your apartments are vacant, you’ll still take home more every month than you will from one vacant house. Keep in mind that the typical rental rate for a one-bedroom apartment will be at least half that of a decent house in the same area. Also, because apartments usually see higher tenant turnover than houses — students graduate, professionals relocate, and people seek larger living spaces for a variety of reasons — you’ll be able to perform renovations more frequently and raise the rental rate between tenants in order to better respond to the market.
If you don’t want the maintenance or upfront cost commitment of an apartment building, but want to attract the urban demographic, consider a townhouse or condo. Townhouses are structured like houses but segregated into two units; condos are essentially apartments, but are individually owned. Both have the benefits of houses and apartments, as well as some of the drawbacks of each.
Townhouses inhabit a price sweet spot between apartments and houses, making them attractive to families and roommates, but many opt to spend a little extra for a house or save some money and stick to a smaller apartment. Condos, functionally houses-within-buildings, are often subject to HOA rules that prevent renting. However, if you find a condo complex that doesn’t forbid renting, you’ll have the benefit of a quickly renting property that requires little in the way of external maintenance, since there’s no driveway, lawn, fence, or other outdoor fixture to maintain or replace in case of damage.
If you’re just dipping your toes into real estate and want to attract low-risk tenants — stable family units and well-paid professionals who want to enjoy some space and peace — your first property should probably be a house. In general, most entry-level investors shouldn’t try running an apartment complex as their first property, but if you’re looking for a more dynamic demographic and want to ditch some of the responsibilities of maintaining a house, consider a condo.
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