Types of residential real estate investments – an overview
When we refer to residential investment property, the two main types are single family and multifamily houses. Land for development purposes is also another form of real estate investment, as are condominiums and cooperatives.
Single family houses
Single family properties are the most widely used investment types for property investors. They are traditionally the easiest to obtain and to finance, making them the preferred entry point for investing amongst first time real estate investors…
Multifamily houses are another attractive investment opportunity for beginner investors. They offer the investor the option of either renting all the units in a building out, or making one of the units in the property their own home, while at the same time renting the other units out and managing the entire property. The obvious advantage to this latter scenario, is that as on on-site landlord, you won’t have very far to travel when a tenant’s unit requires repairs, or when they have emergencies. There are also many tax benefits from being the landlord of your own building.
There are several types of multifamily properties you can invest in. The simplest ones are the two family or the three-family. Some two family properties are duplexes, which are side-by side homes, separated by one common wall. Likewise, a triplex is comprised of three side by side houses, each with a common adjoining wall. In addition, two or three family houses can look like a single family house, but be comprised of units on top of one another.
Four-family homes are usually comprised of four units on several levels – some are vertically grouped, with one unit in the basement, and the others on separate succeeding floors. Others have a couple of units on each floor. However, four-family houses represent the largest multifamily houses that can be financed utilizing residential mortgages. From five-family and above buildings, properties are considered commercial.
Land purchases and development are not usually in the scope of beginner property investors. Most residential land purchases are done by experienced developers who have the deep pockets necessary to accept the increased risks of this type of investment. Purchasing tracts of land, whether small or large, requires a great deal of market research into the areas in question. Since mortgages are not traditionally given by lenders on land alone, developers require a great deal of cash on hand to finance the initial land purchase, prior to actually beginning the development of the property.
Condominiums (condos) can be created for any type of real estate – not strictly apartment buildings. Condos traditionally create a legal structure whereby some of the land of the condo complex is owned in common, but each individual unit (and the land under it) can be bought and sold under separate title. So each unit has it‘s own separate tax assessment.
In addition, bylaws are created for the entire condo complex. These bylaws, among other things, define the exact common areas of the complex (for example, a pool area, clubhouse, parking spots, tennis courts, etc.)
These bylaws also allow for the creation of an association of the owners to manage the entire complex. Each condo unit owner is allowed one vote in the association, and elects a board of directors to take on the duties of managing the complex. This board also sets the budget for the entire complex, including the amounts each unit will have to pay for property taxes, insurance premiums and costs for maintaining all the common areas.
Most cooperatives (co-ops) are actually private corporations. The corporation owns the land and building with all of it’s apartments on it. The corporation also provides for the election of a board of directors (the co-op board) made up of some of the apartment owner/shareholders. The officers on the board take on the responsibility of managing the entire cooperative. Stock in the corporation is issued and sold to apartment buyers in quantities that are proportionate to the value of the apartments available for sale. In effect, buyers are purchasing a proprietary lease within their own company. These tenants are then required to follow the rules and regulations that were created in the corporate charter.
Co-ops can set their rules for buy-ins to the corporation. As an example, a co-op can require only all-cash purchases of it’s units/stock, so that it can attract strictly high-end buyers. But it also can control it’s own economic and social environment as well in so doing.
photos courtesy of 3dluxe.co.uk, philcebuproperties.com, newpointeestates.com