Investing in Single-Family Houses, Multi-Family Homes, and Mixed-Use Properties
There are various categories involving the different forms of properties. Before participating in real estate investing and conducting transactions, it’s essential to understand the classifications for each property type. The main three property groups are single-family houses, multi-family homes, and mixed-use properties. Residential properties tend to be one of the most popular investment routes and are simple for new investors to understand. Residential properties can consist of single-family houses or multi-family properties. These properties are limited on potential layout options considering single-family homes are assigned to consist of one kitchen and unshared utilities, including gas and electric. The two primary aspects of investing in single-family homes tend to be fixed and flips & fix and holds. Fix and flips refer to an investor purchasing a house either directly from a homeowner or through utilizing a licensed realtor; the investor will buy a property that’s typically distressed, at times lower than the market value. After finalizing the purchase, the investor will complete home updates and house repairs to get the home on the market criteria to maximize profit on a home sale. Fix and hold consists of a similar concept to acquiring the property and conducting the necessary renovations; instead of selling the home after the rehab process, the investor would elect to find possible tenants and hold the house as a rental property. Multi-family homes are fantastic investments for more seasoned investors simply because it’s more risk; with more risk comes more reward but utilizing house purchasing skills like running precise real estate comps to determine the return on investment before making an offer on the property. Multi-family houses involve multiple rental opportunities, either in duplex, triplex, quadplex, etc. The third most popular form of real estate would be mixed-use buildings, and these properties consist of commercial property and residential. Mixed-used facilities are much less common than single-family and multi-family but can generate substantial income if approached accurately! Vacant land shouldn’t be excluded; empty lots provide tremendous potential for investors. An investor can purchase vacant land for a reasonable/affordable price. After buying the land, most individuals tend to hold the property until it drastically increases in value. After the enormous increase, the owner will flip the property to an investor or build a home on the lot, depending on the zoning. Changing zoning can be complicated, especially in areas that have recently experienced significant development. To change the zoning, the homeowner will have to complete and submit documents to the zoning board contracted by the city or township; many factors are considered before approval.
A single-family house is self-explanatory; it’s a sole-standing independent structure set alone on its land. The formation of the property is designated to have one kitchen and unshared utilities; the home is allowed to have multiple bathrooms and bedrooms. The overall category of single-family houses pertains to semi-detached or fully detached standard homes, row homes, or even townhouses. Most homeowners prefer single-family houses because these homes require less home maintenance and overall upkeep. New real estate investors are recommended to start their journey by investing in single-family houses; less risk makes these property types more desirable. The best two ways to partake in single-family investments would be fixed and flip or fix and hold; it depends on the area’s rental properties rates and recently sold comps. If the property receives a cap rate annual between eight to ten percent of the total value, it’s a safe long-term investment. After the rehab process, if the property is determined to be a more profitable fix and flipping than holding it as a rental, the investor will list the property on the market with a licensed real estate agent. When the time comes for a potential investor to purchase their first investment property, there are a couple of essential details to keep in mind. First, buyers must put down at least twenty percent of the total purchase price; regardless of whether a single-family or multi-family property is purchased, the loan requirements are very similar. Most lenders will consider rental property loans directly related to business loans, which means the interest rates will be higher than mortgages for private homes and first-time buyers. An enormous benefit of owning rental properties is the potential tax benefits; any renovations conducted to a rental home can be deducted as a tax credit. A landlord can upgrade their property to raise its overall value and utilize these expenses to lower the property tax at the end of each year.
- Independent structure – designated to have one kitchen and unshared utilities.
- Single-family dwellings – are semi-detached, fully detached, row homes, or townhomes.
- Depending on ROI, two significant investments – “fix & flip” or “fix & hold” and recently sold comps.
- The cap rate is at least eight to ten percent annual for single-family investment properties.
- Buyers are required to submit at least twenty percent of the purchase price.
- Tax benefits associated with rental properties – renovations qualify for a tax credit.
As investors gain more knowledge and experience, the next step would be to purchase a multi-family home. There’s a possible profit to be made when owning and renting a multi-family property. Multi-family properties are homes that consist of multiple units, typically considered a duplex, triplex, quadplex, etc. These multi-unit homes tend to have separate utilities and full kitchens. The addresses on each unit in a multi-family property will be separated as a number or letter and typically have their private entrance. A popular method to generate income while minimizing monthly expenses will be the concept of “house hacking.” The notion of house hacking is when the house consists of multiple units, and the homeowner will reside in one of the units while renting out the other units within the property; this allows the rental units to cover expenses such as mortgage insurance interest rates. House hacking is an excellent way to generate wealth, build credit, and gain knowledge/experience. The decision whether to purchase a multi-family property will be determined by a few factors; the neighborhood, potential repairs (the preference would be a turn-key property), long-term expenses, cash flow, purchase price, & Net Operating Income (assesses the value of the home and the potential for it to generate income.) There are potential tax benefits affiliated with house hacking. Still, the landlord needs to prove that the homeowner conducted the updates or renovations on the rental units.
- Multi-family homes consist of multiple units – duplex, triplex, quadplex, etc.
- Separate address – typically a number or letter sub-addresses!
- House Hacking – multiple units in the home – reside in one unit, rent out the rest.
- Factors to consider when purchasing multi-units – the neighborhood, repairs, and overall expenses, cash flow, purchase price, & net operating income.
- Tax benefits – provide proof of home upgrades and renovations for the tax credit.
Mixed-Use & Commercial Buildings
Mixed-use properties refer to properties utilized for a wide variety of purposes with a mixed combination such as commercial, retail, residential, etc. Over the last decade, more investors have sought mixed-use buildings for investment purposes. These investors desire the potential wealth generated by these properties that appeal to various visitors and prospective tenants! There are different routes to acquiring mixed-use investment properties; some investors will utilize a wholesaler to locate and obtain these properties for commissions similar to licensed agents. Another popular method to discover mix-use buildings will be to use a real estate agent who has access to services such as MLS (multiple listing services), which agents connect buyer’s agents with seller’s agents! Most investors prefer purchasing a property from wholesalers, and these off-the-market deals avoid the long, drawn-out process of the traditional real estate sale. Off the market sales typically can close within twenty-one days, as soon as a local reputable title company can clear the title to transfer the deed.
- Mixed-use property: a wide variety of mixed purposes – commercial, retail, residential, etc.
- Great profit potential!
- There are different routes to acquiring a mixed-use commercial property – licensed real estate agent or wholesaler.
Lots & Land
Purchasing land has always been recommended due to the shortage of land. However, purchasing a vacant lot or empty land can be extremely risky because there’s a chance it may not generate any income unless the property owner is aware of an individual willing to rent the ground monthly. There’s also no capital gain if the property owner decides to sell that land. The zoning for an empty lot or vacant land can vary between residential, commercial, or mixed-use. Most developers involved in the building have prior experience or a mentor-type figure to walk the investor through the building process. Average investors can purchase land with the intention are holding it for a brief period until building begins in the area, then flip the property for some form of profit. There’ are also investors who purchase an empty lot/land for a reasonable price and sit on the property for a few years until the neighborhood or area drastically improves in value; at that point, a developer may come in and purchase the property for much more than the original sales price.
- Purchasing land can be risky due to the possibility of not generating income.
- If the owner decides to sell that land or lot, there’s no capital gain.
- Empty lot or land zoning can vary between residential, commercial, or mixed-use.
- Hire a professional for guidance – a licensed realtor or real estate lawyer!
It’s relatively straightforward that properties come in distinct shapes and sizes, but an aspect that’s not as apparent will be the various zonings involved with real estate. It’s essential to understand the difference between each type of zoning before investing in purchasing the property. The zoning may vary depending upon the city or state; generally, local governments use letters of the alphabet as codes to identify each form of zoning. The standard letters will be “R” for residential buildings, “C” for commercial properties, & “I” for industrial. The common types of residential zoning cover homes, apartments, condos, and trailer parks. Commercial property zoning is similar to industrial but set on a smaller scale. Typical zoning for commercial buildings would include office buildings, shopping centers, hotels, and specific warehouses. The factors that separate industrial from commercial will be the overall noise, floor area ratio, & building height. In areas with a history dating back hundreds of years, it’s vital that some of these homes may be protected by historic zoning; if a property is deemed historical, the homeowner will be limited on the renovations or upgrades possible. The homeowner will have to discuss each potential renovation with the city and a committee to seek approval. If there are any concerns before purchasing property, it’s suggested to reach out to a local lawyer or realtor to utilize their real estate services. Investors should always think that they would rather be safe than sorry, and one lousy investment can cause severe financial issues. Most real estate investments are safe for long-term passive income if approved by a professional. It’s essential to consider the location of the area and potential before purchasing an investment property. The site location is critical for locating qualified tenants and receiving a proper return on investment. If you’re considering becoming a real estate investor, establishing credit will be the first step. Most investors use the funds of a bank or a lender to complete their transactions; never tie up too many funds on one project; unforeseen obstacles may arise, and it’s critical to have possible funds to transition through any problem. Real estate is an extraordinary method for financial freedom; the more attained knowledge and experience are the ideal stepping stones to success!