6 Best Types of Rental Investment Properties (2024)

karina Updated on September 18, 2024 60359 views 98

A few types of income properties for new real estate investors stand above the rest. Even though the market is full of homes for sale right now, that doesn’t mean you should move to the first house you see down the street. Instead, looking at the homes through a few filters is best to know if they’d make a great starter investment property.

Here are the best income properties and rental investments to consider, primarily because of the positive cash flow potential.

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1. Multi-Family Homes

Perhaps the best way for new investors to get started is with multi-family homes. There’s a reason why it’s usually not easy to find them for sale! Fellow investors know these are great investments, thanks to the diversified risk.

Here’s why multi-family rentals have become a popular real estate investment strategy:

• Consistent Rental Demand – People always need places to live and rental demand tends to be more consistent across markets compared to other real estate. Vacancy rates are usually lower than other commercial properties.
• Income Growth Potential – Multi-family properties can generate rental income that rises with inflation over time through raising rents. More units mean more rental income potential.
• Lower Purchase Costs – The purchase price per door tends to be lower for a 100-unit apartment than buying 100 single-family homes. There are some economics of scale.
• Management Efficiencies – Single location and common facilities allow operating efficiencies compared to scattered single-family rentals. Centralizing maintenance and management is easier.
• Financing Advantages – Multi-family buyers can often put less money down, utilize commercial debt terms, and get better interest rates than with single-family homes.
• Tax Benefits – Depreciation, deductions for operating expenses, and 1031 exchanges help defer/lower tax bills for commercial-style multi-family.

For investors who want to scale up beyond single-family rentals, multi-family properties provide a way to build a larger income-generating portfolio from fewer but higher-value property purchases. The hands-off management, income growth, leverage, and tax perks make it an attractive sector.

2. House Hacking

3. REITs

A REIT, or Real Estate Investment Trust, provides a way for individuals to invest in income-producing real estate without having to buy, manage, or finance properties themselves. Here is a quick overview of why REITs can make a good real estate investment:

• Professionally Managed – REITs purchase and operate various property types. They provide the institutional management experience individual investors often lack.
• Income Focused – REITs must pay out 90% of taxable income as shareholder dividends. This provides steady income for investors.
• Market Diversification – Many REITs hold diverse portfolios with hundreds of properties across sectors like apartments, offices, malls, and warehouses.
• Liquidity – As publicly traded securities listed on stock exchanges, REIT shares can be bought and sold easily.
• Low Investment Threshold – For a few hundred dollars, an investor can gain exposure to multimillion-dollar property portfolios.
• Tax Advantages – REIT dividends often qualify for preferential tax rates under certain holding periods.

For hands-off real estate investment, REITs offer easy access to income-generating property along with the convenience and liquidity of stocks. Their significant property holdings, professional management, and focus on distributions can provide good diversity and returns.

4. Detached Single-Family Homes on Sale

Investing in detached single-family homes involves purchasing stand-alone houses and renting them out to tenants. Here is a brief overview of why they can make attractive rental investments:

• Appreciation Potential – Single-family housing often appreciates faster than inflation over time, allowing investors to build long-term wealth.
• Ability to Add Value – Investors can create value through renovations and repairs that allow raising rents.
• Tax Benefits – Expenses like property taxes, maintenance, and mortgage interest can be deducted to offset taxable rental income.
• Loan Access – Financing is easier to obtain for standard single-family homes versus other commercial properties.
• Flexible Exit Strategies – Properties can be sold, traded up via 1031 exchanges, or refinanced thanks to high liquidity.
• Lower Tenant Turnover – Tenants often rent houses for longer stretches than apartments. This lowers vacancy rates and replacement costs.

While detached homes do require active landlording and management, the wealth-building potential through appreciation makes them a foundational piece for many real estate investors. By maximizing operating income and leveraging tax perks, savvy investors can see strong returns on houses purchased at good valuations.

5. Mobile Homes

Investing in mobile homes involves purchasing manufactured housing units and the land they sit on, then renting them out to tenants. Here’s a quick rundown of why they are among the best income properties:

• Lower Purchase Costs – Mobile homes are less expensive to purchase than typical single-family houses, allowing investors to get into the market with less startup capital required.
• Affordable Housing – There is high demand from tenants seeking affordable housing options. Vacancy rates tend to be lower than standard rentals.
• Steady Cash Flows – While appreciation lags standard homes, monthly cash flow is the primary return.
• Less Maintenance – Construction techniques and smaller spaces make upkeep costs lower than traditional single-family rentals.
• Stable Tenant Base – Longer leases are common in mobile home parks, reducing turnover costs. Retirees often create consistent occupancy.

The lower startup costs, combined with solid ongoing returns from rent make mobile home parks worth considering for investors comfortable with the dynamics of manufactured housing. While capital appreciation trails other options, cash flow in the near term can deliver good recurring returns. With the right property and tenants, they can be a fairly hands-off investment as well. Returns ultimately hinge on buying at an attractive valuation.

6. Airbnb Rentals

Investing in Airbnbs involves utilizing the popular vacation rental platform to generate income from short-term guests rather than long-term tenants. Here is a quick rundown of why Airbnbs can deliver strong returns:

• Higher Nightly Rates – Airbnb allows charging hotel-like prices far exceeding monthly rents, with dynamic pricing to capture peak travel demand.
• Utilizes Existing Housing Stock – Converting current housing or underused second homes allows taking advantage of Airbnb demand.
• Lower Vacancy Risk – Weekend and seasonal travelers provide more consistent bookings than relying on full-time tenants.
• Upfront Design & Amenities – By designing units for the short-term experience, higher rents can be commanded.
• Hybrid Model Potential – Properties can still be rented traditionally during slower booking periods to manage cash flow.
• Scalability – Once systems are in place, managing multiple units has become easier to scale up.

For investors able to tap into the demand for lodging alternatives, Airbnb provides a way to maximize returns beyond the norms of long-term buy-and-hold rentals. However, hands-on effort is required, from ensuring regulatory compliance to managing rapid tenant turnover.

Key Factors to Consider for the Best Income Properties

Here is a very brief comparison of the best income properties for beginners based on key factors:

House Hacking

• High ROI as rental income offsets living costs
• Lower downpayment than other options
• Need to manage tenants

Multi-Family Homes

• Moderate ROI potential
• High upfront costs, but economies of scale
• Lower risk from consistent occupancy

Single-Family Homes

• Appreciation can drive ROI
• High competition from other investors
• Need renovation and tenant management

Mobile Homes

• Low upfront and operating costs
• Less appreciation upside over time
• High tenant turnover rates

Airbnb Rentals

• Higher ROIs possible in some markets
• Requires extensive effort and furnish properties

REITs

• Simple to gain exposure to real estate
• Lower returns historically
• Minimal involvement or hassle

The optimal entry point differs based on an investor’s capital, risk tolerance, desired effort levels, and ability to manage tenants or properties. However, each option can play a role for the right real estate investor based on their personal financial profile and goals. Evaluating the tradeoffs allows finding the right fit when it comes to the best income properties.

What type of rental property is most profitable?

Based on our extensive research and experience of dealing with dozens of property managers, house hacking and multi-family homes appear to be the most profitable rental properties for beginning real estate investors.

Here’s a simple comparison of these 5 investment opportunities for a beginner:

Rental Property Type	ROI Potential	Upfront Costs	Ongoing Effort	Risk Level
Multi-Family Homes	Moderate	High	Low	Low
House Hacking	High	Low	High	Moderate
REITs	Low	Low	Minimal	Low
Single-Family Homes	High through appreciation	Moderate	High	Moderate
Mobile Homes	Moderate	Low	Low	Moderate
Airbnb Rentals	High	Moderate	High	High

Investing in the best income properties

To be clear, there are many types of income properties you can invest in. For example, you can buy/build several tiny homes and rent them out on Airbnb. Another option is to purchase a commercial warehouse, divide it up, and rent out each space to a different small business.

But when you’re first getting started, you want to invest in properties that are easy to understand and don’t require an extremely large upfront cash investment–primarily if you’re investing on your own. That’s why we recommend sticking with either a multi-family home, mobile home, or single-family home that you got for a great deal.

The most important thing is to think outside the box. New investors are just learning the ropes and usually don’t have the cash flow that more experienced investors have. While this can be a disadvantage when shopping for some properties, you can turn it into an advantage by using your brain to find some overlooked gems.

What are the best places to buy rental property in 2024?

The best places to buy rental property in 2024 are likely to share some key desirable traits such as:

• Strong job growth and in-migration – Raleigh, Nashville, Austin, and other Southeast hubs are expected to continue attracting residents with employment opportunities, driving housing demand.
• New employer headquarters or facilities – Areas attracting major planned projects like Amazon HQ2 or metaverse buildouts that will bring waves of new, well-paid workers needing convenient housing close by.
• Pro-development policies – Cities actively enabling new construction are more likely to contain housing costs, providing future rent appreciation. Markets with NIMBY restrictions fall behind in adding supply to meet demand.
• Affordability in high-growth areas – Some secondary cities adjacent to pricey major metros, like commutable towns around LA/SF with lower buy-in prices can draw commuter renters and enable higher future yields.
• Low vacancy rates and landlord protections – Areas with already slim rental inventory and strict eviction processes position landlords favorably to keep occupancy high via limited alternatives.

Ultimately rental buyer demand for both single and multi-family housing will cluster around affordable but economically vibrant areas. Leveraging local intel allows for finding pocket opportunity markets.

FAQs

What type of rental income properties are best for first-time investors?

The best income properties have beginner-friendly attributes like low maintenance, available financing, and cash flow focus. Multi-family properties like apartments, townhouses, condos, and even student housing require less day-to-day effort from the owner and enable hands-off ownership.

FHA loans allow investors to buy multi-family properties with just 3.5% down. Low down payments are ideal for new investors with less capital. For truly passive exposure, real estate investment trusts provide pre-packaged portfolios without direct property costs or management.

The easiest entry points rely more on existing income rather than future sales gains. Hands-off options keep more money in investors’ pockets.

What kind of property makes the best investment?

The best income properties often come down to the investor’s personal financial situation, risk appetite, and capability to take an active management role. However, broadly speaking, an ideal rental investment property should be located in a mid-sized metropolitan area experiencing both population and job growth to ensure ongoing tenant demand.

Either a multi-family building with economies of scale or a turnkey single-family residence that requires little rehab or maintenance upkeep can get you off to a good start. The rental should be proximate to public transit or neighborhood amenities that future tenants will pay a premium for convenient access to.

What is a good ROI in real estate investment?

A good return on investment (ROI) in real estate depends greatly on the type of property, location, financing, and other factors. Use these figures below as a general benchmark:

• Single Family Rentals: Target at least 8-12% ROI on spent capital as a decent return for managing individual homes
  Multi-Family Units: Aim for 10-15%+ overall ROI over time from combined cash flow and appreciation
• Short Term Rentals: Can see 15%+ returns but involves intensive continuous effort
• REITs: Average around 8-10%+ long run historical gains balancing stock market-like returns and income.